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                                 UNITED STATES
                        SECURITIES & EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

                               ----------------

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

    For the year ended December 31, 1999

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the Transition period from          to         .

                               ----------------

                        Commission File Number 000-26465

                               ----------------

                             PURCHASEPRO.COM, INC.
             (Exact name of registrant as specified in its charter)

                 Nevada                                88-0385401
    (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)                Identification No.)


           3291 North Buffalo Drive, Suite 2, Las Vegas, Nevada 89129
              (Address of principal executive offices) (Zip Code)

                                 (702) 316-7000
              (Registrant's telephone number, including area code)

   (Former name, former address and former fiscal year, if changed since last
                                    report)

                               ----------------
        Securities Registered Pursuant to Section 12(b) of the Act: None

 Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
                                  value $0.01.

   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]

   Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of outstanding
shares of the Registrant's Common Stock, $.01 par value, was 31,164,230 as of
March 27, 2000.

   The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2000 Annual Meeting of Stockholders which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 1999.

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                             PURCHASEPRO.COM, INC.

                                   FORM 10-K
                               DECEMBER 31, 1999

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
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 <C>  <S>                                                                  <C>
                                    PART I
 ITEM

  1.  Business..........................................................     1
  2.  Facilities........................................................    14
  3.  Legal Proceedings.................................................    14
  4.  Submission of Matters to a Vote of Security Holders...............    14

                                    PART II

  5.       Market for Registrant's Common Equity and Related Stockholder
      Matters...........................................................    15
  6.  Selected Consolidated Financial Data..............................    16
  7.     Management's Discussion and Analysis of Financial Condition and
      Results of Operations.............................................    17
 7a.  Factors That May Affect Results...................................    22
  8.  Financial Statements and Supplementary Data.......................    32
  9.     Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure..............................................    54

                                   PART III

 10.  Directors and Executive Officers of the Registrant................    55
 11.  Executive Compensation............................................    55
 12.  Security Ownership of Certain Beneficial Owners and Management....    55
 13.  Certain Relationships and Related Transactions....................    55

                                    PART IV

 14.  Exhibits, Financial Statement Schedules and Reports of Form 8-K...    56
      Signatures........................................................    59
</TABLE>

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                                     PART I

ITEM 1: BUSINESS

PurchasePro.com, Inc.

   PurchasePro.com is a leading provider of Internet business-to-business
electronic commerce services. Our members can buy and sell a wide range of
products and services on our procurement networks in an efficient, competitive
and cost-effective manner. We have designed our procurement networks to meet
the needs of smaller and medium sized businesses and their large business
partners.

   We began developing our service in 1996 by closely evaluating the purchasing
process of the hospitality industry that is characterized by high volume,
frequent purchases of a broad range of goods and services by a large number of
geographically distributed buyers. We capitalized on the large-property
purchasing expertise of several Las Vegas-based hotels and resorts to develop,
test and validate our service. These hotels have provided important marketing
references for the expansion of our procurement networks. Since launching our
public procurement network in April 1997, we have continuously upgraded the
functionality of our service. Our most recent enhancement enables the creation
of private procurement network communities for access on an invitation-only
basis.

Industry Overview

   Growth of Internet Usage and E-Commerce. The Internet and related
technologies are revolutionizing the way businesses and consumers communicate,
share information and conduct business. As the number of Internet users and the
sophistication of Internet-enabled content and development tools have
increased, the Internet's functionality has expanded from a medium primarily
for publishing information to one that enables more complex business-to-
business communications and commerce. At the same time, businesses across many
industries are facing increasing competitive pressures to lower costs, decrease
inventories and improve sales and marketing productivity. To address these
challenges, businesses are increasingly replacing paper-based transactions with
Internet e-commerce solutions that provide cost-effective and efficient
channels for connecting and transacting with global suppliers, distributors and
customers. Forrester Research estimates that the business-to-business e-
commerce market will grow from $43 billion in 1998 to $1.3 trillion by 2003,
representing a compound annual growth rate of approximately 98%.

   Inefficiencies in Corporate Purchasing and Supply. Historically, the
purchasing of supplies and services has involved significant manual processes
and in many industries has been highly fragmented and decentralized.
Decentralized purchasing makes it difficult for businesses to manage employee
purchases, control spending and prevent duplicative or unauthorized orders.
Many companies do not have an efficient and easy-to-use means of executing and
managing purchases of supplies and services. According to the Center of
Advanced Purchasing Studies, corporate purchases of goods and services
represent on average 38% of a company's revenues. Cost-effective purchasing is
an important contributor to improving a company's profitability. Despite the
importance of the purchasing function and the prevalence of information
technology systems in many enterprises, purchasing at many companies remains
heavily paper-based, labor-intensive and decentralized. AMR Research estimates
that the cost per procurement transaction for non-production supplies and
services ranges from $75 to $175. These costs can exceed the cost of the items
being purchased. In addition, these time consuming processes often result in
fulfillment delays to end-users, leading to productivity losses.

   Traditional Electronic Purchasing. A number of companies have attempted to
use information technology to reduce the inefficiencies that characterize most
corporate purchasing functions. Although existing electronic purchasing methods
have helped facilitate e-commerce, we believe that these current methods have
limitations that prevent widespread adoption by buyers and sellers:

  . Conventional Electronic Data Interchange. Electronic data interchange, or
    EDI, systems involve a set of uniform formats for commercial documents
    such as invoices and purchase orders that allow

                                       1
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   computers to exchange such documents across private networks without human
   intervention. Forrester Research estimates that of the 2 million U.S.
   companies with 10 or more employees, only five percent have deployed
   conventional EDI systems. Barriers to implementation include the high cost
   of installation and maintenance as well as significant, on-going
   transaction fees. Because EDI systems rely on the execution of pre-defined
   transactions, they generally are not well suited for dynamic procurement
   environments involving many buyers and suppliers or a wide variety of
   goods and services.

  . Enterprise Purchasing Software Systems. A number of vendors have
    developed purchasing software systems designed to improve the
    coordination of the purchasing function across large enterprises. Most of
    these systems are expensive to license, with up-front licensing fees that
    can exceed $1 million. Users also typically pay ongoing maintenance fees.
    Additionally, the complexity of these systems typically requires a
    lengthy and expensive implementation process.

   Furthermore, most EDI and enterprise purchasing software systems do not
offer a full spectrum of online procurement functions, such as sourcing from
multiple suppliers and placing simultaneous bid requests with multiple
suppliers. Due to the expense and complexity of these systems, they are
generally unsuitable for all but the largest organizations.

   The PurchasePro.com Opportunity. Companies recognize the necessity to
establish an electronic platform that can be utilized by business partners of
all sizes cost effectively, with limited hurdles to rapid implementation and
use. The Internet provides a cost-effective medium for businesses, regardless
of size, to link directly to their communities of customers, suppliers and
other business partners. PurchasePro.com takes advantage of the low costs and
community building nature of the Internet to deliver our business-to-business
e-commerce solution.

The PurchasePro.com Solution

   PurchasePro.com's business-to-business e-commerce solution is comprised of
public and private procurement networks where businesses can buy and sell a
wide range of products and services over the Internet in an efficient and cost-
effective manner. With a PurchasePro.com membership, companies of all sizes can
participate in an interactive procurement network community of businesses
seeking to expand sales and lower costs. We believe our service enables
companies and their trading partners to quickly realize the benefits of
increased efficiency, faster turnaround and more timely information. Our user-
friendly solution is scalable in its application, provides many features and is
designed to provide the following benefits:

     Lower Operating Costs. By eliminating many costly and time-consuming
  functions of traditional, paper-based buying and selling, our procurement
  networks may allow companies to reduce operating costs and shorten cycle
  times in the purchasing and selling processes. Our solution enables members
  to rapidly prepare bid requests and simultaneously distribute them
  electronically to multiple parties. Responding bids are automatically
  aggregated and compiled in line-item comparison reports for easy analysis,
  enabling purchase orders to be expedited. Moreover, our service operates as
  a rapidly deployable outsourced solution that does not require companies to
  install expensive enterprise purchasing software systems and hire costly
  information technology specialists to maintain and manage these systems.

     Lower Prices. We believe many of our members have realized significant
  reductions in the cost of the goods and services they have purchased as
  members of our networks. Our procurement networks support competitive
  bidding in response to bid requests from buyers. By automating the sourcing
  process, our solution allows companies to send out bid requests for smaller
  quantities more efficiently and expand the number of suppliers from which
  they request bids. Furthermore, buyers can achieve economies of scale by
  aggregating purchasing among subsidiaries and divisions and benefit from
  group buying discounts that we plan to negotiate with national suppliers
  participating in our networks.

     Improved Management and Control. Our solution allows companies to
  proactively manage procurement through user-defined approval procedures.
  Procurement managers, for example, can pre-set

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  the level of access and purchasing authority for each staff member.
  Utilizing the workflow features of our service, managers can quickly view,
  analyze and manage employee activities, providing improved control and more
  informed purchasing decisions. In addition, our solution automatically
  generates inquiry and transaction records facilitating improved
  documentation and auditing. We also maintain records of procurement
  activity by our members that can be used to verify or validate
  transactions.

     Better Information. Our service provides members with up-to-date
  pricing, product and supplier profile information on a 24-hour, 7-day a
  week basis. Our solution allows suppliers to maintain real-time control of
  pricing and other descriptive information about products and services they
  offer, helping to ensure that potential buyers obtain accurate information
  in a customizable format.

     Greater Access to Business Partners. We believe that our networks enable
  members to access new customers and suppliers. With our public procurement
  network, members can communicate with and conduct business among a broad
  array of companies in a highly efficient manner. In addition, we believe
  that our solution enables many of our members to offer, for the first time,
  their goods and services for sale over the Internet.

Our Strategies

   Our objective is to be the preferred business-to-business e-commerce
solution through our public and private procurement networks. Key strategies to
achieve our objective include:

   Expand Our Membership. We intend to expand our membership through the
following:

  . Build Upon Our Leadership Position Serving the Hospitality Industry. We
    believe we are the leading provider of business-to-business e-commerce
    solutions to the hospitality industry and its suppliers. We have grown
    our procurement network membership by focusing on major hospitality
    buyers with large supplier bases. Through our direct and indirect sales
    channels and by using our existing relationships, we plan to develop new
    partnerships within the hospitality industry to further increase our
    membership base.

  . Pursue New Vertical Markets. We are applying our solutions to markets
    with similar procurement characteristics to the hospitality industry.
    These markets include:

    . architecture, engineering and construction

    . colleges and universities

    . facilities management

    . food services

    . healthcare

    . janitorial supply distribution

  . Enter New Geographic Markets. We are expanding into new geographic
    markets by establishing new relationships or leveraging our current
    relationships with large buyers or suppliers with operations in those
    locations. These business partners provide us access to their business
    partners, allowing us to establish a foothold in new major metropolitan
    areas. In addition, we recently licensed our procurement network software
    to a third party that will market our solution to the hospitality and
    travel industry in Asia and the South Pacific.

   Encourage Users to Rely on Our Procurement Networks. We believe that as
members increase their usage of our networks, they become more reliant on the
PurchasePro.com solution as an important part of their procurement processes.
Our service often reduces repetitive clerical tasks associated with the
procurement process for both buyers and sellers. Moreover, the benefits of our
service are increased when it is integrated with existing enterprise
information systems. Active buyers have reported significant cost savings
realized from

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reductions in forms, communication charges and other labor and materials as
well as improved pricing arising from the competitive bidding on the
procurement network.

   Develop Multiple Revenue Streams. Substantially all of our current revenues
are derived from member subscription fees paid for access to our public network
However, we are in the process of developing a number of additional revenue
sources including:

  . public and private network transaction fees;

  . advertising revenues including banners, classified ads and other
    electronic promotions;

  . licensing and recurring maintenance fees from larger corporate accounts
    that create and sponsor private network communities; and

  . procurement network hosting fees and administration charges.

Although the costs associated with developing these revenue sources may be
substantial and the timing of the development of each revenue source is
uncertain, we believe that the revenues from these and other sources will
eventually become a larger part of our overall revenue mix.

   Provide Value Added Services. We intend to expand the value-added services
that we offer to our members. We plan to make available products and services
such as reduced rates and fees from long distance telephone carriers, cellular
service providers and worker's compensation insurers. In addition, we intend to
offer discounts on office products and other business consumables through our
sales and marketing partners. We intend to make these discounts available to
all members so that they can realize cost savings associated with participating
in a large buying group.

   Pursue Strategic Sales and Marketing Relationships. We intend to continue to
pursue strategic sales and marketing relationships to expand our membership,
extend our marketing reach, provide value-added merchandise or services and
further develop our procurement networks in a rapid and cost-effective manner.
Our current sales and marketing partners include Office Depot, Sprint,
VerticalNet and ZoomTown.com, a subsidiary of Cincinnati Bell, Inc.

   Strengthen the PurchasePro.com Brand. We plan to expand and enhance our
marketing initiatives to increase our brand awareness and identity. These
initiatives will include traditional and Internet-based advertising targeted at
selected audiences, interviews and articles in business media and trade
publications and direct sales and telemarketing. We also engage in joint-
marketing and sales efforts with our business partners.

Our Services

   Our networks are designed to streamline the procurement cycle for our
members--from sourcing to bidding to order to payment. Our procurement networks
enable each member to participate as both a buyer and a seller. When acting as
buyers, our members can realize a reduction in processing costs, achieve
improved pricing, enforce corporate purchasing policies and maintain an audit
trail for evaluating purchasing programs. When acting as suppliers, our members
can strengthen relationships with existing customers, reach new buyers and
lower sales, marketing and administrative costs. Our networks are online
business-to-business e-commerce communities. With the recent enhancements to
our software, members can create private procurement networks.

 Basic Membership Services

   Online Buying and Selling. Our procurement network solution enables our
members to interact as buyers and suppliers, streamlining their purchase and
sale process over the Internet. Members using the procurement network's
competitive bidding function send a request for a bid (including requests for
line item price quotes) to suppliers who respond electronically with pricing
and availability information. The request for bids can be

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"sealed" electronically so that the buyer cannot view the responses until a
specified date and time. Through our competitive bidding function, we believe
that buyers can achieve cost savings on the prices of products purchased.

   Our procurement networks provide members with a marketing tool that enables
them to sell to all the other members of our networks. Smaller and medium sized
suppliers can compete on a more equal footing with larger suppliers. As a
result, we believe our network is an effective tool for suppliers to achieve
deeper marketing and sales penetration in their primary markets and to enter
new geographic markets on a cost-effective basis.

   Access to a Broad Electronic Database of Potential Business Partners. Our
procurement networks allow members to query and shop from the offerings of our
members. This provides users with the opportunity to purchase from their
existing suppliers as well as develop new supplier relationships.

   Real-Time Information. Our procurement networks provide for the real-time
updating of database information. After suppliers have responded with bids,
buyers can analyze the responses through line item comparison reports with the
opportunity to select one supplier's bid or to select specific items from
selected suppliers. Since the information provided by the suppliers can be
analyzed quickly, response time on bids can be significantly reduced. After a
bid is accepted, our procurement networks allow buyers to create and send
electronic purchase orders, and to finalize the payment and delivery
instructions to complete the purchase. In addition, suppliers can create online
catalogs that provide real-time dissemination of accurate information in a more
cost efficient manner than with printed materials.

   Reporting Services. Procurement network members can review their bids and
purchase orders through keyword, date, supplier or purchase order number
searches. Members can generate comprehensive reports on their activity based on
their search results. Further line-by-line detail can be obtained for each bid
or purchase order by using the analytical tools available on our procurement
networks. For example, the Quick Check Report compares the responses of every
line item for each of the suppliers, calculating the price per unit and
indicating which supplier has the lowest price per item for that particular
item. The report also provides the necessary information for purchasing agents
to make future decisions based on price, service or possible long-term
contracts. The information can be exported via ASCII, EDI, ODBC-compliant
files, or Excel worksheets, so that members can transfer the information to
their enterprise resource planning and accounting systems for further reporting
and data archiving.

   Procurement Controls. Members can restrict employee access to the various
levels of our procurement networks. A client password file is checked at each
member login and whenever members access the database. Members can monitor
employee requests for proposals and purchase orders. Members can also select
options that limit employee access to selected suppliers, specific items,
quantities and service features. Through such protocols, control over corporate
purchasing is significantly enhanced without the installation of expensive
enterprise purchasing software systems.

   Community. We continue to expand our services to help foster interaction
among procurement network members. Our members currently have access to e-mail
accounts, and we plan to introduce additional features such as industry trade
news, discussion forums, chat rooms and bulletin boards, all of which foster
active community participation among our members. We expect to continue to add
features, content and services that enhance the benefits of membership in the
PurchasePro.com community.

   Purchasing Discounts for Members. We intend to negotiate group discounts
with national suppliers for our procurement network members. In return for our
providing electronic access to our large membership base, we expect these
suppliers to provide discounts to our members irrespective of size. As such, we
plan to expand our value proposition to our community, particularly to those
companies that do not normally benefit from the pricing economies of large
companies.

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 Other Membership Services

   Private Networks. With the recent enhancements to our software, members can
create private procurement networks. Private networks allow buyers or suppliers
to sponsor a community of selected business partners on an invitation-only
basis. In these communities, the sponsoring company invites selected trading
partners to participate in customized programs such as special pricing
arrangements and product offerings.

   Procurement Network Catalogs. We create customized electronic catalogs for
our members that enable buyers to browse through a supplier's product and
service offerings and "drag and drop" their desired selections directly into a
purchase order. We also offer a catalog maintenance service.

   Web Site Development, Hosting and Maintenance. We construct Web sites for
our members on a trial basis. After the initial trial period, members are
charged a monthly hosting fee. These sites enable members to provide additional
information on their products and services to other members. We also market to
our members upgrades to these Web sites, which have resulted in additional
fees.

   Banner Advertisements. We offer banner advertisements on our procurement
network as a direct marketing tool for our members. When a buyer sources
products, a banner advertisement appears promoting a related product offered by
a particular supplier.

   Classified Advertising. Our classified advertising section provides real-
time advertising directly from members. All advertisements can be accessed by
keyword searches and can be posted and terminated in real-time.

 Group Buying Services

   In addition to our public and private procurement networks, we offer group
buying services to the hospitality industry through our Hospitality Purchasing
Systems subsidiary. This subsidiary consolidates the buying power of the
properties that it represents to obtain volume discounts that might otherwise
only be available to larger buyers. We receive fees from buyers and rebates
from suppliers. We are marketing our PurchasePro.com solution to participants
of this buying group.

Our Revenue Sources

   To date, our primary source of revenues has been network access fees paid by
our members. In order to build our network membership, we have provided free
access to our public procurement network and technical support to large
corporate members. In return we have gained access to and assistance in
recruiting their smaller and medium sized business partners as members of our
procurement network.

   Our revenue sources include the following:

     Transaction Fees. We charge transaction fees on purchases consummated by
  our members with our strategic partners and value added merchandise and
  service providers. In addition, in certain of our private procurement
  networks we derive revenues from transaction fees levied on sales within
  the community.

     Licensing, Maintenance and Procurement Network Hosting Fees. We charge a
  one-time licensing fee and annual maintenance fees for private networks in
  place of or in certain cases in addition to transaction fees. We also
  charge recurring fees for hosting these private procurement networks.

     Other Revenue Sources. Other revenue sources include advertising and Web
  site development, hosting and maintenance. As our membership grows, we
  intend to charge for banner and classified advertisements that we presently
  offer as a free service. We also construct Web sites for our members and
  charge monthly hosting and maintenance fees after an initial trial period.

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Strategic Relationships

   A key element of our strategy is to expand our sales, marketing and
distribution channels through strategic relationships with entities that are
commercial partners, and in some cases, equity investors. We have established,
and will continue to pursue, these strategic relationships in order to grow
revenues, to provide indirect sales and marketing of our networks, and to
enhance our procurement network services. The following are examples of our
strategic relationships:

     Sprint. In December 1999, we entered into a strategic e-commerce
  marketing agreement with Sprint Communications Company, L.P. Under the
  agreement, we will develop a co-branded website, which will be marketed by
  Sprint as the preferred business-to-business e-commerce solution for the
  procurement of goods and services to its business customers in long
  distance, paging and collaborative services. Sprint will become the
  preferred communications provider of long distance, paging and
  collaborative services on the PurchasePro.com procurement network. We will
  pay Sprint a quarterly sales commission equal to 25% of net collected
  revenues from the sales of subscriptions generated by promoting
  PurchasePro.com to the Sprint marketplace. In connection with the strategic
  e-commerce agreement, we issued to Sprint a warrant to purchase up to
  2,700,000 shares of our common stock at a price per share of $95.79. One
  half of the warrant vested upon issuance and the actual number of shares
  issuable upon exercise of the remainder is based on the actual net
  annualized revenue that is generated for us under the strategic e-commerce
  agreement.

     Advanstar. In November 1999, we entered into an agreement with
  Advanstar, Inc., a leading worldwide business information company with more
  than 100 business and professional publications and directories, 113
  exhibitions and conferences, numerous web sites and direct marketing,
  database and reference products. Under the agreement, we will create twenty
  web-based industry-specific business communities for Advanstar. The
  communities will utilize our e-commerce solutions and provide access to our
  procurement network. Advanstar will pay us development and maintenance fees
  for these communities. In addition, we will share subscription fees,
  transaction fees, and advertising fees generated from these communities. We
  have also issued to Advanstar a warrant to purchase 525,000 shares of our
  common stock that can be exercised prior to the six-month anniversary of
  the signing of the agreement at a price per share of $37.58.

     Workflow Management. In November and December 1999, we entered into
  agreements with Workflow Management, Inc., which provides customers with an
  innovative electronic outsourcing and facilities management system,
  iGetSmart((TM)) serving over 30,000 businesses throughout North America.
  Workflow Management has designated us as a preferred e-commerce solutions
  provider to Workflow Management. We have designated Workflow Management as
  the preferred provider of printing needs, including corporate stationery,
  business cards and forms. We will receive an annual fee for this preferred
  provider status. Under the agreement, we will also create a co-branded
  private procurement network for Workflow Management. Workflow Management
  will prepay supplier subscription fees and pay us a commission on gross
  sales to PurchasePro.com procurement network customers and we will share
  transaction fees.

     DigitalWork. In June and July 1999, we entered into agreements with
  DigitalWork.com, an online business services portal enabling growing
  businesses to complete critical business tasks online. DigitalWork will pay
  us to create a co-branded procurement network and prepay subscriptions for
  their registered members to access the PurchasePro.com network. We will
  share subscription, transaction and advertising fees related to this
  network. We also agreed to provide access to DigitalWork's online services
  to members of our public procurement network. We will share revenue from
  transaction and other fees.

     Office Depot. In July 1999, we entered into a strategic e-business
  relationship and marketing agreement with Office Depot, Inc., the world's
  largest seller of office supplies. Under terms of the agreement, we will be
  a recommended web-based business-to-business e-commerce solution to be
  marketed to the Office Depot customers and clients. Office Depot will be
  featured as the exclusive preferred provider for the office supplies and
  products category in our business-to-business procurement network. Terms of
  the agreement provide that transaction fees of 1% will be shared, with 25%
  to Office Depot and the remaining 75% to us.

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     VerticalNet. In July 1999, we entered into an agreement with
  VerticalNet, Inc., an owner and operator of online business-to-business
  vertical communities. Under the agreement, we will assist VerticalNet in
  launching and promoting hospitality and food service vertical communities.
  We will provide e-commerce solutions to VerticalNet and its users will have
  access to our public procurement network. We will engage in joint
  promotional activities and provide links to each other's Web sites. We will
  share transaction fees.

     ZoomTown.com. In May 1999, we entered into an agreement with
  ZoomTown.com, a subsidiary of Cincinnati Bell, Inc. We have granted to
  ZoomTown.com, as our agent and representative, the exclusive right to
  market and offer access to our procurement networks in Ohio, a co-exclusive
  right in Kentucky, and a nonexclusive right in other domestic markets until
  April 2001. Under the agreement ZoomTown.com may co-brand our procurement
  networks. In addition, ZoomTown.com can extend its exclusive rights to
  market and offer access to our procurement networks under a ZoomTown.com
  co-brand to include the states neighboring Ohio and Kentucky. ZoomTown.com
  receives sales commissions for members it adds to the co-branded
  procurement networks.

Our Procurement Network Members

   The following is a representative list of our major procurement network
members:

                                               Lexington/Louisville, Kentucky
  National Accounts                            and Cincinnati, Ohio
    Advanstar                                      Amtek Electrical
    American Hotel Register                        Ball Homes
    Barton Management                              Clay Ingels Company
    Best Western International                     Central Baptist Hospital
    Building One Services                          Fidelity National Credit
    DigitalWork                                     Services
    Handy Source                                   Host Communications, Inc.
    Hospitality City                               Lodestar Energy
    MeriStar Management Company                    Montgomery Inn
    MGC Communications                             St. Joseph Hospital
    Mirage Resorts                                 University of Louisville
    National Association of Women                   Hospital
     Business Owners
    National Black Chamber of Commerce         Florida
    National Minority Supplier                     The Breakers Hotel
     Development Council                           Carnival Cruise Lines
    1800Wedding.com                                Loews Hotels
    Park Place Entertainment                       Registry Resort
    Sunstone Hotels                                Seaway Hotel Corporation
    Tarsadia Hotels
    Travelscape                                Arizona
    VerticalNet                                    America West Arena
                                                   Arizona Diamondbacks
  Nevada                                           Bank One Ballpark
    Aladdin Hotel and Casino                       Embassy Suites Scottdale
    Marnell Corrao Construction                    ILX Resorts
    MGM Grand                                      Greater Phoenix Chamber of
    Mission Industries                              Commerce
    Nevada Power Company                           Phoenix Suns
    Rio Hotel and Casino                           Scottsdale Princess
    State of Nevada

   These relationships provide us with access to and assistance in recruiting a
large number of smaller to medium sized companies for our procurement networks.

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Sales and Marketing

 Sales Strategy

   We sell through direct and indirect channels. Our direct sales group targets
buyers, suppliers and their respective business partners. As of December 31,
1999 we had 189 people in our sales and marketing group, and we plan to
significantly expand this group over the next 12 months. Sales offices in the
United States currently include Las Vegas, Nevada, San Rafael, California,
Chicago, Illinois, Detroit, Michigan, Atlanta, Georgia, Dallas, Texas and
Phoenix, Arizona. We also have sales representatives located in Washington,
D.C., Orlando, Florida and Atlantic City, New Jersey.

   The sales forces of our sales and marketing partners offer our services to
their business partners. To gain market presence and exposure to potential new
members, we plan to team with large buyers and suppliers that have strong
industry backgrounds and market presence in their respective markets and
geographic regions.

 Marketing Strategy

   Our marketing strategy focuses on increasing our brand awareness and
identity. We intend to continue to market ourselves through traditional and on-
line business media and trade publications. Co-branded relationships and
cooperative direct mail initiatives support our direct marketing efforts. We
participate in events, conferences and trade shows to promote our business-to-
business brand presence.

Member Service and Support

   We provide member service support on a 24-hour per day, 7-day per week
basis. Our customer support department is responsible for day-to-day contact
with members and responds to questions from members through e-mail and a 24-
hour toll-free number. This department is responsible for retaining and
increasing use by existing members and is an important aspect of member
satisfaction.

Technology and Operations

   PurchasePro.com's proprietary network technology serves as the enabling
platform for all of our solutions. This community-oriented, trading procurement
network technology resides centrally on our servers located at our
headquarters. Members access our service using either a standard Web browser or
our proprietary client software. We have designed our technology and operations
with the following key characteristics, many of which are based on our
centralized architecture:

     Scalability. Our architecture is scalable, enabling us to accommodate
  membership growth. This scalability permits us to quickly add our members'
  business partners to our procurement networks without those members
  incurring infrastructure costs.

     Accuracy. We have designed our system to enable each member to maintain
  their information on our databases so that other users can access the most
  current data. In addition, by using custom interfaces to our client
  software, members can automate the process of maintaining their data.

     Reliability. We currently maintain four T1 Internet connections. In
  addition, we maintain a separate DS3 Internet connection. The client
  connections are load balanced over our application servers. Database
  servers are configured to be fault-tolerant and their hard drives can be
  swapped while the system is operating. These databases are replicated on
  additional back-up servers for quick access. Uninterruptible power supplies
  support all production servers.

     Security. Multiple layers of security, including secure socket layer
  technology from Verisign, protect the network and data. Our procurement
  network uses up to 128-bit standard encryption technology, along with
  rigorously monitored firewalls and other restrictions and physical or
  electronic separations to prevent harm to the service. Servers add, update
  and retrieve data through procedures designed to prevent

                                       9
<PAGE>

  improper access to data. Additionally, our staff has restricted access to
  our data and procurement network. All servers are equipped with virus
  detection and removal software, including an enhanced version on our mail
  server.

     Recovery. In addition to the redundant database servers, all member data
  is backed-up to tape every thirty minutes and removed from the premises on
  a daily basis for off-site storage.

Intellectual Property

   We rely on a combination of trademark, copyright and patent law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers and business partners to protect our proprietary rights in
products, services, know-how and information. We have been granted one patent
in the United States and we may seek additional patents in the future. We do
not know if any future patent application will be issued with the scope of the
claims we seek, if at all, or whether any patents we receive will be challenged
or invalidated. Our means of protecting our proprietary rights in the United
States or abroad may not be adequate and competitors may independently develop
similar technology. We cannot be certain that our services do not infringe
patents or other intellectual property rights that may relate to our services.
Like other technology and internet based businesses, we face the risk that we
will be unable to protect our intellectual property and other proprietary
rights, and the risk that we will be found to have infringed the proprietary
rights of others.

Competition

   The e-commerce market is new, rapidly evolving and intensely competitive,
and we expect competition to intensify in the future. Barriers to entry are
minimal, and competitors may develop and offer similar services in the future.
Although we believe that there may be opportunities for several providers of
products and services similar to ours, a single provider may dominate the
market. We expect that additional companies will offer competing e-commerce
solutions in the future.

   We have encountered and expect to encounter competition from other e-
commerce solutions providers including:

  . companies such as Microsoft Corporation, America Online and its Netscape
    subsidiary, and Yahoo! that offer a broad array of Internet-related
    services and either offer business-to-business e-commerce services
    presently or have announced plans to introduce such services in the
    future;

  . enterprise software purchasing system providers such as Ariba and
    Commerce One;

  . electronic data interchange providers such as GE Information Services,
    Harbinger Corp., IBM and Sterling Commerce;

  . enterprise resource planning software developers such as PeopleSoft,
    Oracle and SAP;

  . e-commerce trade communities; and

  . e-commerce Web sites of business retailers.

   Virtually all of our current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition in business and
Internet markets and significantly greater financial, marketing, technical and
other resources than PurchasePro.com. In addition, other e-commerce service
providers may be acquired by, receive investments from or enter into other
commercial or strategic relationships with larger, well established and well-
financed companies as use of Internet and other online services increases.
Therefore, certain of our competitors may be able to devote significantly
greater resources to marketing and promotional campaigns, may adopt more
aggressive pricing policies or may try to attract users by offering services
for free and devote substantially more resources to product development than
PurchasePro.com. Increased competition may result in reduced operating margins,
loss of market share and diminished value in our brand, any of which

                                       10
<PAGE>

could materially and adversely affect our business, financial condition and
results of operations. New technologies and the expansion of existing
technologies may increase the competitive pressures on us by enabling our
competitors to offer a similar but lower-cost service. We cannot assure you
that we will be able to compete successfully against current and future
competitors. Further, as a strategic response to changes in the competitive
environment or otherwise, we may, from time to time, make certain pricing,
service or marketing decisions or acquisitions that could materially and
adversely affect our business, financial condition and results of operations.
New technologies and the expansion of existing technologies may increase the
competitive pressures on us by enabling our competitors to offer a similar but
lower-cost service.

   Although we have established several strategic relationships, there can be
no assurance that these arrangements will be renewed on commercially reasonable
terms or that they will otherwise continue to result in increased users of the
PurchasePro.com service. In addition, companies that control access to ISP
services used to connect to our procurement network could promote our
competitors or charge our clients substantial fees for Internet access.

Government Regulation

   We are subject to various laws and regulations relating to our business. Few
laws or regulations are currently directly applicable to access to the
Internet. However, because of the Internet's popularity and increasing use, new
laws and regulations may be adopted. Such laws and regulations may cover issues
such as:

  . user privacy;

  . pricing;

  . tax;

  . content;

  . copyrights;

  . distribution; and

  . characteristics and quality of products and services.

   In addition, the growth of the Internet and e-commerce, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations may impede the
growth of the Internet, which could decrease our potential revenues from
electronic commerce or otherwise adversely affect our business, financial
condition and operating results.

   Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. The most recent session of Congress
enacted Internet laws regarding online copyright infringement. Although not yet
enacted, Congress is considering laws regarding Internet taxation. The European
Union recently enacted new privacy regulations. These are all recent
enactments, and there is uncertainty regarding their marketplace impact. In
addition, various jurisdictions already have enacted laws that are not
specifically directed to e-commerce but that could affect our business. The
applicability of many of these laws to the Internet is uncertain and could
expose us to substantial liability.

   Any new legislation or regulation regarding the Internet, or the application
of existing laws and regulations to the Internet, could materially adversely
affect us. If we were alleged to violate federal, state or foreign, civil or
criminal law, even if we could successfully defend such claims, it could
materially adversely affect us.

   We believe that our use of third-party material on our procurement network
communities is permitted under current provisions of copyright law. However,
because legal rights of certain aspects of Internet content and commerce are
not clearly settled, our ability to rely upon exemptions or defenses under
copyright law is uncertain.

                                       11
<PAGE>

   Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission in the
same manner as other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to regulate
Internet providers and online service providers in a manner similar to long
distance telephone carriers and to impose access fees on such providers. If
either of these petitions is granted, the costs of communicating on the
Internet could increase substantially. This, in turn, could slow the growth of
use of the Internet. Any such legislation or regulation could materially
adversely affect our business, financial condition and operating results.

Employees

   As of December 31, 1999, we had 351 full time employees. Of these, 66 were
in programming and technical support, 189 in sales and marketing, 28 in
customer support and operations and 68 in finance and administration. None of
our employees is represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to be good.

Executive Officers of the Registrant

   The executive officers and directors of PurchasePro.com and their ages as of
March 23, 2000 are as follows:

<TABLE>
<CAPTION>
             Name            Age                    Position
             ----            ---                    --------
   <C>                       <C> <S>
   Charles E. Johnson, Jr...  39 Chairman and Chief Executive Officer
                                 President, Chief Operating Officer, Secretary
   Christopher P. Carton....  41 and Director
                                 Executive Vice President--Corporate
   James P. Clough..........  49 Development
                                 Executive Vice President, Chief Financial
   Richard St. Peter........  51 Officer and Treasurer
   Michael L. Ford..........  45 Chief Technical Officer
   Jeffrey A. Neppl.........  38 Senior Vice President--Sales
                                 Senior Vice President--Hospitality Purchasing
   Richard T. Moskal........  56 Systems
                                 Senior Vice President--Strategic Development
   Robert G. Layne..........  34 and e-Commerce
                                 Vice President--Finance, Chief Accounting
   Scott H. Miller..........  41 Officer
   John G. Chiles(1)(2).....  47 Director
   David I. Fuente(2).......  54 Director
   J. Terrance Lanni(1)(2)..  57 Director
   Michael D. O'Brien(1)....  43 Director
   Bradley D. Redmon........  37 Director
</TABLE>
--------
(1) Member of Audit Committee
(2) Member of Compensation Committee

   Charles E. Johnson, Jr. Mr. Johnson has served as Chairman and Chief
Executive Officer of PurchasePro.com since its inception in 1996. In 1996, Mr.
Johnson founded and was the chief executive officer of Cart-it & Cabinetry LLC,
a company that manufactured casino carts and cabinetry. Mr. Johnson also
currently owns several video stores in Cincinnati, Ohio. From 1984 to August
1996, Mr. Johnson was the owner and President of Johnson Safety and Security, a
family owned security business located in Lexington, Kentucky.

   Christopher P. Carton. Mr. Carton joined PurchasePro.com as President, Chief
Operating Officer and Secretary in November 1996 and was elected to the board
of directors of PurchasePro.com in April 1999. Prior to joining
PurchasePro.com, Mr. Carton was Chief Operating Officer of Wilmington County
Country Club in Wilmington, Delaware from August 1995 to January 1996. From
1987 to August 1995, Mr. Carton was Chief Operating Officer of the Idle Hour
Country Club in Lexington, Kentucky. In addition, Mr. Carton has held the
position of Chief Operating Officer at both West Lake Country Club and Augusta
Country Club in Augusta, Georgia.


                                       12
<PAGE>

   James P. Clough. Mr. Clough joined PurchasePro.com in January 2000 as
Executive Vice President--Corporate Development. Mr. Clough had been a
corporate securities Partner with Pillsbury Madison & Sutro LLP, a leading
national law firm, since December 1992. Mr. Clough specialized in representing
start-ups and emerging companies in venture capital, mergers and acquisitions,
initial public offerings and follow-on public offerings and strategic
relationships. He concentrated on representing Internet and technology
companies and the underwriters that work with these companies. He is admitted
to practice as an attorney in California, New York and the District of
Columbia, and he is a member of the Federal Regulation of Securities Committee
of the Business Law Section of the American Bar Association.

   Richard C. St. Peter. Mr. St. Peter has served as Senior Vice President,
Chief Financial Officer and Treasurer from July 1999 to October 1999, and as
Executive Vice President, Chief Financial Officer and Treasurer since October
1999. Since November 1998, Mr. St. Peter has served as a consultant to Petco
Animal Supplies Inc., a retailer of pet supplies. From September 1990 to
October 1998, Mr. St. Peter was the Executive Vice President, Administration
and Chief Financial Officer of Petco. From 1986 to 1990, Mr. St. Peter was 42
Vice President and Chief Financial Officer at Stor, a furniture retailer. From
1982 to 1986, Mr. St. Peter held various positions at W.R. Grace's Home Centers
West, including Vice President and Chief Financial Officer.

   Michael L. Ford. Mr. Ford joined PurchasePro.com as Chief Technology Officer
in July 1999. Prior to joining PurchasePro.com, Mr. Ford was the Chief
Information Officer of Best Western International from August 1995 through May
1999 where he was responsible for coordinating Best Western's technical
businesses initiatives. From 1988 through December 1995, Mr. Ford was a
corporate director of Holiday Inn WorldWide.

   Jeffery A. Neppl. Mr. Neppl has served as Vice President--Sales from April
1999 to October 1999, and as Senior Vice President--Sales since October 1999.
Prior to joining PurchasePro.com, Mr. Neppl served as Managing Director of
Field Sales and Marketing for Coca-Cola USA from August 1998 to April 1999.
From July 1996 to August 1998, Mr. Neppl was Vice President of Sales for the
Campbell's Soup Company. From 1983 through June 1996, Mr. Neppl was employed by
Procter & Gamble where he held a number of positions including National
Accounts Managers and Customer Business Development Manager.

   Richard T. Moskal. Mr. Moskal has served as Vice President--Hospitality
Purchasing Systems since September 1999 and has served as chief executive
officer of our Hospitality Purchasing Systems subsidiary since joining our
company in January 1999. From March 1997 to January 1999, Mr. Moskal was the
Vice President of Purchasing Management for Promus Hotels and its predecessor
Doubletree Hotels Corporation. From 1986 to March 1997, Mr. Moskal served as
Vice President--Hotel Operations/Services for Prime Hospitality Corp.

   Robert G. Layne. Mr. Layne has served as Vice President--Strategic
Development of PurchasePro.com from April 1999 to October 1999, and as Senior
Vice President--Strategic Development and e-Commerce since October 1999. From
December 1996 to April 1999, Mr. Layne was PurchasePro.com's National Sales
Director. From 1988 to December 1996, Mr. Layne was a Regional Sales Manager
with Fisher Scientific, a manufacturer of laboratory supplies, and its
predecessor, Curtin Matheson Scientific.

   Scott H. Miller. Mr. Miller has served as Vice President--Finance, Chief
Accounting Officer of PurchasePro.com since July 1999. From April 1999 through
June 1999, Mr. Miller served as our Chief Financial Officer. From October 1998
through April 1999, Mr. Miller served as our Controller. From September 1997
through September 1998, Mr. Miller was the Chief Financial Officer of Max Riggs
Construction Company in Las Vegas, Nevada. From 1984 to September 1997, Mr.
Miller held various management positions at Arthur Andersen LLP in Denver and
Las Vegas, most recently as senior manager.

   John G. Chiles. Mr. Chiles has served as a member of the board of directors
of PurchasePro.com since June 1998. Mr. Chiles has served as a Managing
Director in Corporate Finance Department at Jefferies & Company, Inc. since
1993. He is the manager of the firm's Business, Information & Internet Services
Group. For the fifteen years prior to joining Jefferies & Company, Mr. Chiles
held various positions at Dean Witter Reynolds, including Managing Director and
Co-Manager of its Consumer Businesses Group.

                                       13
<PAGE>

   David I. Fuente. Mr. Fuente has served as a member of the board of directors
of PurchasePro.com since June 1999. Mr. Fuente has been the Chairman of the
Board and Chief Executive Officer of Office Depot, Inc. since December 1987.
Mr. Fuente is also a director of Vista Eye Care, Inc. and Ryder System, Inc.

   J. Terrence Lanni. Mr. Lanni has served as a member of the board of
directors of PurchasePro.com since June 1999. Mr. Lanni has been the Chairman
of MGM Grand, Inc. since July 1995, and Chief Executive Officer of MGM Grand,
Inc. since June 1995. He also served as President of MGM Grand, Inc. from June
1995 to July 1995. Prior thereto, he was President and Chief Operating Officer
of Caesars World, Inc. from April 1981 to February 1995.

   Michael D. O'Brien. Mr. O'Brien has served as a member of the board of
directors of PurchasePro.com since June 1999. Mr. O'Brien has served as the
President of ZoomTown.com, a subsidiary of Cincinnati Bell, Inc. since January
1998. From January 1992 through December 1997, Mr. O'Brien served as President
of Europe Chiquita Brands, Inc.

   Bradley D. Redmon. Mr. Redmon has served as a member of the board of
directors of PurchasePro.com since August 1998. Mr. Redmon is the Chairman of
E-MarketPro, LLC, an e-commerce service company Mr. Redmon founded in 1999.
Since March 1996, Mr. Redmon has owned and operated three Pretzelmaker
franchises, and since January 1992, Mr. Redmon has owned and operated several
Blockbuster Video franchises. Mr. Redmon is a cousin of Mr. Johnson.

   Mr. St. Peter, Petco and some of its other officers have been named as
defendants in class action lawsuits filed in 1998. The complaints allege the
defendants violated various federal securities laws through material
misrepresentations and omissions during the class period and seek unspecified
monetary damages. The lawsuits are in the discovery stage. Petco and Mr. St.
Peter have stated they believe the allegations contained in these lawsuits are
without merit and intend to defend themselves vigorously.

ITEM 2: FACILITIES

   Our corporate headquarters are located at 3291 North Buffalo Drive, Suite 2,
Las Vegas, Nevada where we lease approximately 20,000 square feet of office
space as of December 31, 1999. This facility houses significantly all of our
operations, including the executive staff, marketplace operations, customer
support and programming and development. We will be leasing an additional
34,000 and 75,000 square feet of office space in the same general area
beginning April 1, 2000, and November 1, 2000, respectively. We also maintain
sales and office sites in Phoenix, Arizona, Atlanta, Georgia, Dallas, Texas,
San Rafael, California, Detroit, Michigan, and Chicago, Illinois.

ITEM 3: LEGAL PROCEEDINGS

   We are not a party to any material legal proceedings.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   None

                                       14
<PAGE>

                                    PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   Our common stock is traded on the Nasdaq National Market under the symbol
"PPRO." Our initial public offering of stock was September 14, 1999, at $8.00
per share. The price range per share reflected in the table below, is the
highest and lowest sale price for our stock as reported by the Nasdaq National
Market during each quarter the stock has been publicly traded. Our present
policy is to retain earnings, if any, to finance future growth. We have never
paid cash dividends and have no present intention to pay cash dividends. At
March 15, 2000, there were approximately 255 stockholders of record and the
price per share of our common stock was $137.875.

<TABLE>
<CAPTION>
                                            For the Three Months Ended
                                   ---------------------------------------------
                                   March 31, June 30, September 30, December 31,
                                     1999      1999       1999          1999
                                   --------- -------- ------------- ------------
     <S>                           <C>       <C>      <C>           <C>
     Range per share
       High.......................    --       --        $31.83       $175.00
       Low........................    --       --        $14.66       $ 18.33
</TABLE>

   The above information has been restated to reflect a two-for-one stock
split, effected in the form of a stock dividend to each stockholder of record
as of December 13, 1999. On September 14, 1999, PurchasePro.com completed the
initial public offering of its common stock. The managing underwriters in the
offering were Prudential Securities and Jefferies & Company, Inc. The shares of
the common stock sold in the offering were registered under the Securities Act
of 1933, as amended, on a Registration Statement on Form S-1 (No. 333-80165).
The Securities and Exchange Commission declared the Registration Statement
effective on September 13, 1999. The offering commenced on September 14, 1999,
and terminated on September 30, 1999, after we had sold all of the 6,900,000
shares of common stock registered under the Registration Statement (including
900,000 shares sold in connection with the exercise of the underwriters' over-
allotment option). The initial public offering price was $8.00 per share for an
aggregate initial public offering of $55.2 million. We paid a total of $3.9
million in underwriting discounts and commissions and approximately $5.7
million has been or will be paid for costs and expenses related to the
offering. None of the costs and expenses related to the offering were paid
directly or indirectly to any director, officer, general partner of
PurchasePro.com or their associates, persons owning 10 percent or more of any
class of equity securities of PurchasePro.com or an affiliate of
PurchasePro.com. After deducting the underwriting discounts and commissions and
the offering expenses the estimated net proceeds to PurchasePro.com from the
offering were approximately $49.5 million. The net offering proceeds have been
used for general corporate purposes, to provide working capital to develop
products and to expand our operations, including expansion of our sales
infrastructure, marketing, investment in our network technology, and
investments in key strategic partners. Funds that have not been used have been
invested in money market funds, certificate of deposits and other investment
grade securities. We also may use a portion of the net proceeds to acquire or
invest in businesses, technologies, products or services.

   In November and December 1999, we issued warrants to Sprint and Advanstar,
respectively (See "Strategic Relationship" and Note 5, "Common Stock
Warrants"). Based in part upon representations of Sprint and Advanstar, the
warrants were issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933. The warrants were issued in
connection with agreements entered into by us with Sprint and Advanstar.

                                       15
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this report. The consolidated statement of operations data for each of the
three years in the period ended December 31, 1999, and the consolidated balance
sheet data at December 31, 1999 and 1998, are derived from our audited
consolidated financial statements. Activity for the period from October 8, 1996
(inception) to December 30, 1996, consisted of the sales and marketing
activities, and general and administrative expenditures which were paid for
from owner contributions.

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                             --------------------------------------------------
                                1996         1997         1998         1999
                             -----------  -----------  -----------  -----------
                                (In thousands, except share and per share
                                                amounts)
<S>                          <C>          <C>          <C>          <C>
Statement of Operations
 Data:
Revenues:
  Network access fees......  $       --   $       513  $     1,308  $     4,092
  Advertising..............          --           --           --         1,142
  Other....................          --           162          362          783
                             -----------  -----------  -----------  -----------
    Total revenues.........          --           675        1,670        6,017
                             -----------  -----------  -----------  -----------
Cost of revenues...........          --           214          445          836
                             -----------  -----------  -----------  -----------
Gross profit...............          --           461        1,225        5,181
Operating expenses:
  Sales and marketing
   (exclusive of non-cash
   strategic marketing
   expense)................           22          929        3,121        9,217
  Non-cash strategic
   marketing expense.......          --           250          720       50,925
  Programming and
   development.............           87          802          971        2,366
  General and
   administrative
   (exclusive of non-cash
   stock-based
   compensation)...........           10        1,345        2,896        9,026
  Amortization of stock-
   based compensation......          --           --           --         5,778
                             -----------  -----------  -----------  -----------
    Total operating
     expenses..............          119        3,326        7,708       77,312
                             -----------  -----------  -----------  -----------
Operating loss.............          119       (2,865)      (6,483)     (72,131)
                             -----------  -----------  -----------  -----------
Other income (expense):
  Interest income
   (expense), net..........           (4)        (120)        (317)         469
  Other....................          --           --           --          (279)
                             -----------  -----------  -----------  -----------
    Total other income
     (expense).............           (4)        (120)        (317)         190
                             -----------  -----------  -----------  -----------
Net loss before benefit for
 income taxes..............         (123)      (2,985)      (6,800)     (71,941)
Benefit for income taxes...          --           --           --           --
                             -----------  -----------  -----------  -----------
Net loss...................         (123)      (2,985)      (6,800)     (71,941)
Preferred stock dividends..          --           --          (245)        (511)
Accretion of preferred
 stock to redemption
 value.....................          --           --           (90)        (131)
Value of preferred stock
 beneficial conversion
 feature...................          --           --           --        (9,400)
                             -----------  -----------  -----------  -----------
Net loss applicable to
 common stockholders.......  $      (123) $    (2,985) $    (7,135) $   (81,983)
                             ===========  ===========  ===========  ===========
Loss per share:
  Basic....................  $     (0.01) $     (0.26) $     (0.55) $     (4.88)
                             ===========  ===========  ===========  ===========
  Diluted..................  $     (0.01) $     (0.24) $     (0.52) $     (4.78)
                             ===========  ===========  ===========  ===========
Weighted average shares
 outstanding:
  Basic....................   11,550,000   11,550,000   12,900,000   16,798,784
                             ===========  ===========  ===========  ===========
  Diluted..................   12,389,999   12,389,999   13,739,999   17,136,518
                             ===========  ===========  ===========  ===========
</TABLE>

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                        Year Ended December 31,
                         --------------------------------------------------------
                            1996          1997           1998           1999
                         ------------ -------------  -------------  -------------
                          (In thousands, except share and per share amounts)
<S>                      <C>          <C>            <C>            <C>
Balance Sheet Data:
Cash and cash
 equivalents............ $         1  $           8  $       1,690  $      30,356
Working capital
 (deficit)..............         (49)        (1,907)           907         28,439
Total assets............          70            609          2,745         66,477
Notes payable...........         133          2,567          1,545             25
Redeemable convertible
 preferred stock........         --             --           6,339            --
Total stockholders'
 equity (deficit).......        (113)        (2,709)        (5,881)        61,854
</TABLE>

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Overview

   PurchasePro.com, Inc. is a leading provider of Internet business-to-business
electronic commerce services. We develop public and private online business
procurement network communities. Our procurement networks provide businesses of
all sizes with a low cost and efficient e-commerce solution for buying and
selling a wide range of products and services over the Internet.

   Our predecessor company was incorporated in October 1996. In January 1998,
we incorporated PurchasePro.com, Inc. and acquired all of the assets and
assumed all the liabilities of our predecessor. In August 1998, we acquired our
subsidiary company, Hospitality Purchasing Systems (HPS). From October 1996 to
the commercial release of our service in April 1997, we were primarily engaged
in raising capital and developing our procurement network and software
infrastructure.

   In April 1997, we released PurchasePro 1.0, enabling our members to transact
e-commerce over our procurement network. Our next release in July 1997 provided
this capability over the Internet. In September 1998, we released PurchasePro
3.0, our procurement network enabling software. In February 1999, we released
PurchasePro 4.0, which allows members the additional capability of building
private procurement networks. On December 15, 1999, the Company released a
browser-based version, which allows members to access the network directly
without the use of software.

   From inception through June 30, 1999, substantially all of our revenues were
derived from monthly membership subscription fees for access to our public
procurement network. Beginning in 1999, we began to earn revenues from other
sources, including transaction fees, license fees and advertising. Generally,
our subscription and license fee contracts are entered into on a month-to-month
basis. Although we have executed contracts of a longer duration, generally
these contracts may be terminated at any time on 30 to 60 days' notice. Some of
our agreements with members are verbal and as such may be terminated at any
time. In August 1998, HPS began generating transaction fees from group buying
services provided to the hospitality industry. In 1999, with the release of
version 4.0, we began contracting with larger corporate customers to create
customized, private procurement networks. Typically, we charge these companies
licensing and maintenance fees for this service. The licensing and maintenance
fees are initially deferred and recognized ratably over the period of service.
In order to build our subscriber base we have also provided Web site
development and hosting services and fees for catalog building services. We
also charge our members a fee for processing their subscription payments by
invoice.

   In September 1999, we began generating transaction fee revenues from
transactions consummated by our members with value added merchandise and
service providers. Also, we began generating advertising fees, which we believe
will continue to generate both transaction fees and advertising revenues in the
future, and that these revenue streams will become a more significant portion
of our total revenues. As of December 31, 1999, we believe that there are
approximately 20,000 users that have been provided with the capability to
access and use our procurement network.

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<PAGE>

   Since our inception on October 8, 1996, we have incurred significant net
losses. From inception through December 31, 1996, we had a net loss of
$123,000. For the years ended December 31, 1997, 1998 and 1999, our net losses
applicable to common stockholders were $3.0 million, $7.1 million and $82.0
million, respectively. The net loss in the fourth quarter of 1999 included a
one-time non-cash charge of $50.1 million related to the issuance of warrants
to Sprint Communications Company, a strategic partner. As of December 31, 1999,
our accumulated deficit totaled $78.7 million.

Results of Operations

 Comparison of the Years Ended December 31, 1998 and December 31, 1999

   Revenues. Our revenues consist primarily of (1) network access fees for
access to our public and private networks, (2) advertising on our networks and
(3) other revenues associated with our networks and our HPS subsidiary,
including transaction fees, website development and hosting, and catalog
development. Network access fees include subscriptions to our public networks
generally paid by vendors. Network access fees also include fees paid by buyer
companies for developing, hosting and maintaining private procurement networks,
as well as providing customer support. Our net revenues increased from $1.7
million for the year ended December 31, 1998, to $6.0 million for the year
ended December 31, 1999. Substantially all of this increase resulted from
growth in our membership, new license arrangements to develop and host private
procurement networks and advertising revenues. Our network access revenue
increased from $1.3 million for the year ended December 31, 1998 to $4.1
million for the year ended December 31, 1999. Advertising revenue increased
from $0 to $1.1 million due to contracts with Office Depot, Workflow Management
and American Hotel Register. Other revenues increased from $362,000 for the
year ended December 31, 1998, to $783,000 for the year ended December 31, 1999,
including an increase in HPS revenues from $154,000 to $475,000.

   Cost of Revenues. Our cost of revenues consists primarily of costs for
member support and Web site operations, including fees for independent
contractors, compensation for our member support and site operations personnel
and, to a lesser extent, bank and credit card processing charges. Our cost of
revenues increased from $445,000 for the year ended December 31, 1998, to
$836,000 for the year ended December 31, 1999. The increase was primarily the
result of the increase in personnel in our member service department. Expenses
related to personnel costs of our member service and web site operations
departments increased from $357,000 for the year ended December 31, 1998 to
$699,000 for the year ended December 31, 1999. We expect that our cost of
revenues will increase in absolute dollars, but will remain constant or
decrease as a percentage of revenues in future periods, as a result of an
anticipated increase in the efficiency of our member service department to
provide service to our customers and the decrease in the number of member
service calls per member as our members gain experience using the procurement
network. Our gross profit increased from $1.2 million for the year ended
December 31, 1998 to $5.2 million for the year ended December 31, 1999.

   Sales and Marketing Expenses. Our sales and marketing expenses are comprised
primarily of compensation for our sales and marketing personnel, travel and
related costs, and costs associated with our marketing activities, such as
advertising, trade show and other promotional activities. Our sales and
marketing expenses increased from $3.1 million for the year ended December 31,
1998, to $9.2 million for the year ended December 31, 1999. This increase is
primarily attributable to an increase in the size of our sales force. Expenses
related to personnel costs of sales and marketing personnel increased from $2.2
million for the year ended December 31, 1998 to $5.9 million for the year ended
December 31, 1999. We plan to continue to increase the size of our sales force
and to expand our advertising and marketing activities. Travel and related
costs increased from $437,000 for the year ended December 31, 1998, to $1.2
million for the year ended December 31, 1999. Costs associated with our
marketing activities increased from $362,000 for the year ended December 31,
1998, to $2.0 million for the year ended December 31, 1999.

   During the year ended December 31, 1999, we recognized non-cash charges of
$800,000 and $50.1 million related to the issuance of stock options and
warrants, respectively, issued to strategic marketing partners. We expect that
our sales and marketing expenditures will increase significantly, both in
absolute

                                       18
<PAGE>

dollars and as a percentage of net revenues, as a result of the anticipated
opening of sales offices in new geographic regions, increased marketing efforts
and additional sales commissions.

   Programming and Development Expenses. Programming and development expenses
consist primarily of compensation for our programming and development staff and
payments to outside contractors. Our programming and development expenses
increased from $971,000 for the year ended December 31, 1998, to $2.4 million
for the year ended December 31, 1999. The increase is primarily attributable to
an increase in our programming staff. Expenses related to programming and
development personnel increased from $851,000 for the year ended December 31,
1998, to $2.0 million for the year ended December 31, 1999. In 1999, we
capitalized $396,000 of internal expenses related to programming and
development personnel who worked directly on the development of new services on
the network or on private network development. These costs are being amortized
over a 24-month period. We expect that our programming and development expenses
will increase in absolute dollars but remain relatively constant as a
percentage of revenues as we anticipate continuing to develop and enhance our
service offerings.

   General and Administrative Expenses. Our general and administrative expenses
consist primarily of compensation for personnel and, to a lesser extent, fees
for professional services, facility costs and communications costs, charges for
doubtful accounts and depreciation and amortization. Our general and
administrative expenses increased from $2.9 million for the year ended December
31, 1998, to $9.0 million for the year ended December 31, 1999. The increase is
primarily attributable to the increased size of our executive and
administrative staff. Expenses related to personnel costs of our general and
administrative personnel increased from $1.3 million for the year ended
December 31, 1998, to $2.9 million for the year ended December 31, 1999.
Professional fees increased from $222,000 to $1.5 million for the year ended
December 31, 1998 and 1999, respectively, due to recruiting fees and legal fees
related to items not associated with the initial public offering. Facilities
costs increased from $723,000 for the year ended December 31, 1998, to $1.6
million for the year ended December 31, 1999, as the result of our move into
our new corporate location and our expansion into new geographic areas
throughout late 1998 and early 1999. Other general and administrative expenses
increased primarily as a result of a larger amount charged to our reserve for
doubtful accounts. The charge for doubtful accounts totaled $127,000 for the
year ended December 31, 1998, as compared to $1.1 million for the year ended
December 31, 1999. The increase resulted primarily from the increase in our
revenues, and a better knowledge of the estimated bad debt percentage based on
our collection experience. We believe that our allowance for doubtful accounts
will decrease as a percentage of revenues in future periods as we anticipate
implementing more efficient membership credit reviews and as we expect more
members will convert to electronic fund transfer or credit card payment
methods. We expect that our general and administrative expenses will increase
in absolute dollars but remain relatively constant as a percentage of net
revenues, as we anticipate continuing to expand our operations. Our
depreciation increased from $253,000 for the year ended December 31, 1998, to
$847,000 for the year ended December 31, 1999. The increase is due to the
addition of computer hardware and software used to enhance the capabilities of
the network.

   Deferred Stock-Based Compensation. During the year ended December 31, 1999,
we recorded aggregate deferred stock compensation of $9.7 million in connection
with certain stock options granted to employees as additional paid-in capital.
The deferred stock compensation is being amortized over the vesting periods of
the related options. For the year ended December 31, 1999, amortization of
deferred stock-based compensation totaled $5.8 million.

   Other Income (Expense). Interest income increased from $16,000 to $656,000
for the years ended December 31, 1998 and 1999, respectively. The increase
relates to interest earned on initial public offering proceeds that were
invested in short-term investments. Our interest expense decreased from
$333,000 for the year ended December 31, 1998, to $187,000 for the year ended
December 31, 1999. The decrease resulted from the repayment of $2.3 million of
notes payable. Interest expense primarily relates to borrowings from our
Chairman and Chief Executive Officer in 1997, notes payable outstanding from
January 1998 through September 1998, and notes payable outstanding since
September 1998 and December 1998. Other expense includes the write-off of debt
issuance costs of $279,000 related to $1.5 million of notes payable issued in
September 1998 and repaid in June 1999.

                                       19
<PAGE>

 Comparison of the Years Ended December 31, 1997 and December 31, 1998

   Revenues. Revenues increased from $675,000 for 1997 to $1.7 million for
1998. Substantially all of this increase resulted from growth in our
membership. For the year ended December 31, 1997, $513,000 of our revenues were
from member network access fees and $162,000 were from Web site development and
hosting fees, and other fees. For the year ended December 31, 1998, our member
network access fees totaled $1.3 million and other revenue totaled $362,000.

   Cost of Revenues. Our cost of revenues increased from $214,000 for the year
ended December 31, 1997, to $445,000 for the year ended December 31, 1998. The
increase was primarily the result of the increase in personnel in our member
service department. Expenses related to personnel costs of our member service
and web site operations departments increased from $159,000 for the year ended
December 31, 1997, to $357,000 for the year ended December 31, 1998. Our gross
profit increased from $461,000 for 1997 to $1.2 million for 1998.

   Sales and Marketing Expenses. Our sales and marketing expenses increased
from $929,000 for 1997 to $3.1 million for 1998. This increase was primarily
attributable to expansion of our sales force into several geographic regions
throughout the country, plus expanded marketing activities that included
attendance at numerous trade shows, advertising campaigns and costs of
producing marketing materials. Further, we recognized a non-cash charge of
$720,000 related to the issuance of common stock to a stockholder at a price
below fair value in connection with services provided by a stockholder.
Expenses related to personnel costs of our sales and marketing department
increased from $686,000 for the year ended December 31, 1997, to $2.2 million
for the year ended December 31, 1998. Travel and related costs increased from
$117,000 for the year ended December 31, 1997, to $437,000 for the year ended
December 31, 1998. Costs associated with our marketing activities increased
from $131,000 for the year ended December 31, 1997, to $362,000 for the year
ended December 31, 1998.

   Programming and Development Expenses. Our programming and development
expenses increased from $802,000 for 1997 to $971,000 for 1998. The increase is
primarily attributable to increased salaries, payroll taxes and employee
benefits associated with the development of new versions of our procurement
network during 1998.

   General and Administrative Expenses. Our general and administrative expenses
increased from $1.3 million for 1997 to $2.9 million for 1998. This increase
was primarily attributable to increasing the size of our executive and
administrative staffs, legal fees and, to a lesser extent, communication costs
and our reserve for doubtful accounts. Expenses related to personnel costs of
our general and administrative personnel increased from $695,000 for the year
ended December 31, 1997, to $1.3 million for the year ended December 31, 1998.
The increase is primarily attributable to the increased size of our executive
and administrative staff. Our communications costs increased significantly from
$94,000 for the year ended December 31, 1997, to $257,000 for the year ended
December 31, 1998, as a result of our expansion into new geographic areas
throughout 1998. Other general and administrative expenses increased primarily
as a result of a larger amount charged to our reserve for doubtful accounts.
The charge for doubtful accounts totaled $73,000 for the year ended December
31, 1997, as compared to $127,000 for the year ended December 31, 1998. The
increase corresponds to the increase in our revenues between years.

   Interest Expense. Our interest expense increased from $120,000 for 1997 to
$333,000 for 1998. This increase resulted from the issuance of $2.3 million of
notes payable in January 1998 that were repaid in June 1998, $1.5 million of
notes payable in September 1998 and $350,000 of notes payable in December 1998.

Liquidity and Capital Resources

   Since our inception on October 8, 1996, we have had significant negative
cash flows from our operations. For the years ended December 31, 1997, 1998 and
1999, we used $1.9 million, $6.0 million and $12.6 million of cash,
respectively, in our operations. Cash used in operating activities in each
period resulted primarily from

                                       20
<PAGE>

net losses in those periods, offset by non-cash charges and changes in current
assets and liabilities. For the years ended December 31, 1998 and 1999, our
cash used in operating activities included increases in our trade accounts
receivable of $323,000 and $2.8 million. The increase is primarily attributable
to billings under terms of our license and advertising contracts entered into
during the last two quarters ended December 31, 1999, as well as member
receivables that reflect our efforts to expand the membership base by allowing
for payment terms up to 90 days.

   For the years ended December 31, 1997, 1998 and 1999, we used cash totaling
$654,000, $360,000 and $15.6 million, respectively, in our investing
activities. The increase in 1999 consisted of $8.6 million for computers and
related equipment purchases and $6.1 million for investments in other
marketable equity securities.

   Net cash provided by financing activities for the years ended December 31,
1997, 1998 and 1999, was $2.6 million, $8.1 million and $56.9 million,
respectively. Since inception, we have financed our operations primarily from
the issuance of common stock, proceeds of notes payable, the sale of Series A
Preferred Stock and Series B Preferred Stock and the proceeds of our initial
public offering. Funds provided by financing activities in 1997 consisted
primarily of loans from Charles E. Johnson, Jr., our Chief Executive Officer.
Funds provided by financing in 1998 consisted primarily of the issuance of
preferred stock of $7.0 million. In addition, we borrowed $2.3 million from
various individuals in January and $1.5 million from various individuals,
including Mr. Johnson, in September. Mr Johnson also advanced us an additional
$637,000. During 1998, we repaid $1.1 million of the loans from Mr. Johnson and
the $2.3 million loans. Funds provided by financing activities in 1999 included
the completion of our initial public offering, with net proceeds of
approximately $50 million after underwriting discounts and commissions and
other offering costs, and the issuance of Series B Preferred Stock. Funds used
in financing activities related to the repayment of the September 1998 Notes.

   As of December 31, 1999, our principal source of liquidity was approximately
$30 million of cash and cash equivalents. As of December 31, 1999, we had
material commitments for capital expenditures of $17.4 million for leasehold
improvements, network enhancements, and computer equipment. We have also
entered into several non-cancelable lease commitments that will require
payments of approximately $6.1 million over the next five years.

   In February 2000, we completed a public offering of 3,000,000 shares of
common stock for $80 per share. We sold 2,000,000 of the shares, with the
remaining 1,000,000 shares being sold by some of our stockholders. Net proceeds
to us from the secondary offering were $151.7 million.

   We believe that we have sufficient cash and cash equivalents, including the
proceeds from this offering, to fund our operating and investing activities for
at least the next 18 months. However, we may need to raise additional funds in
future periods through public or private financings, or other arrangements. Any
additional financings, if needed, might not be available on reasonable terms or
at all. Failure to raise capital when needed could harm our business, financial
condition and results of operations.

Recent Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The FASB recently issued SFAS No. 137, which defers the effective
date of SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. We currently do not engage in, nor
do we expect to engage in, derivative or hedging activities, and, therefore, we
do not believe that SFAS No. 133 will have a material impact on our results of
operations or financial position.

   In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, which summarizes the SEC's views
in applying generally acccepted accounting

                                       21
<PAGE>

principles to revenue recognition in financial statements. We believe that we
have followed the guidelines set forth in SAB No. 101 as it relates to revenue
recognition in our financial statements.

ITEM 7A: FACTORS THAT MAY AFFECT RESULTS

   You should carefully consider the following risk factors, before purchasing
shares of common stock of PurchasePro.com. Each of these risk factors could
adversely affect our business, financial condition and results of operations as
well as adversely affect the value of an investment in our common stock.

   Risks Related to Our Business

We are an early stage company. Our limited operating history makes it difficult
to evaluate our future prospects.

   We only began offering access to our procurement network in April 1997. We
have entered into the majority of our contracts and significant relationships
only within the last 15 months. Our extremely limited operating history makes
it difficult to evaluate our future prospects. Our prospects are subject to
risks and uncertainties frequently encountered by start-up companies in new and
rapidly evolving markets such as the business-to-business e-commerce market.
Many of these risks are unknown, but include the lack of widespread acceptance
of the Internet as a means of purchasing products and services and managing our
growth. Our failure to identify the challenges and risks in this new market and
successfully address these risks would harm our business.

We have a history of losses and anticipate continued losses, and we may be
unable to achieve profitability.

   We have never been profitable and expect to continue to incur operating
losses on both a quarterly and annual basis for at least the foreseeable
future. We may be unable to achieve profitability in the future. We have
incurred net losses in each accounting period since our organization in October
1996. As of December 31, 1999, we had an accumulated deficit of $78.7 million.
For a detailed discussion of our losses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview." We expect
to continue to make significant expenditures for sales and marketing,
programming and development and general and administrative functions. As a
result, we will need to generate significant revenues to achieve profitability.
We cannot assure you that revenues will grow in the future or that we will
achieve sufficient revenues for profitability. If revenues grow more slowly
than we anticipate, or if operating expenses exceed our expectations, our
business would be severely harmed. We may need to raise additional operating
capital if our business does not show a profit within the next 18 months.

The revenue and profit potential of our business model is unproven. Our success
is dependent on our ability to expand our membership base and expand into new
markets and industries.

   Our business model is to generate revenues from the development of both
public and private procurement networks for business-to-business e-commerce.
Our business model is new and our ability to generate revenue or profits is
unproven. We have initially focused on the hospitality industry and our success
is dependent on our ability to expand our membership base within the
hospitality industry. Our success is also dependent on our ability to expand
into new markets and industries. We cannot assure you that we will be
successful.

We depend on sales and marketing strategic relationships for growth. These
relationships may not contribute to increased use of our services, help us add
new members, or increase our revenue. We may not be able to enter into new
relationships or maintain our existing relationships.

   We have used and plan to continue to establish sales and marketing strategic
relationships with large organizations as part of our growth strategy. These
arrangements may not generate any new members or increase revenues and may not
achieve the anticipated member or revenue growth. We may not be able to enter

                                       22
<PAGE>

into new relationships or renew existing relationships on favorable terms, if
at all. As an example, in September 1999 we announced our intent to form a
strategic alliance with Ariba, Inc. We no longer intend to form a strategic
alliance with Ariba, Inc. In addition, we may not be able to recover our costs
and expenses associated with these efforts which could severely harm our
business.

A number of statements in our press releases and interviews are based on
internal estimates and projections that may not be achieved by us, our partners
or our customers.

   From time to time, we issue press releases and give press interviews
concerning our products, business and strategic relationships. Some of our
press releases and interviews contained statements about the potential revenue
that may be achieved as a result of these strategic relationships, including
our recently announced relationship with Sprint. These statements were based on
our internal estimates and projections.

   In the press release we issued on December 3, 1999, announcing that we had
entered into a strategic e-commerce marketing agreement with Sprint, Charles E.
Johnson, Jr., our Chairman and Chief Executive Officer, was quoted as saying:
"Although there is no guarantee, we anticipate generating up to $40 million
dollars in net annualized recurring revenue with this agreement. For
PurchasePro.com, this represents new incremental business derived from the
Sprint marketplace over a twelve month period." Management's internally
prepared projections forecast $10 million in quarterly revenue derived from the
Sprint agreement being realized during the second quarter of 2001. The $10
million quarterly rate would be equivalent to a $40 million annualized rate.
The projections we used were based upon assumed penetration rates in reaching
Sprint's customers. These statements are forward-looking statements subject to
risks and uncertainties, including the risk that the full revenue target may
not be achieved. Delays or difficulties could be encountered in achieving the
assumed penetration rates and in reaching the revenue forecasted. In addition,
while we have reached agreement on the basic elements of the marketing
agreement between Sprint and us, we must reach agreement with Sprint on all
material terms in order for our relationship to go forward. Delays or
difficulties may be experienced in reaching agreement and we may never reach
the full revenue target. You should only consider this forward-looking
statement after carefully evaluating these factors and all the other
information in this prospectus, including the risks described in this section
and throughout this prospectus.

   In addition, in an article published by The Street.com on December 3, 1999,
Mr. Johnson was quoted as saying he expects a "significant leap" in non-
hospitality transaction fees in the quarter ended December 31, 1999. While we
believe the percentage increase in our non-hospitality transaction fees in the
quarter ended December 31, 1999, was significant, the amount of non-hospitality
transaction fees was not a material component of our revenues for that quarter.
These statements about our expected levels of transaction fee revenues are
forward-looking statements that are subject to risks and uncertainties,
including the risks described in this section and throughout this prospectus.
Actual results could differ materially.

   In March 2000, the Company released a projection of fiscal year 2000 first
quarter results. These projections were based on our internal estimates and are
subject to uncertainties. Actual results could differ from those projections.

   At the time of those press releases and interviews, we believed the
statements regarding the potential revenue that may be achieved from these
relationships, including our relationship with Sprint, to be reasonable based
upon these estimates. These estimates are subject to substantial uncertainties.
As a result, actual results could vary significantly from the projected results
contained in our press releases and interviews. In addition, many of the risks
described elsewhere in this risk factors section apply to these statements.

We have historically received substantially all of our revenue from companies
serving the hospitality industry. A serious downturn in the hospitality
industry could adversely affect us.

   Our dependence on members associated with the hospitality industry makes us
vulnerable to downturns in this industry. Such a downturn could lead our
members associated with this industry to reduce their level of activity on our
procurement network and cause some to cancel their membership.

                                       23
<PAGE>

We face intense competition in the business-to-business e-commerce market, and
we cannot assure you that we will be able to compete successfully.

   The business-to-business e-commerce market is new, rapidly evolving and
intensely competitive, and we expect competition to intensify in the future.
Barriers to entry are minimal, and competitors may develop and offer similar
services in the future. Our business could be severely harmed if we are not
able to compete successfully against current or future competitors. Although we
believe that there may be opportunities for several providers of products and
services similar to ours, a single provider may dominate the market. We believe
there is no current dominant provider in our market. We expect that additional
companies will offer competing e-commerce solutions in the future.

   In addition, our members and partners may become competitors in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could harm our business. Our
competitors vary in size and in the scope and breadth of the services they
offer. In addition to competition from several e-commerce trade communities, we
primarily encounter competition from enterprise software purchasing systems
providers such as Ariba and Commerce One. We may also encounter competition
from enterprise software developers such as Peoplesoft, Oracle and SAP.

   Virtually all of our current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition in business and
Internet markets and significantly greater financial, marketing, technical and
other resources. Our competitors may be able to devote significantly greater
resources to marketing and promotional campaigns, may adopt more aggressive
pricing policies or may try to attract users by offering services for free and
may devote substantially more resources to product development.

We will need to improve and implement new systems, procedures and controls in
order to effectively manage our growth and expansion.

   Continued implementation of our business plan requires an effective planning
and management process. Our business will suffer dramatically if we do not
effectively manage our growth. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and we will need to continue to expand, train and manage our
workforce. We continue to increase the scope of our operations both
domestically and internationally, and we have grown our workforce
substantially. Our growth has placed, and our anticipated future growth in our
operations will continue to place, a significant strain on our management
systems and resources. We have grown from eight employees in January 1997 to
351 employees as of December 31, 1999. In addition, we plan to continue to add
to our sales and marketing, customer support and product development personnel.
Our future performance may also depend on the effective integration of acquired
businesses. This integration, even if successful, may take a significant period
of time and expense, and may place a significant strain on our resources.

We may pursue the acquisition of new and complementary business, products and
technologies to grow our business. Unsuccessful acquisitions could harm our
operating results, business and growth.

   We may acquire businesses, products and technologies that complement or
augment our existing businesses, services and technologies. The inability to
integrate any newly acquired entities or technologies effectively could harm
our operating results, business and growth. Integrating any newly acquired
businesses or technologies may be expensive and time consuming. To finance any
acquisitions, we may need to raise additional funds through public or private
financings. Any equity or debt financings, if available at all, may be on terms
that are not favorable to us and, in the case of equity financings, may result
in dilution to our stockholders. We may not be able to operate any acquired
businesses profitably or otherwise implement our business strategy
successfully.

Our long sales cycle for large corporate accounts could cause delays in revenue
growth.

   Our sales cycle for large corporate accounts typically takes six to nine
months to complete and varies from contract to contract, but has taken up to 18
months for some contracts. A large number of our members are

                                       24
<PAGE>

introduced to our procurement networks through such accounts. Our lengthy sales
cycle for large corporate accounts could cause delays in revenue growth, and
result in significant fluctuations in our quarterly operating results. The
length of the sales cycle may vary depending on a number of factors over which
we may have little or no control, including the internal decision-making
process of the potential customer and the level of competition that we
encounter in our selling activities. Additionally, since the market for
business-to-business e-commerce is relatively new, we often have to educate
potential customers about the use and benefits of our products and services,
which can prolong the sales process. In some cases, we provide access to our
procurement networks on a trial basis for customer evaluation, which can again
prolong the sales process. Our sales cycle can be further extended for product
sales made through third parties.

Our quarterly results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations of investors and analysts.

   We expect that our quarterly operating results will fluctuate significantly
due to many factors, many of which are outside our control, including:

  . demand for and market acceptance of our products and services;

  . inconsistent growth, if any, of our member base;

  . loss of key customers or strategic partners;

  . timing of the recognition of revenue for large contracts;

  . variations in the dollar volume of transactions effected through our
    procurement networks;

  . intense and increased competition;

  . our ability to control costs;

  . introductions of new services or enhancements, or changes in pricing
    policies, by us and our competitors; and

  . reliable continuity of service and procurement network availability.

   We believe that quarterly revenues, expenses and operating results are
likely to vary significantly in the future, that period-to-period comparisons
of results of operations are not necessarily meaningful and that, as a result,
such comparisons should not be relied upon as indications of future
performance. Due to these and other factors, it is likely that our operating
results will be below market analysts' expectations in some future quarters,
which would cause the market price of our stock to decline.

Some smaller and medium sized businesses that supply larger organizations have
been reluctant to join or continue as a member of our procurement networks. Our
failure to attract and retain a large number of members would severely harm our
business.

   Our public procurement network operates as an open bidding process allowing
buyers to instantaneously compare the prices of suppliers. In some instances,
suppliers have been reluctant to join or continue as a member of our
procurement networks and participate in an open bidding process because of the
increased competition and comparisons this environment creates. We must add and
retain a substantial number of smaller to medium sized businesses as members.
Our ability to attract and retain members will depend in part on the continued
willingness of our large organization members who buy from them to support us
in our recruiting and retention efforts. A significant number of our members
using an older version of our software allowed their procurement network
memberships to lapse at the end of 1998.

Our revenue is derived from providing procurement network access to members
under short-term, pilot and verbal agreements. The cancellation or non-renewal
of these agreements would adversely affect us.

   We have generated substantially all of our revenues through member
subscription and license fees for access to our procurement networks. A failure
of our members to continuously renew their contracts, or a high

                                       25
<PAGE>

rate of termination, would significantly reduce our revenues. For the year
ended December 31, 1999, approximately 46% of our revenues were comprised of
member network access fees. Generally, our subscription and license fee
contracts are entered into on a month-to-month basis. Although we have executed
contracts of a longer duration, generally these longer contracts may be
terminated on short-term notice. Some of our agreements with members are verbal
and may be terminated at any time. Moreover, several of our significant member
agreements are pilot programs. We have expended significant financial and
personnel resources and have expanded our operations on the assumption that
these will be long-term contracts. If these become contracts of short-term
duration because of an early termination or non-renewal by the member, we may
be unable to recover the costs we incurred and our business could suffer
dramatically.

Our success depends on our ability to continuously enhance our services.

   Our future success will depend on our ability to enhance our procurement
network software, and to continue to develop and introduce new services that
keep pace with competitive introductions and technological developments,
satisfy diverse and evolving member requirements, and otherwise achieve market
acceptance. Any failure by us to anticipate or respond adequately to changes in
technology and member preferences, or any significant delays in our development
efforts, could make our services unmarketable or obsolete. We may not be
successful in developing and marketing quickly and effectively future versions
or upgrades of our procurement network software and browser system, or offer
new services that respond to technological advances or new market requirements.

We depend upon our key personnel and they would be difficult to replace.

   We believe that our success will depend on the continued employment of our
senior management team and key sales and technical personnel. If one or more
members of our senior management team were unable or unwilling to continue in
their present positions, our business would suffer.

   We plan to expand our employee base to manage our anticipated growth. Most
importantly, we plan to hire additional members of senior management.
Competition for personnel, particularly for senior management personnel and
employees with technical and sales expertise, is intense. The success of our
business is dependent upon hiring and retaining suitable personnel.

If our intellectual property protection is inadequate, competitors may gain
access to our technology and undermine our competitive position, causing us to
lose members. Infringement by us on the intellectual property rights of others
could expose us to substantial liabilities which would severely harm our
business.

   We regard our copyrights, service marks, trademarks, patents, trade secrets
and similar intellectual property as important to our success, and rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers and business partners to
protect our proprietary rights. Despite our precautions, unauthorized third
parties may copy certain portions of our services or reverse engineer or obtain
and use information that we regard as proprietary. End-user license provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program may be unenforceable under the laws of certain jurisdictions
and foreign countries. The status of United States patent protection in the
software industry is not well defined and will evolve as the U.S. Patent and
Trademark Office grants additional patents. We have been granted one patent in
the United States and we may seek additional patents in the future. We do not
know if any future patent application will be issued with the scope of the
claims we seek, if at all, or whether any patents we receive will be challenged
or invalidated. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting our proprietary rights in the United States or abroad may
not be adequate and competitors may independently develop similar technology.

   Third parties may infringe or misappropriate our copyrights, trademarks,
patents and similar proprietary rights. In addition, other parties may assert
infringement claims against us. We cannot be certain that our

                                       26
<PAGE>

services do not infringe patents or other intellectual property rights that may
relate to our services. In addition, because patent applications in the United
States are not publicly disclosed until the patent is issued, applications may
have been filed which relate to our services. We may be subject to legal
proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. If our services violate third-
party proprietary rights, we cannot assure you that we would be able to obtain
licenses to continue offering such services on commercially reasonable terms,
or at all. Any claims against us relating to the infringement of third-party
proprietary rights, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and in injunctions preventing us
from distributing these services.

Our inability to continue licensing third-party technologies could delay
product development which could result in a loss of members or slow our growth.

   We intend to continue to license technology from third parties, including
our Web server and encryption technology. Our inability to obtain any of these
licenses could delay product development until equivalent technology could be
identified, licensed and integrated. Any such delays in services could result
in a loss of members, and slow our growth and severely harm our business. The
market is evolving and we may need to license additional technologies to remain
competitive. We may not be able to license these technologies on commercially
reasonable terms or at all. In addition, we may fail to successfully integrate
any licensed technology into our services. These third-party licenses may
expose us to increased risks, including risks associated with the integration
of new technology, the diversion of resources from the development of our own
proprietary technology and our ability to generate revenues from new technology
sufficient to offset associated acquisition and maintenance costs.

Our agreements with affiliates may not have been the result of arm's-length
negotiations, and may be less favorable to us than those we could obtain from
unaffiliated third parties. Entering into agreements on less than the most
favorable terms available could harm our business or limit our revenue growth.

   Our agreements with some of our sales and marketing partners may not have
been the result of arm's-length negotiations. To the extent our agreements with
our affiliates, such as E-MarketPro, were not negotiated at arm's-length, they
may contain terms and conditions less favorable to us than we could have
obtained from unaffiliated third parties. Any future agreements or
relationships with affiliates may not necessarily result from arm's-length
negotiations and may not be on terms that are most favorable to us, which could
severely harm our business or limit our revenue growth.

If we expand our international sales and marketing activities, our business
will be exposed to the numerous risks associated with international operations.

   We intend to have operations in a number of international markets. To date,
we have limited experience in developing localized versions of our procurement
network enabling software and in marketing, selling and distributing our
solutions internationally.

   International operations are subject to many risks, including:

  . the impact of recessions in economies outside the United States,
    especially in Asia;

  . changes in regulatory requirements;

  . reduced protection for intellectual property rights in some countries;

  . potentially adverse tax consequences;

  . difficulties and costs of staffing and managing foreign operations;

  . political and economic instability;

  . fluctuations in currency exchange rates;

                                       27
<PAGE>

  . seasonal reductions in business activity during the summer months in
    Europe and certain other parts of the world; and

  . tarriffs, export controls and other trade barriers.

Our articles of incorporation and bylaws and Nevada law contain provisions
which could delay or prevent a change in control and could also limit the
market price of your stock.

   Our articles of incorporation and bylaws contain provisions that could delay
or prevent a change in control. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
Some of these provisions:

  . divide our board of directors into three classes;

  . authorize the issuance of preferred stock which can be created and issued
    by the board of directors without prior stockholder approval, commonly
    referred to as "blank check" preferred stock, with rights senior to those
    of common stock;

  . prohibit stockholder action by written consent; and

  . establish advance notice requirements for submitting nominations for
    election to the board of directors and for proposing matters that can be
    acted upon by stockholders at a meeting.

   In addition, we are seeking approval from our stockholders to increase the
amount of our authorized capital stock, which could then be used to prevent a
change in control.

   Further, certain provisions of Nevada law make it more difficult for a third
party to acquire us. Some of these provisions:

  . establish a supermajority stockholder voting requirement to approve an
    acquisition by a third party of a controlling interest; and

  . impose time restrictions or require additional approvals for an
    acquisition of us by an interested stockholder.

   These provisions could also limit the price that investors might be willing
to pay in the future for shares of our common stock.

   Risks Related to the Internet and E-commerce Industries

Our success depends on the Internet's ability to accommodate growth in e-
commerce.

   The use of the Internet for retrieving, sharing and transferring information
among businesses, buyers, suppliers and partners has only recently begun to
develop. If the Internet is not able to accommodate growth in e-commerce, our
business would suffer. The recent growth in the use of the Internet has caused
frequent periods of performance degradation. Our ability to sustain and improve
our services is limited, in part, by the speed and reliability of the
procurement networks operated by third parties. Consequently, the emergence and
growth of the market for our services is dependent on improvements being made
to the Internet infrastructure to alleviate overloading and congestion.

We are dependent upon the growth of the Internet as a means of commerce.

   If the e-commerce market does not grow or grows more slowly than expected,
our business will suffer. The possible slow adoption of the Internet as a means
of commerce by businesses may harm our prospects. A number of factors could
prevent the acceptance and growth of e-commerce, including the following:

  . e-commerce is at an early stage and buyers may be unwilling to shift
    their traditional purchasing to online purchasing;

                                       28
<PAGE>

  . businesses may not be able to implement e-commerce applications on these
    procurement networks;

  . increased government regulation or taxation may adversely affect the
    viability of e-commerce;

  . insufficient availability of telecommunication services or changes in
    telecommunication services may result in slower response times; and

  . adverse publicity and consumer concern about the reliability, cost, ease
    of access, quality of services, capacity, performance and security of e-
    commerce transactions could discourage its acceptance and growth.

   Even if the Internet is widely adopted as a means of commerce, the adoption
of our procurement network for procurement, particularly by companies that have
relied on traditional means of procurement, will require broad acceptance of
the new approach. In addition, companies that have already invested substantial
resources in traditional methods of procurement, or in-house e-commerce
solutions, may be reluctant to adopt our e-commerce solution.

Security risks of electronic commerce may deter use of our products and
services.

   A fundamental requirement to conduct business-to-business e-commerce is the
secure transmission of information over public procurement networks. If members
are not confident in the security of e-commerce, they may not effect
transactions on our procurement networks or renew their memberships which would
severely harm our business. We cannot be certain that advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments will not result in the compromise or breach of the algorithms we
use to protect content and transactions on our procurement networks or
proprietary information in our databases. Anyone who is able to circumvent our
security measures could misappropriate proprietary, confidential member
information, place false orders or cause interruptions in our operations. We
may be required to incur significant costs to protect against security breaches
or to alleviate problems caused by breaches. Further, a well-publicized
compromise of security could deter people from using the Internet to conduct
transactions that involve transmitting confidential information. Our failure to
prevent security breaches, or well-publicized security breaches affecting the
Internet in general could adversely affect our business.

Failure to maintain accurate databases could seriously harm our business and
reputation.

   We update and maintain extensive databases of the products, services and
procurement network transactions for our members. Our computer systems and
databases must allow for expansion as a member's business grows without losing
performance. Database capacity constraints may result in data maintenance and
accuracy problems which could cause a disruption in our service and our ability
to provide accurate information to our members. These problems may result in a
loss of members which could severely harm our business. Some of our customer
contracts provide for service level guarantees for the accuracy of data. Our
failure to satisfy these service level guarantees could result in liability or
termination of the contract and a loss of business, and our business and our
reputation would suffer.

We may not be able to accurately predict the rate of increase in the usage of
our procurement network, which may affect our timing and ability to expand and
upgrade our systems.

   Traffic in our procurement networks has increased to the point where we must
expand and upgrade some of our transaction processing systems and procurement
network hardware and software. We may not be able to accurately predict the
rate of increase in the usage of our procurement network. This may affect our
timing and ability to expand and upgrade our systems and procurement network
hardware and software capabilities to accommodate increased use of our
procurement network. If we do not upgrade our systems and procurement network
hardware and software appropriately, we may experience downgraded service which
could damage our business reputation, relationship with members and our
operating results.


                                       29
<PAGE>

If we encounter system failure, service to our customers could be delayed or
interrupted. Service delays or interruptions could severely harm our business
and result in a loss of customers.

   Our ability to successfully maintain an e-commerce marketplace and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and
procurement network systems. Any interruptions could severely harm our business
and result in a loss of customers. Our computer and communications systems are
located in Las Vegas, Nevada. Although we periodically back up our databases to
tapes and store the backup tapes offsite, we do not maintain a redundant site.
Our systems and operations are vulnerable to damage or interruption from human
error, sabotage, fire, flood, earthquake, power loss, telecommunications
failure and similar events. Although we have taken steps to prevent a system
failure, we cannot assure you that our measures will be successful and that we
will not experience system failures in the future. Moreover, we have
experienced delays and interruptions in our telephone and Internet access which
have prevented members from accessing our procurement networks and customer
service department. Furthermore, we do not have a formal disaster recovery plan
and do not carry sufficient business interruption insurance to compensate us
for losses that may occur as a result of any system failure. The occurrence of
any system failure or similar event could harm our business dramatically. In
addition, we may move to third-party hosting of our servers. We cannot assure
you that this transition, if undertaken, would be effected without
interruptions. Further, any such third-party host could be subject to the same
risks of system failure as our current site.

Our services depend on complex software. Unknown defects in this software could
result in service and development delays.

   Our procurement network services depend on complex software developed
internally and by third parties. Software often contains defects, particularly
when first introduced or when new versions are released. Our testing procedures
may not discover software defects that affect our new or current services or
enhancements until after they are deployed. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance or divert our development
resources, any of which could severely harm our business. In the past, we have
missed internal software development and enhancement deadlines. Some of our
contracts contain software enhancement and development milestones. If we are
unable to meet these milestones, whether or not the failure is attributable to
us or a third party, we may be in breach of our contractual obligations. Such a
breach could damage our reputation, lead to termination of the contract, and
adversely affect our business.

Governmental regulation and legal uncertainties could impair the growth of the
Internet and decrease demand for our services and increase our cost of doing
business.

   The laws governing Internet transactions remain largely unsettled, even in
areas where there has been some legislative action. The adoption or
modification of laws or regulations relating to the Internet could increase our
costs and administrative burdens. It may take years to determine whether and
how existing laws such as those governing intellectual property, privacy,
libel, consumer protection and taxation apply to the Internet.

   Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. We must comply with new regulations
in the United States and other countries where we conduct business. The growth
and development of the business-to-business e-commerce market may prompt calls
for more stringent laws governing consumer protection and the taxation of e-
commerce. Non-compliance with any newly adopted laws and regulations could
expose us to significant liabilities.

The inability to acquire or maintain effective Web domain names could create
confusion and direct traffic away from our procurement networks.

   We currently hold various Internet Web addresses relating to our procurement
network. If we are not able to prevent third parties from acquiring Web
addresses that are similar to our addresses third parties could

                                       30
<PAGE>

acquire similar domain names which could create confusion that diverts traffic
to other websites away from our procurement networks thereby adversely
affecting our business. The acquisition and maintenance of Web addresses
generally is regulated by governmental agencies and their designees. The
regulation of Web addresses in the United States and in foreign countries is
subject to change. As a result, we may not be able to acquire or maintain
relevant Web addresses in all countries where we conduct business. Furthermore,
the relationship between regulations governing such addresses and laws
protecting proprietary rights is unclear.

We may be subject to legal liability for communication on our procurement
network.

   We may be subject to legal claims relating to the content in our procurement
network, or the downloading and distribution of such content. Claims could
involve matters such as fraud, defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content of material. Our insurance
may not cover claims of this type, or may not provide sufficient coverage. Even
if we are ultimately successful in our defense of these claims, any such
litigation is costly and these claims could harm our reputation and our
business.

We may be harmed by delayed Year 2000 problems.

   Although the date is now past January 1, 2000, and we have not experienced
immediate adverse impact from the transition to the Year 2000, we cannot
provide assurance that we or our suppliers and customers have not been affected
in a manner that is not yet apparent. In addition, some computer programs that
were date sensitive to the Year 2000 may not have been programmed to process
the Year 2000 as a leap year, and any negative consequential effects remain
unknown. As a result, we will continue to monitor our Year 2000 compliance and
the Year 2000 compliance of our suppliers and customers.

                                       31
<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
PurchasePro.com, Inc.:

   We have audited the accompanying consolidated balance sheets of
PurchasePro.com, Inc. (a Nevada corporation) and subsidiary as of December 31,
1998 and 1999, and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PurchasePro.com, Inc. and
subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States.

Arthur Andersen LLP

Las Vegas, Nevada
March 29, 2000

                                       32
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              December 31,
                                                           -------------------
                                                             1998      1999
                                                           --------- ---------
                                                             (In thousands,
                                                            except share and
                                                           per share amounts)
<S>                                                        <C>       <C>
                          ASSETS

Current assets:
  Cash and cash equivalents............................... $  1,690  $  30,356
  Trade accounts receivable, net of allowance for doubtful
   accounts of $200 and $594, respectively................      215      1,950
  Other receivables.......................................       99        205
  Prepaid expenses and other..............................       20        551
                                                           --------  ---------
    Total current assets..................................    2,024     33,062
Property and equipment:
  Computer equipment and software.........................      715      8,585
  Communication equipment.................................       65         65
  Furniture and fixtures..................................      155        890
  Leasehold improvements..................................       44         58
                                                           --------  ---------
                                                                979      9,598
  Less--accumulated depreciation..........................     (415)    (1,262)
                                                           --------  ---------
    Net property and equipment............................      564      8,336
Other assets:
  Marketable securities...................................      --      12,587
  Editorial content rights................................      --      10,747
  Other...................................................      157      1,745
                                                           --------  ---------
    Total other assets, net...............................      157     25,079
                                                           --------  ---------
    Total assets.......................................... $  2,745  $  66,477
                                                           ========  =========
</TABLE>


  The accompanying notes to consolidated financial statements are an integral
                     part of these consolidated statements.

                                       33
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                               1998      1999
                                                              -------  --------
                                                               (In thousands,
                                                              except share and
                                                                 per share
                                                                  amounts)
<S>                                                           <C>      <C>
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable........................................... $    99  $  2,847
  Accrued salaries and benefits..............................     208       757
  Deferred revenues..........................................     165       250
  Notes payable, current portion.............................     375        25
  Other current liabilities..................................     270       744
                                                              -------  --------
    Total current liabilities................................   1,117     4,623

Notes payable, net of current portion........................   1,170       --

Commitments and contingencies (Note 4)

Redeemable convertible preferred stock:
  Preferred stock, Series A: $0.001 par value; 8%
   convertible; $1.67 liquidation preference; 0 and 3,150,000
   shares authorized, issued and outstanding, mandatorily
   converted to common stock in September 1999...............   4,339       --
  Preferred stock, Series B: $0.001 par value; 8%
   convertible; $2.33 liquidation preference; 4,950,000
   shares authorized; 0 and 0, issued and outstanding,
   mandatorily converted to common stock in September 1999...   2,000       --

Stockholders' equity (deficit):
  Common stock: $0.01 par value; 40,000,000 shares
   authorized; 11,400,000 and 28,183,680 shares issued and
   outstanding, respectively.................................     114       282
  Additional paid-in capital.................................     805   137,770
  Deferred stock-based compensation..........................     --     (3,941)
  Accumulated deficit........................................  (6,800)  (78,741)
  Accumulated other comprehensive income.....................     --      6,484
                                                              -------  --------
    Total stockholders' equity (deficit).....................  (5,881)   61,854
                                                              -------  --------
      Total liabilities and stockholders' equity (deficit)... $ 2,745  $ 66,477
                                                              =======  ========
</TABLE>

          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       34
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                         -------------------------------------
                                            1997         1998         1999
                                         -----------  -----------  -----------
                                         (In thousands, except share and per
                                                   share amounts)
<S>                                      <C>          <C>          <C>
Revenues:
  Network access fees................... $       513  $     1,308  $     4,092
  Advertising...........................         --           --         1,142
  Other.................................         162          362          783
                                         -----------  -----------  -----------
    Total revenues......................         675        1,670        6,017
                                         -----------  -----------  -----------
Cost of revenues........................         214          445          836
                                         -----------  -----------  -----------
Gross profit............................         461        1,225        5,181
Operating expenses:
  Sales and marketing (exclusive of non-
   cash strategic marketing expense)....         929        3,121        9,217
  Non-cash strategic marketing expense..         250          720       50,925
  Programming and development...........         802          971        2,366
  General and administrative (exclusive
   of non-cash stock-based
   compensation)........................       1,345        2,896        9,026
  Amortization of stock-based
   compensation.........................         --           --         5,778
                                         -----------  -----------  -----------
    Total operating expenses............       3,326        7,708       77,312
                                         -----------  -----------  -----------
Operating loss..........................      (2,865)      (6,483)     (72,131)
Other income (expense):
  Interest income (expense), net........        (120)        (317)         469
  Other.................................         --           --          (279)
                                         -----------  -----------  -----------
    Total other income (expense)........        (120)        (317)         190
                                         -----------  -----------  -----------
Net loss before benefit for income
 taxes..................................      (2,985)      (6,800)     (71,941)
Benefit for income taxes................         --           --           --
                                         -----------  -----------  -----------
Net loss................................      (2,985)      (6,800)     (71,941)
Preferred stock dividends...............         --          (245)        (511)
Accretion of preferred stock to
 redemption value.......................         --           (90)        (131)
Value of preferred stock beneficial
 conversion feature.....................         --           --        (9,400)
                                         -----------  -----------  -----------
Net loss applicable to common
 stockholders........................... $    (2,985) $    (7,135) $   (81,983)
                                         ===========  ===========  ===========
Loss per share:
  Basic................................. $     (0.26) $     (0.55) $     (4.88)
                                         ===========  ===========  ===========
  Diluted............................... $     (0.24) $     (0.52) $     (4.78)
                                         ===========  ===========  ===========
Weighted average shares outstanding:
  Basic.................................  11,550,000   12,900,000   16,798,784
                                         ===========  ===========  ===========
  Diluted...............................  12,389,999   13,739,999   17,136,518
                                         ===========  ===========  ===========
</TABLE>

  The accompanying notes to consolidated financial statements are an integral
                     part of these consolidated statements.

                                       35
<PAGE>

                     PURCHASEPRO.COM, INC. AND SUBSIDIARY

     CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                        STOCKHOLDERS' EQUITY (DEFICIT)
              (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                    Redeemable Convertible Preferred Stock
                    -----------------------------------------
                         Series A             Series B
                    -------------------  --------------------
                      Shares    Amount     Shares     Amount
                    ----------  -------  ----------  --------
<S>                 <C>         <C>      <C>         <C>
Balance,
December 31,
1996............           --   $   --          --   $    --
Contribution
from
stockholder.....           --       --          --        --
Services donated
by stockholder..           --       --          --        --
Net loss........           --       --          --        --
                    ----------  -------  ----------  --------
Balance,
December 31,
1997............           --       --          --        --
Effect of
recapitalization..         --       --          --        --
Issuance of
common stock....           --       --          --        --
Redemption and
retirement of
common stock....           --       --          --        --
Contribution by
principal
stockholder.....           --       --          --        --
Charge for
services........           --       --          --        --
Issuance of
Series A
preferred stock,
net of issuance
costs and value
of warrants
issued..........     3,150,000    4,004         --        --
Issuance of
warrants to
holders of notes
payable.........           --       --          --        --
Issuance of
Series B
preferred stock
pursuant to
subscription
agreements......           --       --          --      2,000
Preferred stock
dividends.......           --       245         --        --
Accretion of
preferred stock
to redemption
value...........           --        90         --        --
Net loss........           --       --          --        --
                    ----------  -------  ----------  --------
Balance,
December 31,
1998............     3,150,000    4,339         --      2,000
Issuance of
common stock,
net of offering
costs...........           --       --          --        --
Issuance of
common stock to
Series A
stockholders....           --       --          --        --
Issuance of
Series B
preferred stock,
net of issuance
costs...........           --       --    4,950,000       --
Mandatory
conversion of
Series A and
Series B
preferred stock
to shares of
common stock....    (3,150,000)  (4,743) (4,950,000)  (11,638)
Issuance of
warrants to
strategic
marketing
partners........           --       --          --        --
Strategic
partner stock
option grant....           --       --          --        --
Exercise of
warrants........           --       --          --        --
Exercise of
options.........           --       --          --        --
Deferred stock-
based
compensation....           --       --          --        --
Amortization of
deferred stock-
based
compensation....
Preferred stock
dividends.......           --       280         --        231
Accretion of
preferred stock
to redemption
value...........           --       124         --          7
Value of
preferred stock
beneficial
conversion
feature.........           --       --          --      9,400
Net loss........           --       --          --        --
Unrealized gain
on marketable
securities......           --       --          --        --
                    ----------  -------  ----------  --------
Balance December
31, 1999........           --   $   --          --   $    --
                    ==========  =======  ==========  ========
<CAPTION>
                                           Stockholders' Equity (Deficit)
                    ------------------------------------------------------------------------------
                                                                            Accumulated
                      Common Stock     Additional   Deferred                   Other
                    ------------------  Paid-in   Stock-Based  Accumulated Comprehensive
                      Shares    Amount  Capital   Compensation   Deficit      Income      Total
                    ----------- ------ ---------- ------------ ----------- ------------- ---------
<S>                 <C>         <C>    <C>        <C>          <C>         <C>           <C>
Balance,
December 31,
1996............    11,550,000   $116   $   (106)   $    --     $   (123)     $  --      $   (113)
Contribution
from
stockholder.....           --     --         139         --          --          --           139
Services donated
by stockholder..           --     --         250         --          --          --           250
Net loss........           --     --          --         --       (2,985)        --        (2,985)
                    ----------- ------ ---------- ------------ ----------- ------------- ---------
Balance,
December 31,
1997............    11,550,000    116        283         --       (3,108)        --        (2,709)
Effect of
recapitalization..         --     --      (3,108)        --        3,108         --           --
Issuance of
common stock....     3,450,000     34         33         --          --          --            67
Redemption and
retirement of
common stock....    (3,600,000)   (36)        36         --          --          --           --
Contribution by
principal
stockholder.....           --     --       1,782         --          --          --         1,782
Charge for
services........           --     --         720         --          --          --           720
Issuance of
Series A
preferred stock,
net of issuance
costs and value
of warrants
issued..........           --     --         996         --          --          --           996
Issuance of
warrants to
holders of notes
payable.........           --     --         398         --          --          --           398
Issuance of
Series B
preferred stock
pursuant to
subscription
agreements......           --     --         --          --          --          --           --
Preferred stock
dividends.......           --     --        (245)        --          --          --          (245)
Accretion of
preferred stock
to redemption
value...........           --     --         (90)        --          --          --           (90)
Net loss........           --     --         --          --       (6,800)        --        (6,800)
                    ----------- ------ ---------- ------------ ----------- ------------- ---------
Balance,
December 31,
1998............    11,400,000    114        805         --       (6,800)        --        (5,881)
Issuance of
common stock,
net of offering
costs...........     6,900,000     69     49,445         --          --          --        49,514
Issuance of
common stock to
Series A
stockholders....       675,000      7         (7)        --          --          --           --
Issuance of
Series B
preferred stock,
net of issuance
costs...........           --     --       9,400         --          --          --         9,400
Mandatory
conversion of
Series A and
Series B
preferred stock
to shares of
common stock....     8,100,000     81     16,300         --          --          --        16,381
Issuance of
warrants to
strategic
marketing
partners........           --     --      60,872         --          --          --        60,872
Strategic
partner stock
option grant....           --     --         800         --          --          --           800
Exercise of
warrants........       839,999      8         (2)        --          --          --             6
Exercise of
options.........       268,681      3        480         --          --          --           483
Deferred stock-
based
compensation....           --     --       9,719      (9,719)        --          --           --
Amortization of
deferred stock-
based
compensation....                  --         --        5,778                                5,778
Preferred stock
dividends.......           --     --        (511)        --          --          --          (511)
Accretion of
preferred stock
to redemption
value...........           --     --        (131)        --          --          --          (131)
Value of
preferred stock
beneficial
conversion
feature.........           --     --      (9,400)        --          --          --        (9,400)
Net loss........           --     --         --          --      (71,941)        --       (71,941)
Unrealized gain
on marketable
securities......           --     --         --          --          --        6,484        6,484
                    ----------- ------ ---------- ------------ ----------- ------------- ---------
Balance December
31, 1999........    28,183,680   $282   $137,770    $ (3,941)   $(78,741)     $6,484     $ 61,854
                    =========== ====== ========== ============ =========== ============= =========
</TABLE>

  The accompanying notes to consolidated financial statements are an integral
                    part of these consolidated statements.

                                       36
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                     1997     1998      1999
                                                    -------  -------  --------
                                                         (In Thousands)
<S>                                                 <C>      <C>      <C>
Cash flows from operating activities:
  Net loss......................................... $(2,985) $(6,800) $(71,941)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation...................................     159      253       847
    Amortization of stock-based compensation.......     --       --      5,778
    Imputed interest...............................     --        67       --
    Amortization of debt discount..................     --        43       356
    Provision for doubtful accounts................      73      127     1,078
    Non-cash strategic marketing expense...........     250      720    50,925
    (Increase) decrease in:
      Trade accounts receivable....................     (91)    (323)   (2,813)
      Other receivables............................     (18)     (81)     (105)
      Prepaid expenses and other...................     --       (20)     (531)
    Increase (decrease) in:
      Accounts payable.............................     141     (201)    2,748
      Accrued liabilities..........................     513       74     1,023
      Deferred revenues............................      46      118        85
                                                    -------  -------  --------
        Net cash used in operating activities......  (1,912)  (6,023)  (12,550)
                                                    -------  -------  --------
Cash flows from investing activities:
  Purchase of property and equipment...............    (649)    (257)   (8,619)
  Purchase of marketable securities................     --       --     (6,104)
  Other assets.....................................      (5)    (103)     (914)
                                                    -------  -------  --------
        Net cash used in investing activities......    (654)    (360)  (15,637)
                                                    -------  -------  --------
Cash flows from financing activities:
  Proceeds from notes payable and advances.........   2,434    4,427       200
  Repayment of notes payable and advances..........     --    (3,362)   (1,375)
  Issuance of common stock, net....................     --       --     50,002
  Issuance of preferred stock and warrants, net....     --     7,000     8,026
  Contribution from stockholder....................     139      --        --
                                                    -------  -------  --------
        Net cash provided by financing activities..   2,573    8,065    56,853
                                                    -------  -------  --------
Increase in cash and cash equivalents..............       7    1,682    28,666
Cash and cash equivalents:
  Beginning of period..............................       1        8     1,690
                                                    -------  -------  --------
  End of period.................................... $     8  $ 1,690  $ 30,356
                                                    =======  =======  ========
Non-cash investing and financing activities:
  Other assets acquired with note payable.......... $   --   $    50  $    --
                                                    =======  =======  ========
  Other assets acquired with preferred stock....... $   --   $   --   $    674
                                                    =======  =======  ========
  Conversion of notes payable to equity............ $   --   $ 1,782  $    700
                                                    =======  =======  ========
  Conversion of preferred stock to common stock.... $   --   $   --   $ 16,381
                                                    =======  =======  ========
  Value of warrants issued for editorial content
   rights.......................................... $   --   $   --   $ 10,747
                                                    =======  =======  ========
Cash paid for:
  Interest......................................... $    97  $   166  $    124
                                                    =======  =======  ========
</TABLE>

  The accompanying notes to consolidated financial statements are an integral
                     part of these consolidated statements

                                       37
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1999

(1) The Company

 Organization

   Purchase Pro, Inc., a Nevada corporation, was incorporated on October 8,
1996, as an S corporation for federal income tax purposes. On January 12, 1998,
PP International, Inc. was incorporated in Nevada as a C corporation for
federal income tax purposes. On January 15, 1998, PP International, Inc.
changed its name to Purchase Pro International, Inc., and on June 1, 1999,
changed its name to PurchasePro.com, Inc. (the "Company"). The Company
initially authorized the issuance of 20,000,000 shares, $0.01 par value stock.
On January 12, 1998, the Company issued 11,550,000 shares of common stock to
the three stockholders of Purchase Pro, Inc. The Company's principal and
controlling stockholder was the controlling stockholder of Purchase Pro, Inc.
On January 15, 1998, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Purchase Pro, Inc. The purchase
has been accounted for as a reorganization of companies under common control in
a manner similar to a pooling of interests. Accordingly, the financial position
and results of operations of the Company and Purchase Pro, Inc. have been
included in the accompanying consolidated financial statements. In August 1998,
the Company formed its wholly owned subsidiary, Hospitality Purchasing Systems,
Inc., ("HPS"), a Nevada corporation.

 Nature of Business

   The Company is a provider of Internet business-to-business electronic
commerce services. The Company's e-commerce solution is comprised of public and
private communities called "procurement networks" where businesses can buy and
sell a wide range of products and services over the Internet in an efficient,
competitive and cost-effective manner. Subscribers to the Company's procurement
networks need only an Internet connection, a Web browser and a PurchasePro.com
membership in order to participate in interactive buying and selling
communities. The procurement networks are customizable and scalable, utilizing
an open-architecture platform that can be integrated with members' existing
enterprise resource planning and accounting systems. The Company's solution
leverages the growth, pervasiveness, low costs and community building nature of
the Internet as a basis for e-commerce for the broad business-to-business
market.

   The Company began testing the first working model of its primary product in
early 1997 and began selling network access in April 1997. Until that time, the
Company was considered a development-stage enterprise.

   From October 1996 to the commercial release of the service in April 1997,
the Company primarily engaged in raising capital and recruiting employees to
develop the procurement network software and network infrastructure. In April
1997, the Company released version 1.0 of its software, enabling members to
transact e-commerce over its network and in late 1997, members were provided
network connectivity over the Internet. In September 1998, the Company released
version 3.0 that provides members access to procurement network enabling
software and in February 1999, the Company released version 4.0, which allows
members the additional capability of building private procurement networks. In
December 1999, the Company released a browser-based version which allows
members to access the network directly without the use of software.

   In May 1999, the Company acquired substantially all of the assets of a
software development company for $215,000, consisting of $75,000 cash and
60,000 shares of Series B preferred stock valued at $2.33 per share. The
Company has developed programs for the architectural, engineering and
construction industry that provide an extension of the Company's e-commerce
services into that industry. The Company entered into five-year non-compete
agreements with these individuals in exchange for 165,000 shares of Series B
preferred stock (see Note 5).


                                       38
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   From inception through June 30, 1999, substantially all of the Company's
revenues have come from monthly membership subscription fees for access to the
public procurement network. Subscription contracts can be cancelled by either
party on as little as 30 days notice. The Company also provides Web site
hosting services and ISP connectivity services for a fee and charges members a
fee for processing their payments by invoice. In August 1998, HPS began
generating transaction fees from group buying services provided to the
hospitality industry. In 1999, the Company began generating fees from contracts
with larger corporate customers to create customized, private procurement
networks and transaction fees from members. The Company considers its
operations to be part of one operating segment.

   HPS' principal operation is negotiating contracts on behalf of independent
hotels and hotel management companies for which it receives fees and rebates.
In August 1998, HPS acquired the rights to certain contracts previously managed
by General Network Management Services, Inc. for $100,000 in the form of
$50,000 cash and a $50,000 note payable.

   The Company is subject to risks common to rapidly growing, technology-based
companies, including rapid technological change, growth and commercial
acceptance of the Internet, dependence on principal products, new product
development, new product introductions and other activities of competitors, and
a limited operating history.

(2) Significant Accounting Policies

 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.

 Reclassifications

   Certain reclassifications have been made to prior period financial
statements to conform to the 1999 presentations, which have no effect on
previously reported net income.

 Management's Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

 Concentration of Credit Risk

   Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in the U.S. and are denominated in U.S.
dollars. Portions of the Company's accounts receivable balances are settled
either through customer credit cards or electronic fund transfers. As a result,
the majority of accounts receivable are collected upon processing of those
transactions. The Company maintains an allowance for doubtful accounts based
upon the expected collectibility of accounts receivable. During the years ended
December 31, 1997, 1998 and 1999, no customers accounted for more than 10% of
net revenues. As of December 31, 1998, no customers accounted for more than 10%
of net accounts receivable. As of December 31, 1999, one customer accounted for
26% of net accounts receivable.

                                       39
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Fair Value of Financial Instruments

   The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and notes payable are carried at cost,
which approximates their fair value because of the short-term maturity of these
instruments. Marketable securities that have readily determinable fair values
are carried at fair value.

 Cash and Cash Equivalents

   Cash equivalents consist of investments in bank certificates of deposit and
other interest bearing instruments with initial maturities of three months or
less. Such investments are carried at cost which approximates fair value.

 Property and Equipment

   Property and equipment is stated at cost, including costs of software
purchased from third parties. Costs incurred for additions, improvements and
betterments are capitalized as incurred. Costs for maintenance and repairs are
charged to expense as incurred. Gains or losses on dispositions of property and
equipment are included in the determination of income. Depreciation and
amortization are computed using the straight-line method over the following
estimated service lives of the related assets:

<TABLE>
       <S>                                                               <C>
       Computer equipment and software.................................. 3 years
       Communication equipment.......................................... 3 years
       Furniture and fixtures........................................... 5 years
       Leasehold improvements........................................... 3 years
</TABLE>

 Revenue Recognition

   The Company earns revenue from several sources. The nature and revenue
recognition policy for each major source of revenue follows:

   Public Procurement Network Access Fees: Public procurement network fees
consist of subscription fees and transaction fees. Through December 31, 1999,
primarily all fees from the Company's public procurement network have been
subscription fees. Subscription fees are recorded, net of discounts, ratably
over the subscription period and deferred revenues are recognized for amounts
received before services are provided. The Company does not charge initial
sign-up fees to new subscribers. Transaction fees are recognized in the period
the transaction takes place.

   During the year ended December 31, 1999, the Company exchanged subscriptions
on its public procurement network for services and advertising, consisting of
development of customized websites and designation as a preferred provider of
procurement services for another web site. Revenues were recorded at the fair
value of subscriptions given, with corresponding amounts recorded for expenses.
Such revenue represented 7% of total revenues for the year ended December 31,
1999.

   Private Procurement Network Access Fees: The Company develops and
administers private procurement networks for some customers. Fees are generally
charged for development, hosting, maintenance, and customer support. Up-front
fees for private procurement network development are generally deferred and
recognized ratably over the hosting term. Maintenance, hosting and other
services are recognized ratably over the hosting term. Deferred revenues are
recognized for amounts received in excess of recorded revenue. Unbilled revenue
of $0 and $525,000 was recognized at December 31, 1998 and 1999, respectively,
on amounts earned but not

                                       40
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

yet billed and are included in accounts receivable in the accompanying
consolidated balance sheets. In some cases, the Company has licensed the
private procurement network to the customer and earned only development fees.
These arangements have been accounted for under the completed contract method
in accordance with SOP 97-2, "Software Revenue Recognition."

   Advertising: Advertising represents banner advertisements on the Company's
public and private procurement networks and slotting fees for vendors
designated as "preferred" or "exclusive" providers of a category of goods or
services on the public procurement network. Advertising revenue is recorded
over the term of the advertisements of slotting arangements.

   Other: Other revenues represent website development, transaction and
participation fees from groups buying services, and miscellaneous revenues.
Other revenues are generally recognized as earned or as services are provided.

 Marketable Securities

   Marketable securities consist of investments in other companies in the form
of equity securities. The Company has classified all investments as available-
for-sale. Available-for-sale securities are recorded at market value.
Unrealized holding gains and losses, net of the related income tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity (deficit) until realized. Dividend
and interest income are recognized when earned. Realized gains and losses for
securities classified as available-for-sale are included in earnings and are
derived using the specific identification method for determining the cost of
securities sold. As of December 31, 1999, unrealized holding gains were $6.5
million. There was no dividend or interest income, nor were there any realized
gains or losses as of December 31, 1999.

 Intangible Assets

   Intangible assets include the costs of acquired technology and a non-compete
agreement with two employees, and are included in other assets in the
acompanying consolidated balance sheets. These assets are being amortized over
a 36-month and 60-month period, respectively. Other intangible assets also
include the purchase of a software license and a trademark. These assets are
being amortized over a 60-month period.

 Network Development Costs

   The Company capitalizes certain internal network development costs, which
are amortized by the straight-line method over a two-year period. The
capitalized costs are payroll and payroll-related costs for employees who are
directly associated with the enhancement or new functionality of the network or
the development of private networks. At December 31, 1999, unamortized network
development costs were $296,000, net of accumulated amortization of $99,000.
The amortization of these costs are included in programming and development
costs in the accompanying consolidated statements of operations.

 Stock-Based Compensation

   The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation. Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.


                                       41
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Income Taxes

   The Company accounts for income taxes according to SFAS No. 109, "Accounting
for Income Taxes." Prior to 1998, PurchasePro, Inc., with the consent of its
stockholders, elected to be taxed under Section 1372 of the Internal Revenue
Code (the "Code") as an S corporation, which provides that, in lieu of
corporate income taxes, the stockholders account for their pro rata share of
the Company's items of income, deductions, losses, and credits. In connection
with the reorganization of the Company in January 1998 (see Note 1), the
Company, with the consent of its stockholders, elected to be taxed under the
provisions of Subchapter C of the Code. As a result, the Company reclassified
its cumulative net losses totaling $3,108,278 through the date of the
reorganization to additional paid-in capital in the accompanying consolidated
balance sheets.

 Earnings (Loss) per Share

   The Company follows the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with SFAS No. 128, basic earnings per share ("EPS") is computed by
dividing net loss applicable to common stock by the weighted average common
shares outstanding during the period. Pursuant to SEC Staff Accounting Bulletin
No. 98, shares of common stock or convertible preferred stock are considered
outstanding for all periods presented in the computation of basic and diluted
EPS if issued for nominal consideration. Options, warrants or other common
stock equivalents are considered outstanding for all periods presented in the
computation of diluted EPS if issued for nominal consideration. For the years
ended December 31, 1997, 1998, and 1999, the weighted average common shares
outstanding used to compute diluted EPS includes the effect of warrants issued
by the Company to acquire shares of common stock for $0.007 per share.

   For those periods in which potentially dilutive securities such as stock
options and convertible preferred stock have a dilutive effect, the weighted
average shares outstanding used for computation of diluted EPS includes the
effect of these potentially dilutive securities.

   All share and per share amounts in the accompanying consolidated financial
statements have been restated to give effect to the three-for-two stock split
which occurred on December 14, 1999.

 Comprehensive Income

   Comprehensive income consists of the unrealized holding gain on available-
for-sale securities purchased for investment purposes in 1999. The unrealized
gain is the difference between the purchase price and the fair market value of
the securities as of December 31, 1999.

 Recently Issued Accounting Standards

   In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The FASB recently issued SFAS No. 137, which defers the effective
date of SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company currently does not
engage in, nor does management expect the Company to engage in, derivative or
hedging activities, and, therefore, management does not believe that
SFAS No. 133 will have a material impact on the Company's results of operations
or financial position.

   In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, which summarizes the SEC's views
in applying generally acccepted accounting principles to revenue recognition in
financial statements. Management believes that the Company has followed the
guidelines set forth in SAB No. 101 as it relates to revenue recognition.


                                       42
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(3) Notes Payable

 Principal Stockholder

   The Company's principal stockholder and Chief Executive Officer (the
"Principal Stockholder") provided funds to finance development of the Company's
product. As of December 31, 1997, the total obligation to the Principal
Stockholder was $2,518,000. In January 1998, the Company paid $813,000 to the
Principal Stockholder with proceeds from the Lenders' Notes Payable (see
below). The remaining obligation of $1,705,000 was formalized with a note
payable. In April 1998, the Principal Stockholder advanced an additional
$387,000 to the Company. In June 1998, the Company repaid $310,000 from the
proceeds of the Series A Preferred Stock offering (see Note 5), and the
Principal Stockholder contributed his remaining notes payable and advances
totaling $1,782,000 to the Company in consideration for previously issued
shares of common stock. The Company has included the $1,782,000 as additional
paid-in capital in the accompanying consolidated balance sheets.

 Lenders' Notes Payable

   In January 1998, the Company issued promissory notes totaling $2,300,000
(the "Lenders' Notes Payable") to several individuals (the "Lenders"). Terms of
the Lenders' Notes Payable provided for interest at 8% payable quarterly and 48
monthly principal payments beginning January 1999. In addition, the Lenders
were issued 3,450,000 shares of the Company's common stock; however, if the
Company repaid the Lenders' Notes Payable within 120 days, 1,725,000 of these
shares were to be contributed back to the Company. The Company did not repay
the Lenders' Notes Payable within 120 days; however, the Lenders' Notes Payable
were repaid in June 1998 with proceeds from the Series A Preferred Stock
offering. The Lenders ultimately contributed 2,212,500 shares of common stock
back to the Company (see Note 5).

   The Company allocated the $2,300,000 of proceeds between the Lenders' Notes
Payable and the shares issued based on their estimated fair values.
Accordingly, an additional $67,000 of interest expense was recorded with a
corresponding credit to additional paid-in capital.

 September 1998 Notes Payable

   In September 1998, the Company issued promissory notes to three individuals,
including the Principal Stockholder and a member of the Company's Board of
Directors, totaling $1,500,000 (the "September 1998 Notes"). Terms of the
September 1998 Notes required quarterly payments of interest at 15% and were to
mature in September 2000. In connection with the issuance of these notes, the
Company issued 239,999 warrants to the note holders. Each warrant provides the
holder the right to purchase one share of Company common stock for $0.007 per
share through September 2003. Using the Black-Scholes pricing model, the
Company determined the value of these warrants to be $1.66 per share, or
$398,400. The Company recognized the $398,400 as an original issue discount and
is amortizing the discount to interest expense over the period from grant to
maturity.

   In June 1999, $700,000 of the notes payable were converted into 300,000
shares of Series B Preferred Stock, and the Company used $800,000 of the Series
B proceeds to repay the remaining amounts outstanding (see Note 5).

 Other Notes Payable

   In January 1998, the Company repaid its obligation to a stockholder in
connection with the sale of that stockholder's common shares to the Principal
Stockholder. In addition to the outstanding principal of $49,000, the Company
agreed to make payments of $60,000 to charities selected by the stockholder
that was charged to interest expense.

                                       43
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In December 1998, the Principal Stockholder and the President of the Company
advanced a total of $350,000 to the Company. In March 1999, the Principal
Stockholder advanced an additional $200,000 to the Company. In connection with
Series B Preferred Stock offering (see Note 5) the Company used proceeds of
$450,000 and $100,000 to repay the Principal Stockholder and the President,
respectively, for their advances.

 HPS Note Payable

   In connection with HPS' acquisition of certain assets from General Network
Management Services, Inc. (see Note 1), HPS issued a note payable for $50,000
that requires two payments of $25,000 each on July 31, 1999 and July 31, 2000.

(4) Commitments and Contingencies

 Operating Leases

   The Company is party to several non-cancelable lease agreements for certain
equipment as well as its principal administrative offices. Rent expense under
non-cancelable operating leases totaled approximately $148,000, $280,000, and
$418,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Minimum future lease obligations under non-cancelable operating leases in
effect at December 31, 1999, are as follows (in thousands):

<TABLE>
<CAPTION>
       Year Ending December 31,
       ------------------------
       <S>                                                               <C>
         2000........................................................... $ 1,414
         2001...........................................................   1,462
         2002...........................................................   1,369
         2003...........................................................   1,075
         2004...........................................................     804
         Thereafter.....................................................   4,110
                                                                         -------
           Total........................................................ $10,234
                                                                         =======
</TABLE>

(5) Stockholders' Equity

 Common Stock

   The Company has authorized the issuance of 40,000,000 shares of common
stock. For the period from inception (October 8, 1996) through December
31,1997, the Principal Stockholder contributed cash of $139,382 and services
valued at $250,000 for his shares of common stock. The Principal Stockholder
served as the Company's Chief Executive Officer during 1997 and did not receive
a salary. The Company recognized compensation expense in the amount of $250,000
and a contribution to capital relating to the Principal Stockholder's services.

   In connection with the repayment of the Lenders' Notes Payable in June 1998
(see Note 3), the Company and the Lenders entered into an agreement whereby
2,212,500 shares were contributed back to the Company. Accordingly, the number
of shares held by the Lenders was reduced to 1,237,500. In connection with the
same agreement and in connection with the Series A Preferred Stock offering,
two of the founders of the Company contributed an aggregate of 1,387,500 shares
of common stock to the Company.

   In June 1998, the Principal Stockholder sold 450,000 of his shares of common
stock to an unrelated third party for $0.07 per share. The Company recognized a
charge of $720,000 that reflects the difference between the fair value of its
stock on that date of $1.67 per share and the sales price. The third party
provided significant assistance to the Company in obtaining subscriber
contracts and, accordingly, the Company recorded

                                       44
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the full amount of the charge to sales and marketing expense at the time the
transaction occurred. During 1998, the Principal Stockholder sold an additional
2,205,000 shares of common stock that he owned to various individuals at prices
that reflected their estimated fair value at the time of each sale.

   In connection with the closing of the Series B Preferred Stock private
placement in June 1999, the holders of Series A Preferred Stock were granted an
aggregate 675,000 shares of common stock pursuant to certain anti-dilution
rights of the holders of Series A Preferred Stock.

   On September 13, 1999, the Company completed an initial public offering
("IPO") in which it sold 6,900,000 shares of common stock, including 900,000
shares in connection with the exercise of the underwriters' over-allotment
option, at $8.00 per share. The Company received approximately $50 million in
cash, net of underwriting discounts, commissions and other offering costs. At
December 31, 1999, the net proceeds were predominately held in short-term
investments. Upon the closing of the IPO, all of the Company's Series A
preferred stock and Series B preferred stock automatically converted into an
aggregate of 8,100,000 shares of common stock (see below).

 Preferred Stock

   In June 1998, the Company issued 3,150,000 shares of 8% Series A Convertible
Preferred Stock, par value $0.001 ("Series A"). In June 1998, the Company sold
the 3,150,000 Series A shares at $1.67 per share. Net proceeds from the
offering totaled $5,000,000, net of offering costs of $250,000, which were paid
to a company that employs a member of the Company's Board of Directors. In
connection with the issuance of the Series A, the Company granted warrants to
purchase a total of 600,000 shares of common stock, including warrants to
purchase 570,000 shares of common stock to three members of the Company's Board
of Directors and a company which employs one such director. Each warrant
provides for the holder to purchase one share of Company common stock for
$0.007 per share through June 1, 2003. Using the Black-Scholes pricing model,
the Company determined that the value of the warrants was $996,000, as of the
date of issuance. The value of the warrants has been recognized as a cost of
issuance of the Series A shares.

   In May 1999, the Company issued 4,950,000 shares of 8% Series B Convertible
Preferred Stock, par value $0.001 ("Series B") for $2.33 per share and received
aggregate proceeds of $11,400,000, net of offering costs of $150,000.

   Prior to the completion of the Series B offering, the Company had received
cash totaling $3,140,000 pursuant to Series B subscription agreements. Of this
amount, $2,000,000 was received in December 1998, $500,000 was received in
March 1999, and the remaining $640,000 was received in April 1999. The Series B
shares subscribed and issued after December 1998 have a beneficial conversion
feature totaling $9.4 million, measured as the difference between the
conversion price of $2.33 per share and the fair value of the underlying common
stock at the time of issuance. The beneficial conversion feature has been
recorded as additional paid-in capital. The value of the beneficial conversion
feature was recognized immediately because the Series B shares are convertible
at the option of the holder.

   Of the 4,950,000 Series B shares issued, 300,000 shares were issued to
holders of the September 1998 Notes, including a former member of the Company's
Board of Directors (see Note 3). The Company used cash proceeds from the Series
B offering to repay $800,000 of the September 1998 Notes, including $500,000 to
the Principal Stockholder, and to repay $450,000 and $100,000 of advances made
by the Company's Principal Stockholder and President, respectively.

   The Company issued 225,000 shares of Series B to acquire the assets of a
software development company and for non-compete agreements with the owners of
the company. In May 1999, the Company issued 63,750 shares of Series B to an
individual in exchange for his rescission of a future right to acquire up to
35% of HPS.

                                       45
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On September 13, 1999, the date of the IPO, all shares of preferred stock
were mandatorily converted to shares of common stock and all amounts included
in the preferred stock accounts, including cumulative unpaid dividends and
associated accretion totaling $642,000, were converted to common stock and
additional paid-in capital.

 Common Stock Warrants

   In December 1999, the Company issued 1,350,000 common stock warrants valued
at $50.1 million to a strategic marketing partner. The value of the warrant is
included in the consolidated statements of operations as a non-cash strategic
marketing expense. The fair value of the warrants issued was determined using
the Black-Scholes pricing model with the following assumptions: Risk-free
interest rate of 7%; no expected dividend yield; warrant term of 1.5 years; and
an expected volatility of 75%. The value of the warrants was expensed
immediately as the options were fully vested and the strategic marketing
partner has no further obligations related to the warrants. The strategic
marketing partner may earn the right to exercise an additional 1,350,000
warrants if certain performance conditions are met.

   In November 1999, the Company issued 525,000 common stock warrants valued at
$10.7 million to a strategic marketing partner in exchange for a license in
business-to-business editorial content. The fair value of the warrants was
determined using the Black-Scholes pricing model with the following
assumptions: Risk-free interest rate of 5.3%; no expected divdiend yield;
warrant term of 6 months; and an expected volatility of 100%. The value of the
content was determined through an independent appraisal and will be amortized
over the term of the license.

(6) Deferred Stock-Based Compensation

   The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option. With respect to the stock options granted since inception
through December 31, 1999, the Company recorded deferred stock-based
compensation of $9.7 million for the difference at the grant date between the
exercise price and the fair value of the common stock underlying the options.
This amount is being amortized over the vesting period of the individual
options.

(7) Stock Option Plans

   1998 Stock Option Plan--In 1998, the Company adopted an incentive stock
option plan (the "1998 Plan"), that provides for the granting of stock options
pursuant to the applicable provisions of the Internal Revenue Code and
regulations. The aggregate options available under the 1998 Plan are 4,500,000.
As of December 31, 1998 and December 31, 1999, the Company had granted options
totaling 1,064,775 and 3,933,176, respectively, to employees under the 1998
Plan. Generally, the options have five-year terms and are exercisable as
follows: Class A options, 50% at the end of each of the first two years after
grant; Class B options, 33% at the end of each of the first three years after
grant; and Class C options, 25% at the end of each of the first four years
after the date of grant. Through December 31, 1998, and December 31, 1999, the
Company had issued a total of 216,000 and 555,000 options, respectively to non-
employees, including 112,500 and 307,500, respectively, issued to members of
the Board of Directors. Options were issued with exercise prices ranging from
$1.67 to $3.33. For the year ended December 31, 1998, the value of these
options was determined to have a de minimis value using the Black-Scholes
pricing model. For the year ended December 31, 1999, the value of these options
was determined to be approximately $1,100,000, of which $800,000 was charged to
non-cash strategic marketing expense for options granted primarily to a
strategic marketing partner. The remaining amount will be amortized over the
vesting periods of the options.

                                       46
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   1999 Stock Option Plan--The 1999 Stock Plan was adopted by the Company's
Board of Directors in June 1999, subject to approval by the Company's
stockholders. The 1999 Stock Plan provides for the issuance of 2,250,000 shares
of common stock, incentive stock options ("ISOs"), or non-statutory stock
options to employees, directors, independent contractors and advisers. The
number of shares eligible for issuance increases each year by 3.25% of the
number of shares of common stock outstanding at the prior calendar year-end. At
December 31, 1999, the Company had granted a total of 2,062,300 options to
employees under the 1999 Stock Plan.

   The exercise price for ISOs is generally at least 100% of the fair market
value of the stock on the date of grant, and 110% for stockholders with 10% or
more ownership of the Company. Vesting provisions are determined at the time of
grant. The Company's Chairman and Chief Executive Officer is authorized to
grant up to 37,500 options in each instance to employees, with the exercise
price to be approved by the compensation committee of the Company's Board of
Directors.

   A summary of the options granted to employees under the Company's plans as
of December 31, 1998 and December 31, 1999 is presented below (this does not
include 216,000 and 517,500 options granted to non-employees as of December 31,
1998 and December 31, 1999, respectively):

<TABLE>
<CAPTION>
                              December 31, 1998          December 31, 1999
                          -------------------------- ---------------------------
                                    Weighted Average            Weighted Average
                           Number    Exercise Price   Number     Exercise Price
                          --------- ---------------- ---------  ----------------
<S>                       <C>       <C>              <C>        <C>
Options Outstanding,
 Beginning of year......        --       $ --        1,064,775       $ 1.67
Granted.................  1,064,775       1.67       4,547,104        14.18
Exercised...............        --         --         (268,675)        1.80
Cancelled...............        --         --         (129,504)        2.45
                          ---------                  ---------
Options Outstanding, End
 of year................  1,064,775       1.67       5,213,700        11.87
                          =========                  =========
</TABLE>

   The following table summarizes information about the options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
                                       Options Outstanding                   Options Exercisable
                         ----------------------------------------------- ----------------------------
                                      Weighted Average
                           Number    Remaining Contract Weighted Average   Number    Weighted Average
Range of Prices          Outstanding    Life (Years)     Exercise Price  Exercisable  Exercise Price
---------------          ----------- ------------------ ---------------- ----------- ----------------
<S>                      <C>         <C>                <C>              <C>         <C>
$1.67-$2.33.............  3,268,300         9.13            $  2.16       1,468,743       $2.15
$3.33-$8.00.............  1,008,000         9.58               6.72          45,000        3.89
$19.77-$45.58...........    575,050         9.80              24.18             --          --
$68.00-$127.00..........    319,600         9.92             102.45             --          --
$132.00-$141.30.........     42,750         9.99             140.64             --          --
                          ---------                                       ---------
                          5,213,700                                       1,513,743
                          =========                                       =========
</TABLE>

   For stock options granted to employees from January through December 1999,
the Company recorded deferred stock-based compensation of $9.7 million for the
difference at the grant date between the exercise price and the fair value of
the Company's common stock. This amount is being amortized to operating expense
over the vesting period of the individual options in accordance with FASB
Interpretation 28. The Company applies the provisions of APB No. 25 and its
related interpretations in accounting for its stock option plans. Accordingly,
compensation expense recognized was different than what would have been
otherwise recognized under the fair value based method defined in SFAS No. 123.
Had the Company accounted for these plans under

                                       47
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

SFAS No. 123, the Company's net loss applicable to common stock and loss per
share would have been reduced to the following pro forma amounts (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                     Year Ended    Year Ended
                                                      December    December 31,
                                                      31, 1998        1999
                                                     -----------  ------------
   <S>                                               <C>          <C>
   Net Loss Applicable to Common Stockholders
     As Reported.................................... $(7,135,448) $(81,982,895)
                                                     ===========  ============
     Pro Forma...................................... $(7,204,634) $(86,002,200)
                                                     ===========  ============
   Basic Loss per Share
     As Reported.................................... $     (0.55) $      (4.88)
                                                     ===========  ============
     Pro Forma...................................... $     (0.56) $      (5.12)
                                                     ===========  ============
   Diluted Loss per Share
     As Reported.................................... $     (0.52) $      (4.78)
                                                     ===========  ============
     Pro Forma...................................... $     (0.52) $      (5.02)
                                                     ===========  ============
</TABLE>

   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants for the year ended December 31, 1998: risk-free
interest rate of 7%; no expected dividend yield; expected life of 1.5 years for
Class A options, 2.0 years for Class B options, and 2.5 years for Class C
options and, an expected volatility of 0%. For the year ended December 31,
1999, the weighted-average assumptions are as follows: risk-free interest rate
of 6%; no expected dividend yield; expected life of 2 years, and an expected
volatility of 116%.

                                       48
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(8) Earnings Per Share

   The computations of basic and diluted earnings per share for each period
were as follows (in thousands, except share and per share amounts):

<TABLE>
<CAPTION>
                                          For the Year Ended December 31,
                                        -------------------------------------
                                           1997         1998         1999
                                        -----------  -----------  -----------
   <S>                                  <C>          <C>          <C>
   Loss (Numerator)
   Net loss............................ $    (2,985) $    (6,800) $   (71,941)
   Preferred stock dividends...........         --          (245)        (511)
   Accretion of preferred stock to
    redemption value...................         --           (90)        (131)
   Value of preferred stock beneficial
    conversion feature.................         --           --        (9,400)
                                        -----------  -----------  -----------
   Basic EPS
     Net loss applicable to common
      stockholders..................... $    (2,985) $    (7,135) $   (81,983)
                                        ===========  ===========  ===========
   Diluted EPS
     Net loss applicable to common
      stockholders after assumed
      conversions...................... $    (2,985) $    (7,135) $   (81,983)
                                        ===========  ===========  ===========
   Shares (Denominator)
   Basic EPS
     Net loss applicable to common
      stockholders.....................  11,500,000   12,900,000   16,798,784
   Effect of Dilutive Securities
     Warrants..........................     839,999      839,999      839,999
     Exercise of Warrants..............         --           --      (502,265)
                                        -----------  -----------  -----------
   Diluted EPS
     Net loss applicable to common
      stockholders after assumed
      conversions......................  12,389,999   13,739,999   17,136,518
                                        ===========  ===========  ===========
   Per Share Amount
   Basic EPS........................... $     (0.26) $     (0.55) $     (4.88)
                                        ===========  ===========  ===========
   Diluted EPS......................... $     (0.24) $     (0.52) $     (4.78)
                                        ===========  ===========  ===========
</TABLE>

   Options to purchase 0, 1,274,775, and 5,731,200 shares of common stock were
outstanding as of December 31, 1997, 1998, and 1999 respectively, but were not
included in the computation of diluted earnings per share because the Company
incurred a loss in each of the periods presented and the effect would have been
antidilutive.

(9) Income Taxes

   SFAS No. 109 requires the recognition of deferred tax assets, net of
applicable reserves, related to net operating loss carryforwards and certain
temporary differences. The standard requires recognition of a future tax
benefit to the extent that realization of such benefit is more likely than not.
Otherwise, a valuation allowance is applied. At December 31, 1998 and 1999, the
Company believes that the "more likely than not" criteria have not been met,
and accordingly, a valuation allowance has been recognized. The Company did not
record any provision (benefit) for income taxes for the years ended December
31, 1998 and 1999, because it experienced net losses and generated net
operating losses for tax purposes. As of December 31, 1999, the Company has
approximately $78.2 million of net operating loss credits, which expire in 2018
and 2019. The Company's utilization of its net operating loss carryforward will
be limited pursuant to Internal Revenue Code Section 382 due to cumulative
changes in ownership in excess of 50% within a three-year period. Prior to
1998, Purchase Pro, Inc. was not subject to Federal or state income taxes.

                                       49
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A reconciliation of income tax benefit provided at the Federal statutory
rate (35%) to income tax benefit is as follows (in thousands):

<TABLE>
<CAPTION>
                                                      Year Ended   Year Ended
                                                     December 31, December 31,
                                                         1998         1999
                                                     ------------ ------------
   <S>                                               <C>          <C>
   Income tax benefit computed at Federal statutory
    rate...........................................    $(2,380)     $(25,179)
   Permanent and other items.......................         11            30
   Change in valuation allowance...................      2,369        25,149
                                                       -------      --------
                                                       $   --       $    --
                                                       =======      ========
</TABLE>

   The major tax effected components of the Company's net deferred tax
liability are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           1998         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Deferred Tax Assets
     Net operating loss carryforward..................   $ 2,278      $ 27,357
     Trade accounts receivable........................        70           208
     Deferred revenue.................................        58            88
     Accruals and reserves............................        36            86
                                                         -------      --------
                                                           2,442        27,739
     Less--valuation allowance........................    (2,369)      (27,518)
                                                         -------      --------
       Total deferred tax assets......................        73           221
   Deferred Tax Liabilities
     Depreciation and amortization....................       (73)         (221)
                                                         -------      --------
       Total deferred tax liability, net..............   $   --       $    --
                                                         =======      ========
</TABLE>

(10) Retirement Benefit Plan

   On October 1, 1999, the Company instituted a defined contribution 401(k)
plan for eligible employees. As of December 31, 1999, the Company has not
matched employee contributions, nor has it contributed any discretionary
amounts to the plan.

(11) Related Party Transactions

 Contract Services

   One of the founding stockholders of the Company provided significant
services designing the Company's technology. The Company pays the stockholder
for his continued services. Payments totaling $105,380, $72,000 and $93,000 are
included in programming and development expense for the years ended December
31, 1997, 1998 and 1999, respectively. There were no amounts owed to the
stockholder as of December 31, 1998 and 1999. In January 1998, concurrent with
the acquisition of assets from Purchase Pro, Inc. (see Note 1), the stockholder
and the Principal Stockholder transferred their rights in the technology to the
Company.

 Due from Other Companies

   The Company has paid certain costs on behalf of a company owned by the
Principal Stockholder. The Company then bills the other company for amounts
owed. At December 31, 1998 and 1999, there was $15,400

                                       50
<PAGE>

                      PURCHASEPRO.COM, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and $25,000, respectively, due to the Company, which is included in other
receivables in the accompanying consolidated balance sheets.

 Office Space Rent

   In 1998, the Company entered into an agreement to lease its corporate office
space from a company owned by individuals who were then members of the
Company's Board of Directors (see Note 4). Terms of the lease require monthly
base payments of $29,297, which is adjusted on an annual basis, but in no case
is the adjustment greater than 5%. During the year ended December 31, 1998, the
Company did not pay any amounts under terms of the lease agreement and recorded
expense related to the lease totaling approximately $20,000. During the year
ended December 31, 1999, the Company paid $308,000 under the terms of the lease
agreement. In management's opinion, the terms of the lease are comparable to
terms that the Company would receive from a third party.

 Strategic Marketing Partnership

   In 1999, the Company recorded $500,000 in revenue from a strategic marketing
partner, whose Chief Executive Officer is a member of the Company's Board of
Directors. These revenues are included in advertising revenue in the
accompanying consolidated statements of operations.

(12) Subsequent Events

   In February 2000, we completed a public offering of 3,000,000 shares of
common stock for $80 per share. We sold 2,000,000 of the shares, with the
remaining 1,000,000 shares being sold by some of our stockholders. Net proceeds
to us from the secondary offering were $151.7 million.

   On March 22, 2000, the Company entered into a strategic alliance with
America Online (AOL) to co-develop a business exchange and technologies for
businesses of all sizes and across all industries. Under the terms of the
agreement, over a two-year period the Company will pay AOL $20.0 million to
develop the business exchange and $50.0 million for certain marketing services.
In addition, the Company granted AOL warrants to purchase up to 2,000,000
shares of the Company's common stock at an exercise price of $126.51 (adjusted
after one year for remaining unvested warrants). Warrants to purchase 500,000
shares vest immediately, and warrants to purchase the remaining 1,500,000
shares vest upon certain revenue targets being met.

                                       51
<PAGE>

       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE

To the Board of Directors and Stockholders of PurchasePro.com, Inc.:

   We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in
PurchasePro.com, Inc.'s (the "Company") Form 10-K and have issued our report
thereon dated March 29, 2000. Our audits were made for the purpose of forming
an opinion on those statements taken as a whole. The supplemental Schedule II
as shown on page 52 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.

ARTHUR ANDERSEN L.L.P.

Las Vegas, Nevada
March 29, 2000

                                       52
<PAGE>

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNT

                         ACCOUNTS RECEIVABLE ALLOWANCES

<TABLE>
<CAPTION>
                         Balances at the
                         Beginning of the Charged to Costs             Balances at the
                              Period        and Expenses   Deductions End of the Period
                         ---------------- ---------------- ---------- -----------------
<S>                      <C>              <C>              <C>        <C>
Period from Inception
 (October 8, 1996)
  Through December 31,
   1996.................     $    --         $      --      $    --       $    --
Year Ended December 31,
 1997...................     $    --         $   72,796     $    --       $ 72,796
Year Ended December 31,
 1998...................     $ 72,796        $  127,204     $    --       $200,000
Year Ended December 31,
 1999...................     $200,000        $1,078,235     $684,235      $594,000
</TABLE>

                                       53
<PAGE>

ITEM 9: CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURES

   None

                                       54
<PAGE>

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11: EXECUTIVE COMPENSATION

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Information called for by PART III (Items 10, 11, 12, and 13) has been
omitted, as the Company intends to file with the Securities and Exchange
Commission not later than 120 days after the end of its fiscal year, a
definitive Proxy Statement pursuant to regulation 14A, except that the
information regarding the Company's executive officers called for by Item 10 of
PART III has been included in PART I of this Form 10-K under the heading
"Executive Officers of the Registrant."

                                       55
<PAGE>

                                    PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  (a)(1) Financial Statements

   The financial statements appear in Item 8 to this Form 10-K.

  (2) Financial Statement Schedules

   Schedule II--Valuation and Qualifying Accounts appear in Item 8 to this Form
10-K.

   The other financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.

  (3) Exhibits

   The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.

<TABLE>
<CAPTION>
  Exhibit
  Number                          Description of Document
  -------                         -----------------------
 <C>       <S>
   3(i).1  Amended and Restated Articles of Incorporation (filed as Exhibit
           3(i).1 to our Quarterly Report on Form 10-Q (No. 000-26465), and
           incorporated herein by reference).

  3(ii).1  Bylaws of the Registrant, as amended (filed as Exhibit 3(ii).1 to
           our Quarterly Report on Form 10-Q (No. 000-26465), and incorporated
           herein by reference).

      4.1  Form of Common Stock Certificate (filed as Exhibit 4.1 to our
           Registration Statement on Form S-1 (No. 333-01865), and incorporated
           herein by reference).

     10.1* Form of Indemnification Agreement between the Registrant and each of
           its directors and officers (filed as Exhibit 10.1 to our
           Registration Statement on Form S-1 (No. 333-01865), and incorporated
           herein by reference).

     10.2* 1998 Stock Option and Incentive Plan and forms of agreements
           thereunder (filed as Exhibit 10.2 to our Registration Statement on
           Form S-1 (No. 333-01865), and incorporated herein by reference).

     10.3* 1999 Stock Plan (filed as Exhibit 10.3 to our Registration Statement
           on Form S-1 (No. 333-01865), and incorporated herein by reference).

     10.4  Securities Purchase Agreement dated as of June 1, 1998 between
           Registrant and the purchasers of its Series A Preferred Stock (filed
           as Exhibit 10.4 to our Registration Statement on Form S-1
           (No. 333-01865), and incorporated herein by reference).

     10.5  Securities Purchase Agreement dated as of April 30, 1999 between
           Registrant and the purchasers of its Series B Preferred Stock (filed
           as Exhibit 10.5 to our Registration Statement on Form S-1 (No. 333-
           01865), and incorporated herein by reference).

     10.6  First Amended and Restated Stockholders Agreement dated as of April
           30, 1999 between the Registrant and the holders of Series A
           Preferred Stock and Series B Preferred Stock (filed as Exhibit 10.6
           to our Registration Statement on Form S-1 (No. 333-01865), and
           incorporated herein by reference).

     10.7+ Agreement dated as of January 4, 1999 between Registrant and the
           Greater Phoenix Chamber of Commerce (filed as Exhibit 10.7 to our
           Registration Statement on Form S-1 (No. 333-01865), and incorporated
           herein by reference).

</TABLE>

                                       56
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
 10.8+   Software Agency and Services Agreement dated as of May 3, 1999 among
         Registrant, ZoomTown.com, Inc. and Bradley D. Redmon (filed as Exhibit
         10.8 to our Registration Statement on Form S-1 (No. 333-01865), and
         incorporated herein by reference).

 10.9+   Agreement dated as of May 1, 1999, between Registrant and
         Hospitalitycity pte ltd (filed as Exhibit 10.9 to our Registration
         Statement on Form S-1 (No. 333-01865), and incorporated herein by
         reference).

 10.10   Agreement dated as of January 1999 between Registrant and E-Marketpro,
         LLC (filed as Exhibit 10.10 to our Registration Statement on Form S-1
         (No. 333-01865), and incorporated herein by reference).

 10.11*  Letter of Employment between Registrant and Charles E. Johnson, Jr.
         (filed as Exhibit 10.11 to our Registration Statement on Form S-1 (No.
         333-01865), and incorporated herein by reference).

 10.12*  Letter of Employment between Registrant and Christopher P. Carton
         (filed as Exhibit 10.12 to our Registration Statement on Form S-1 (No.
         333-01865), and incorporated herein by reference).

 10.13*  Employment Agreement between Registrant and Jeffrey A. Neppl (filed as
         Exhibit 10.13 to our Registration Statement on Form S-1 (No. 333-
         01865), and incorporated herein by reference).

 10.14*  Letter of Employment between Registrant and Robert G. Layne (filed as
         Exhibit 10.14 to our Registration Statement on Form S-1 (No. 333-
         01865), and incorporated herein by reference).

 10.15   Warrant dated as of July 22, 1999, by and between Registrant and
         Office Depot, Inc. (filed as Exhibit 10.15 to our Registration
         Statement on Form S-1 (No. 333-01865), and incorporated herein by
         reference).

 10.16*  Letter of Employment between Registrant and Richard C. St. Peter
         (filed as Exhibit 10.16 to our Registration Statement on Form S-1 (No.
         333-01865), and incorporated herein by reference).

 10.17   Promissory Note dated September 2, 1999 between Registrant and Charles
         E. Johnson, Jr. (filed as Exhibit 10.17 to our Registration Statement
         on Form S-1 (No. 333-01865), and incorporated herein by reference).

 10.18   Loan Commitment dated September 3, 1999 between Registrant and John G.
         Chiles (filed as Exhibit 10.18 to our Registration Statement on Form
         S-1 (No. 333-01865), and incorporated herein by reference).

 10.19   Loan Commitment dated September 3, 1999 between Registrant and Maurice
         J. Gallagher (filed as Exhibit 10.19 to our Registration Statement on
         Form S-1 (No. 333-01865), and incorporated herein by reference).

 10.20   Loan Commitment dated September 3, 1999 between Registrant and Charles
         E. Johnson, Jr. (filed as Exhibit 10.20 to our Registration Statement
         on Form S-1 (No. 333-01865), and incorporated herein by reference).

 10.21   Loan Commitment dated September 3, 1999 between Registrant and Bradley
         D. Redmon (filed as Exhibit 10.21 to our Registration Statement on
         Form S-1 (No. 333-01865), and incorporated herein by reference).

 10.22   Warrant Purchase Agreement dated November 29, 1999 by the Company and
         Sprint Communications Company L.P. (filed as Exhibit 10.22 to our
         Registration Statement on Form S-1 (No. 333-92303), and incorporated
         herein by reference).

 10.23   Warrant to Purchase Common Stock of the Company dated November 1999
         (issued to Sprint Communications Company, L.P.) (filed as Exhibit
         10.23 to our Registration Statement on Form S-1 (No. 333-92303), and
         incorporated herein by reference).

</TABLE>

                                       57
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                         Description of Document
 -------                        -----------------------
 <C>     <S>
 10.24   Amendment to Warrant to Purchase Common Stock of the Company dated
         December 6, 1999 (by Sprint) (filed as Exhibit 10.24 to our
         Registration Statement on Form S-1 (No. 333-92303), and incorporated
         herein by reference).

 10.25   Strategic e-Commerce Marketing Agreement dated December 8, 1999
         between the Company and Sprint (filed as Exhibit 10.25 to our
         Registration Statement on Form S-1 (No. 333-92303), and incorporated
         herein by reference).

 10.26   Form of Warrant to Purchase Common Stock of the Company dated as of
         November 1999 (issued to Advanstar Inc.) (filed as Exhibit 10.26 to
         our Registration Statement on Form S-1 (No. 333-92303), and
         incorporated herein by reference).

 10.27*  Letter of Employment between Registrant and Mr. Moskal (filed as
         Exhibit 10.27 to our Registration Statement on Form S-1 (No. 333-
         92303), and incorporated herein by reference).

 10.28*  Letter of Employment between Registrant and Mr. Miller (filed as
         Exhibit 10.28 to our Registration Statement on Form S-1 (No. 333-
         92303), and incorporated herein by reference).

 23.1    Consent of Arthur Andersen LLP.

 27.1    Financial Data Schedule for year ended December 31, 1999.
</TABLE>
--------
*  Indicates management contract or compensatory plan or arrangement.
+  Confidential treatment has been granted with respect to certain portions of
   these agreements.

  (b) Reports on Form 8-K

   We did not file any report on Form 8-K in the quarter ended December 31,
1999.

                                       58
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, who are duly authorized, in the City of Las Vegas, State of
Nevada, on the 29th day of March, 2000.

                                          PURCHASEPRO.COM, INC.

                                          By /s/ Charles E. Johnson, Jr.
                                            -----------------------------------
                                            Charles E. Johnson, Jr.
                                            Chief Executive Officer and
                                            Chairman

                                            /s/ Christopher P. Carton
                                            -----------------------------------
                                            Christopher P. Carton
                                            Chief Operating Officer,
                                            President, Secretary, and Director

   Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
                 Name                           Title                 Date
                 ----                           -----                 ----

 <C>                                  <S>                        <C>
     /s/ Charles E. Johnson, Jr.      Chief Executive Officer    March 29, 2000
 ____________________________________  and Chairman
       Charles E. Johnson, Jr.

      /s/ Christopher P. Carton       Chief Operating Officer,   March 29, 2000
 ____________________________________  President, Secretary
        Christopher P. Carton          and Director

       /s/ Richard C. St. Peter       Senior Vice President,     March 29, 2000
 ____________________________________  Chief Financial Officer
         Richard C. St. Peter          and Treasurer

         /s/ Scott H. Miller          Vice President--Finance,   March 29, 2000
 ____________________________________  Chief Accounting
           Scott H. Miller             Officer

          /s/ John G. Chiles          Director                   March 29, 2000
 ____________________________________
            John G. Chiles

 ____________________________________ Director                    March  , 2000
           David I. Fuente

        /s/ J. Terrence Lanni         Director                   March 29, 2000
 ____________________________________
          J. Terrence Lanni

        /s/ Michael D. O'Brien        Director                   March 29, 2000
 ____________________________________
          Michael D. O'Brien

        /s/ Bradley D. Redmon         Director                   March 29, 2000
 ____________________________________
          Bradley D. Redmon
</TABLE>

                                       59