<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1999

or

|_| 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: 000-25269

                                VerticalNet, Inc.

             (Exact name of registrant as specified in its charter.)

          Pennsylvania                                  23-2815834              
----------------------------------         -------------------------------------
 (State or other jurisdiction of                     (I.R.S. Employer
 incorporation or organization)                     Identification No.)
                                     
                              2 Walnut Grove Drive
                                Horsham, PA 19044
                     --------------------------------------
                    (Address of principal executive offices)

               Registrant's telephone number, including area code:

                                 (215) 328-6100

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 preceding 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: 
YES |X| NO |_|

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

                  CLASS                   OUTSTANDING AT MARCH 31, 1999 
        ------------------------------   -------------------------------
         Common Stock, $0.01 par value              16,813,812


                                       1
<PAGE>
 
                                VERTICALNET, INC.

                                    FORM 10-Q
                     (For Three Months Ended March 31, 1999)

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Part I
   Item 1.    Financial Statements........................................     3
   Item 2.    Management's Discussion And Analysis Of Financial Condition 
              And Results Of Operations...................................     9
   Item 3.    Quantitative And Qualitative Disclosure About Market Risk ..    20

Part II
   Item 2.    Change in Securities And Use Of Proceeds....................    20
   Item 4.    Submission Of Matters To A Vote Of Security Holders ........    21
   Item 6.    Exhibits And Reports On Form 8-K............................    22


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION

                               VERTICAL NET, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             March 31,     December 31,
                                                               1999            1998
                                                               ----            ----
                                                           (Unaudited)
<S>                                                        <C>             <C>         
                                     Assets
Current assets:
  Cash and cash equivalents                                $ 10,457,327    $  5,662,849
  Short-term investments                                     28,952,539              --
  Accounts receivable, net of allowance
    for doubtful accounts of $84,575
    in 1999 and $61,037 in 1998                               2,238,902       1,794,728
  Prepaid expenses and other assets                           2,741,061         747,951
                                                           ------------    ------------
    Total current assets                                   $ 44,389,829    $  8,205,528
                                                           ------------    ------------
Property and equipment, net                                   1,418,052       1,072,063
Goodwill and other intangibles, net of
  accumulated amortization of $557,558
  in 1999 and $282,900 in 1998                                2,751,623       2,451,991
Long-term investments                                        17,545,994              --
Deferred charges and other assets                                53,318         613,393
                                                           ------------    ------------
    Total assets                                           $ 66,158,816    $ 12,342,975
                                                           ============    ============

         Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
  Current portion of long-term debt                        $    781,562    $    288,016
  Line of credit                                                     --       2,000,000
  Accounts payable                                            1,871,213       1,220,562
  Accrued expenses                                            2,071,348       1,582,038
  Deferred revenues                                           3,149,541       2,176,585
  Note payable                                                   50,000              --
                                                           ------------    ------------
    Total current liabilities                                 7,923,664       7,267,201
                                                           ------------    ------------
Long-term debt, net of current portion                          642,388         351,924
                                                           ------------    ------------
Convertible notes                                                    --       5,000,000
                                                           ------------    ------------

Commitments and contingencies (Note 3)

Shareholders' Equity (Deficit):
  Preferred stock $.01 par value, 10,000,000
    shares authorized, 0 shares issued and
    outstanding in 1999 and 7,805,667 shares
    issued and outstanding in 1998                                   --          78,057
  Common stock $.01 par value, 90,000,000
    shares authorized 16,813,812 issued and
    outstanding in 1999 and 2,634,379 shares
    issued and outstanding in 1998                              168,138          26,344
  Additional paid-in capital                                 82,894,803      19,566,368
  Deferred compensation                                        (502,493)       (594,033)
  Accumulated comprehensive loss                                 (6,040)             --
  Accumulated deficit                                       (24,901,644)    (19,292,886)
                                                           ------------    ------------
                                                             57,652,764        (216,150)
  Treasury stock at cost, 161,289 shares                        (60,000)        (60,000)
                                                           ------------    ------------
    Total shareholders' equity (deficit)                     57,592,764        (276,150)
                                                           ------------    ------------
    Total liabilities and shareholders' equity (deficit)   $ 66,158,816    $ 12,342,975
                                                           ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>
 
                                VERTICALNET, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            Three months ended
                                                            ------------------
                                                                March 31,
                                                                ---------
                                                           1999            1998
                                                       ------------    ------------
<S>                                                    <C>             <C>         
Revenues                                               $  1,933,779    $    377,371
                                                       ------------    ------------
Costs and Expenses:
Editorial and operational                                 1,196,137         435,333
Product development                                       1,209,638         192,880
Sales and marketing                                       3,630,205         934,934
General and administrative                                1,379,636         823,159
Amortization of goodwill                                    274,567              --
                                                       ------------    ------------
Operating loss                                           (5,756,404)     (2,008,935)
                                                       ------------    ------------

Interest and dividend income                                336,893           3,937
Interest expense                                           (189,247)        (79,871)
                                                       ------------    ------------
Interest, net                                               147,646         (75,934)
                                                       ------------    ------------
Net loss                                               $ (5,608,758)   $ (2,084,869)
                                                       ============    ============

Basic and diluted net loss per share                   $      (0.55)   $      (0.83)
                                                       ============    ============
Weighted average shares outstanding
    used in basic and diluted  per-share calculation     10,156,587       2,526,865
                                                       ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>
 
                                VERTICALNET, INC.

            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

                        Three months ended March 31, 1999

<TABLE>
<CAPTION>
                                                                                                   Additional                  
                                         Preferred Stock                   Common Stock              Paid-In        Deferred   
                                     Shares           Amount          Shares          Amount         Capital      Compensation 
                                     ------           ------          ------          ------         -------      ------------ 
<S>                               <C>              <C>              <C>            <C>            <C>             <C>          
Balance, January 1, 1999           7,805,667       $     78,057     2,634,379      $     26,344   $ 19,566,368    $   (594,033)
Conversion to common stock        (7,805,667)           (78,057)    9,734,846            97,349        (19,292)             -- 
Sale of common stock in                   --
   initial public offering                --                 --     4,025,000            40,250     58,247,064              -- 
Notes converted to common stock           --                 --       312,500             3,125      4,996,875              -- 
Exercise of options                       --                 --       107,087             1,070         99,242              -- 
Deferred Compensation                     --                 --            --                --          4,546          91,540 
Unrealized Loss                           --                 --            --                --             --              -- 
Net loss                                  --                 --            --                --             --              -- 
                                   ---------       ------------    ----------      ------------   ------------    ------------ 
Balance, March 31, 1999                   --       $         --    16,813,812      $    168,138   $ 82,894,803    $   (502,493)
                                   =========       ============    ==========      ============   ============    ============ 

<CAPTION>
                                       Other                                            Total
                                  Comprehensive     Accumulated      Treasury       Shareholders'
                                       Loss           Deficit         Stock        Equity (Deficit)
                                       ----           -------         -----        ----------------
<S>              <C>                <C>            <C>             <C>              <C>          
Balance, January 1, 1999            $         --   $(19,292,886)   $    (60,000)    $   (276,150)
Conversion to common stock                    --             --              --               --
Sale of common stock in           
   initial public offering                    --             --              --       58,287,314
Notes converted to common stock               --             --              --        5,000,000
Exercise of options                           --             --              --          100,312
Deferred Compensation                         --             --              --           96,086
Unrealized Loss                           (6,040)            --              --           (6,040)
Net loss                                      --     (5,608,758)             --       (5,608,758)
                                    ------------   ------------    ------------     ------------
Balance, March 31, 1999             $     (6,040)  $(24,901,644)   $    (60,000)    $ 57,592,764
                                    ============   ============    ============     ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>
 
                                VERTICALNET, INC

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                       Three months ended
                                                                                       ------------------
                                                                                            March 31,
                                                                                            ---------
                                                                                      1999            1998
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>          
Cashflows from operating activities:
    Net loss                                                                      $ (5,608,758)   $ (2,084,869)
                                                                                  ------------    ------------
    Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation, amortization and other noncash charges                        626,281          76,915
           Change in assets net of effect of acquisition:
               Accounts receivable                                                    (580,598)         34,393
               Prepaid expenses and other assets                                      (912,800)       (175,606)
           Change in liabilities net of effect of acquisition:
               Accounts payable                                                        650,651         360,646
               Accrued expenses                                                        489,310         235,532
               Deferred revenues                                                       758,744         200,156
                                                                                  ------------    ------------
Net cash used in operating activities                                               (4,577,170)     (1,352,833)
                                                                                  ------------    ------------
Cash flows from investing activities:
    Acquisition, net of cash acquired                                                 (285,376)             --
    Proceeds from sale and redemption of investments                                16,250,876              --
    Purchase of investments                                                        (62,885,581)             --
    Capital expenditures                                                              (146,717)        (95,881)
                                                                                  ------------    ------------
Net cash used investing activities                                                 (47,066,798)        (95,881)
                                                                                  ------------    ------------
Cash flow from financing activities:
    Loans from ICG                                                                          --         800,000
    Repayment of line of credit                                                     (2,000,000)             --
    Principal payments on obligations under capital leases                            (121,171)        (35,983)
    Repayment of long-term debt                                                             --          (2,420)
    Net proceeds from issuance of common stock                                      58,459,305              --
    Proceeds from exercise of stock options                                            100,312              --
                                                                                  ------------    ------------
Net cash provided by financing activities                                           56,438,446         761,597
                                                                                  ------------    ------------
Net increase in cash                                                                 4,794,478        (687,117)
Cash and cash equivalents--beginning of period                                       5,662,849         754,716
                                                                                  ------------    ------------
Cash and cash equivalents--end of period                                          $ 10,457,327    $     67,599
                                                                                  ============    ============
Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                                      $    179,589    $     72,798
Supplemental schedule of noncash investing and financing activities:
    Equipment acquired under capital leases                                       $    349,646    $     48,129
    Notes converted to common stock                                               $  5,000,000    $         --
    Financing agreement for directors and officers liability insurance            $    524,756    $         --
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       6
<PAGE>
 
                                VERTICALNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1) The Company and Basis of Presentation

Description of Company

      VerticalNet, Inc. (VerticalNet or the Company) is an owner and operator of
vertical trade communities, which are targeted business-to-business communities
of commerce on the Internet. The Company's vertical trade communities are Web
sites that act as industry-specific comprehensive sources of information,
interaction and electronic commerce. Vertical trade communities combine product
information; industry news; requests for proposals; directories; classifieds;
job listings; discussion forums; a variety of electronic commerce opportunities
for buyers and sellers; and other services, such as online professional
education courses and virtual trade shows. Each trade community is individually
branded, focuses on one business sector and caters to individuals with similar
professional interests. The virtual trade communities are designed to attract
technical and purchasing professionals with highly specialized product and
specification requirements and purchasing authority or influence. The Company
was founded on July 28, 1995 and as of May 7, 1999 operates 38 vertical trade
communities in eight major industry groups: environmental; advanced
technologies; service; communications; process industries; science; healthcare;
and food and packaging.

      On February 17, 1999, the Company completed its initial public offering
(IPO) of 4,025,000 shares of its common stock at $16.00 per share. Net proceeds
to the Company aggregated approximately $58,300,000 (net of underwriters'
commission and offering expenses of $6,100,000). As of the closing date of the
offering, all of the convertible preferred stock outstanding was converted into
9,734,846 shares of common stock. In addition, the Company's $5.0 million
convertible notes were converted into 312,500 shares of common stock.

      The Company currently generates substantially all of its revenue from
Internet advertising including the development of "storefronts" (Web pages that
focus on advertisers products and provide a link to the advertisers Web sites).

      The accompanying unaudited consolidated statements of the Company for the
three months ended March 31, 1999 and March 31, 1998, included herein, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the SEC. In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the results of the Company's
operations and its cash flows for the three months ended March 31, 1999 and
1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations
relating to interim financial statements. These consolidated financial
statements should be read in conjunction with financial statements and notes
thereto included in the Company's 1998 Annual Report on Form 10-K.

Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share

      Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method) and the incremental
common shares issuable upon the conversion of the convertible preferred stock
(using the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share as if
they were outstanding for all periods presented. To date, the Company has not
had any issuances or grants for nominal consideration.

      Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares from
the convertible preferred stock (using the if-converted method), which
automatically converted into common stock upon the completion of the IPO as if
converted at the original date of issuance, for both basic and diluted net loss
per share, even though inclusion is antidilutive.


                                       7
<PAGE>
 
                                VERTICALNET, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      The following table sets forth the computation of loss per share:

<TABLE>
<CAPTION>
                                                             Three months ended March 31,
                                                             ----------------------------
                                                                 1999            1998
                                                                 ----            ----
<S>                                                          <C>             <C>          
Basic and Diluted net loss per share
Numerator: Net loss ......................................   $ (5,608,758)   $ (2,084,869)
Denominator:
     Weighted-average shares outstanding basic and diluted     10,156,587       2,526,865
Basic and diluted net loss per share .....................   $      (0.55)   $      (0.83)
                                                             ============    ============
Pro forma net loss per share
Numerator: Net loss ......................................   $ (5,608,758)   $ (2,084,869)
Denominator:
     Weighted-average shares outstanding basic and diluted     14,483,185       7,703,305
Basic and diluted net loss per share .....................   $      (0.39)   $      (0.27)
                                                             ============    ============
</TABLE>

(2) Investments

      The Company principally invests its excess cash in debt instruments of the
United States Government and its agencies, and in high-quality corporate
issuers. All highly liquid instruments with an original maturity of three months
or less are considered cash equivalents, those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are considered
long-term investments.

      The Company accounts for investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's marketable investments are classified as available-for-sale as of the
balance sheet date and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in shareholders' equity. Realized gains or losses
and permanent declines in value, if any, on available-for-sale securities will
be reported in other income or expense, as incurred.

(3) Commitments and Contingencies

      On June 30, 1998, the Company entered into a three year Sponsorship
Agreement with Excite, Inc. (Excite). The Sponsorship Agreement provides for the
Company and Excite to sponsor and promote 30 co-branded Web pages and for each
company to sell advertising on the Web pages. Excite has guaranteed a minimum
number of advertising impressions for each of the three years. The agreement is
cancelable by either party, as defined, and requires the Company to pay Excite
$0.9 million, $2.0 million and $3.0 million, respectively, in year one, two and
three under the agreement. Such payments will be charged to expense as the
advertising impressions are provided by Excite. In addition, each company will
provide the other with $200,000 in barter advertising during the term of the
Sponsorship Agreement. As of December 31, 1998, each company has satisfied the
barter provisions under the Sponsorship Agreement.

      On January 19, 1999, the Company entered into a one year agreement with
Compaq Computer Corporation Compaq) and its Internet Web site known as
AltaVista. The agreement provides for the Company and AltaVista to sponsor and
promote 31 co-branded Web pages. The agreement requires the Company to pay
Compaq $1.0 million over the term of the agreement based on the number of
advertising impressions delivered. Such amount will be charged to expense as the
advertising impressions are provided by AltaVista. In addition, each company
will provide the other with $300,000 in barter advertising during the term of
the agreement. The Company has satisfied its obligation under this agreement.

      The Company has entered into non-cancelable obligations with several
content service providers and Internet search engines. Under these agreements,
exclusive of the Excite and AltaVista agreements discussed above, the Company's
obligations are as follows:

      1999.....................................................       $1,421,000
      2000.....................................................           65,500


                                       8
<PAGE>
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

      On April 21, 1999, the Company entered into a 10 year lease for its
headquarters. The total obligation under the lease is $9.0 million and is
payable in monthly payments of $75,222 commencing in July 1999.

      The Company is a party to legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of management, the amount of the
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or cash flows of the Company.

(4) Acquisition of Safetyonline

      In January 1999 the Company acquired certain assets and assumed certain
liabilities including the Safetyonline Web site from Coastal Video
Communications (Coastal). The Company paid $260,000 in cash, issued a $50,000
note, to be paid within 90 days of the closing of the purchase, and provided
Coastal an advertising commitment on the Company's Web site valued at $160,000.
The acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the net assets acquired of approximately
$550,000 was recorded as goodwill and is being amortized over three years. The
results of operations from Safetyonline are not material to the Company's
consolidated financial position or results of operations.

(5) Comprehensive Income (Loss)

      The following presents a reconciliation of net loss to comprehensive loss
for the three months ended March 31, 1999 and March 31, 1998.

                                             Three months ended March 31,
                                               1999                1998  
                                             --------            --------
        Net loss ......................... $(5,608,758)        $(2,084,869)
        Other comprehensive loss:                               
          Unrealized loss on securities ..      (6,040)                 --
                                             ---------           ---------
        Comprehensive loss ............... $(5,614,798)        $(2,084,869)
                                             =========           =========

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDION AND RESULTS OF
        OPERATIONS

                           FORWARD LOOKING STATEMENTS

      The following discussion of our financial condition and results of
operations should be read together with the consolidated financial statements
and the related notes included in another part of this document and which are
deemed to be incorporated into this section. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in those forward-looking
statements as a result of certain factors, including but not limited to, those
set forth under and included in other portions of this document.

                                    OVERVIEW

      We currently own and operate 38 vertical trade communities on the
Internet. Advertising revenues and Web site development fees contributed most of
the revenues for the three months ended March 31, 1999 and March 31, 1998.

      We sell storefront and banner advertising and event sponsorships on our
vertical trade communities. The duration of a storefront advertisement is
typically for a period of one year, while banner advertisements are typically
for a period of three months. All advertising revenues are recognized ratably
over the period in which the advertisement is displayed, provided that the
collection is reasonably assured. As of March 31, 1999, we had approximately
$3.1 million of deferred revenue. We also generate revenues from career
services, education and electronic commerce, specifically the sale of books and
third party software.

      We offer for sale to our visitors books, software and other goods offered
by third party Web sites. We receive a portion of the revenue from the products
sold on our "store." This type of revenue sharing or commission sharing
relationship is typical of electronic commerce transactions and relationships on
the Internet. We receive either a fee per transaction, a percentage of sales
revenue or some other minimum guaranteed payment.

      We plan to expand our electronic commerce relationships to include:


                                       9
<PAGE>
 
      o     selling goods and services promoted on our advertisers' storefronts;

      o     selling goods and services from our owned and operated virtual
            store; and

      o     auctioning goods posted on our Web sites by inventory-liquidators.

      We incurred net losses of approximately $5.6 million for the three months
ended March 31, 1999, $13.6 million for the year ended December 31, 1998, $4.8
million for the year ended December 31, 1997 and $709,000 for the year ended
December 31, 1996. At March 31, 1999 we had an accumulated deficit of $24.9
million. The net losses and accumulated deficit resulted from our lack of
substantial revenues, the costs of the significant infrastructure and other
costs incurred for the development and initial rollout of our vertical trade
communities. Because of our aggressive expansion plans, we expect to incur
significant operating losses for the foreseeable future. Although we have
experienced revenue growth in recent periods, such growth may not be sustainable
and, therefore, these recent periods should not be considered indicative of
future performance. We may never achieve significant revenues or profitability,
or if we achieve significant revenues, it may not be sustained.

                              RESULTS OF OPERATIONS

Three Months Ended March 31, 1999 and March 31, 1998

      Revenues. Revenues increased from $377,000 for the three months ended
March 31, 1998 to $1.9 million for the three months ended March 31, 1999. The
increase in revenues was due primarily to an increase in (i) the number of
storefronts from 644 as of March 31, 1998 to 1600 as of March 31, 1999 (ii) the
number of vertical trade communities from 16 as of March 31, 1998 to 35 as of
March 31, 1999. Advertising revenues, including the development of the
storefronts, accounted for the majority of revenues for the periods ended March
31, 1998 and March 31, 1999. Barter transactions, in which the Company received
advertising or other services in exchange for advertising on its Web sites
accounted for approximately 30% of total revenues for the three months ended
March 31, 1999 and none for the three months ended March 31, 1998. At March 31,
1999, we had deferred revenues of $3.1 million. We expect that advertising
revenue will continue to account for a substantial share of revenues for the
foreseeable future.

      Editorial and Operational Expenses. Editorial and operational expenses
primarily consist of Internet connection charges, cost of acquired content,
depreciation, salaries and benefits of operating and editorial personnel and
other related operating costs. These expenses increased from $435,000 for the
three months ended March 31, 1998 to $1.2 million for the three months ended
March 31, 1999. For these periods, expenses increased by $27,000 for
depreciation, $645,000 for salaries and benefits of operating and editorial
personnel and $93,000 for Internet connection charges, acquired content and
other related operating costs. The increases were primarily related to the
increased number of personnel and amount of equipment required to maintain and
operate our increased number of vertical trade communities.

      Product Development Expenses. Product development expenses consist
primarily of salaries and benefits, consulting expenses and related equipment.
These costs increased from $193,000 for the three months ended March 31, 1998 to
$1.2 million for the three months ended March 31, 1999. For these periods,
expenses increased by $636,000 for salaries and benefit costs and by $371,000
for consulting and equipment costs. This increase in expenses was due to
increased staffing and the costs of enhancing the features, content and services
of our vertical trade communities, as well as increasing the overall number of
vertical trade communities. To date, we have charged to expense all the product
development costs when such costs have been incurred. We believe that continued
investment in product development is critical to attaining our goals, and
therefore expect product development expenses to increase significantly.

      Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel,
advertising and travel and entertainment, including costs of attending trade
shows. These expenses increased from $935,000 for the three months ended March
31, 1998 to $3.6 million for the three months ended March 31, 1999. For these
periods, expenses increased by $981,000 for advertising, $1.1 million for
salaries, commissions and benefits, and $584,000 for travel and entertainment
expenses, including costs of attending trade shows. This was primarily due to
increasing the number of sales and marketing personnel, increasing sales
commissions and increased expenses related to promoting our vertical trade
communities. We expect these expenses will continue to grow significantly, as we
pursue an aggressive growth strategy and hire additional sales/marketing
personnel.

      General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, human resources and business development personnel, as
well as support services and professional service fees. These expenses increased
from $823,000 for the three months ended March 31, 1998 to $1.7 million
(including goodwill amortization) for the three months ended March 31, 1999. For
these periods, expenses increased by 


                                       10
<PAGE>
 
$208,000 for general and administrative personnel, $285,000 for depreciation and
goodwill amortization, $19,000 for professional fees, $86,000 for facility costs
and $279,000 for other general and administrative costs. The increase was
primarily due to increases in the number of personnel to support and grow our
business. We expect these expenses to grow as additional personnel are hired and
additional expenses are incurred. These expenses relate to growing our business
and operating as a public company.

      Interest, Net. Interest income net of expense includes income from cash
and cash equivalents and from investments and expenses related to our financing
obligations. Interest income net of interest expense increased from an expense
of $76,000 for the three months ended March 31, 1998 to income of $148,000 for
the three months ended March 31, 1999. The increase was primarily due to a
higher investment balance as a result of the initial public offering. Currently,
we invest the majority of our cash balances in debt instruments of the United
States Government and its agencies, and in high-quality corporate issuers.

LIQUIDITY AND CAPITAL RESOURCES

      As of March 31, 1999, the Company's primary source of liquidity consisted
of cash and debt instruments that are highly liquid, of high-quality investment
grade and predominately have maturities less than one year with the intent to
make such funds readily available for operating purposes. On February 17, 1999,
the Company completed its initial public offering of 4,025,000 shares of common
stock, resulting in the net proceeds of $58.3 million. At March 31, 1999, the
Company had cash and cash equivalents and investments in marketable debt
securities totaling $57 million compared to $5.7 million at December 31, 1998.

      We have a line of credit with a commercial bank for $500,000, which
expires on June 30, 1999. The line of credit is primarily used for working
capital purposes. The line bears interest at the bank's prime rate of interest
plus 1.5%. Any borrowings under the line of credit are secured by most of our
assets. As of March 31, 1999, we have no outstanding balance.

      We have several capital leases with various financial institutions for
computer and communications equipment used in our operations with lease terms
ranging from three to five years. Additionally, we have an insurance premium
financing agreement for our directors and officers liability insurance. The
interest rates under the leases and insurance premium financing agreement range
from 8% to 20% and we are required to make total monthly payments of
approximately $74,000 under the terms of these agreements.

      For the three months ended March 31, 1999, cash used in operating
activities was $4.6 million. Cash used in operating activities consisted mostly
of net operating losses and increases in accounts receivable and prepaid
expenses, partially offset by increases in deferred revenues, accrued expenses
and accounts payable.

      Net cash used in investing activities was $47.1 million for the three
months ended March 31, 1999. Our investing activities included the purchases of
marketable securities for $46.6 million (net of sales maturities), capital
expenditures for $147,000 and the acquisition of Safetyonline for $285,000.

      For the three months ended March 31, 1999, cash provided by financing
activities of $56.4 million was primarily due to our initial public offering
which raised net proceeds of $58.4 million and the exercise of stock options.
These amounts were partially offset by the repayment of the $2.0 million line of
credit that was outstanding as of December 31, 1998 and principal payments on
capital lease obligations.

Year 2000 Compliance

      We may realize exposure and risk if the systems on which we are dependent
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, information technology
including computers and software, and non-information technology including
telephone systems and other equipment used internally. Additionally, all of the
internally developed production and operation systems for our Web sites are
undergoing a complete re-engineering. All new programs are being tested and
validated for Year 2000 compliance.

      We have taken steps to ensure that telephone systems and other
non-information technology are Year 2000 compliant. We have replaced our
telephone and voicemail systems with new systems that are Year 2000 compliant.
We believe all non-information technology upon which we are materially dependent
is Year 2000 compliant. Additionally, with respect to information technology, we
expect to resolve any Year 2000 compliance issues primarily through normal
upgrades of our software or, when necessary, through replacement of existing
software with Year 2000 compliant applications. The cost of these upgrades or
replacements is included in our capital expenditure budget and is not expected
to be material to our financial position or results of operations. We estimate
that our total cost to become Year 2000 compliant will not exceed $250,000,
which we expect will be funded from working capital or borrowings under our bank
line of credit. However, such upgrades and 


                                       11
<PAGE>
 
replacements may not be completed on schedule or within estimated costs or may
not successfully address our Year 2000 compliance issues.

      We have completed our Year 2000 compliance assessment plan. This plan
includes assessing both our information and non-information technology as well
as our internally developed production and operation systems. Based on this
assessment, we believe that all non-information technology, all internally
developed production and operations systems and 80% of our technology are Year
2000 compliant. We believe that the remaining 20% of our information-technology
that is not Year 2000 compliant is not critical to our business. We intend to
complete the replacement or remediation of these non-compliant technologies, as
well as the testing of any replacement or corrected technologies, by the end of
the second quarter of 1999.

      In addition, we are in the process of seeking verification from our key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not presently compliant, to provide a description of their plans to
become so. As of May 7, 1999, we have received certification from 95% of our
distributors, vendors and suppliers that they are either Year 2000 compliant or
are taking the necessary steps to become Year 2000 compliant. We expect to
receive the remaining certifications by June 30, 1999. To the extent that
vendors fail to provide certification that they are Year 2000 compliant by July
1999, we will seek to terminate and replace those relationships.

      In the event that our production and operational facilities that support
our Web sites are not Year 2000 compliant, small portions of our Web sites may
become unavailable. Our review of our systems has shown that there is no single
application that would make our Web sites totally unavailable and we believe
that we can quickly address any difficulties that may arise.

      In the event that our Web-hosting facilities are not Year 2000 compliant,
our Web sites would be unavailable and we would not be able to deliver services
to our users.

      We do not currently have a contingency plan to deal with the worst-case
scenario that might occur if technologies we are dependent upon are not Year
2000 compliant and fail to operate effectively after the Year 2000. We intend to
develop a plan for this scenario by the end of the second quarter of 1999.

      If our present efforts to address the Year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with which we
conduct business do not successfully address such issues, our business,
operating results and financial position could be materially and adversely
affected.

Other Commitments

      Our financial commitments for our marketing and distribution agreements
with Excite and AltaVista are $2.3 million in 1999, $2.3 million in 2000 and
$2.0 million in 2001. The Excite agreement expires in August 2001 and renews
automatically unless terminated by either party upon 15 days notice prior to the
anniversary date of the agreement. The AltaVista agreement expires one year from
the date of the agreement and renews automatically unless terminated by either
party upon 30 days prior to the anniversary date of the agreement. On April 21,
1999, the Company executed a 10 year operating lease for its headquarters. The
lease commences in July 1999 and has average monthly payments of $75,000.

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. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As we do not currently engage or plan to engage
in derivative or hedging activities, we do not expect there to be any impact to
our results of operations, financial position or cash flows upon the adoption of
this standard.

FACTORS AFFECTING OUR BUSINESS CONDITION

      In addition to the other information included in this Report, the
following factors should be considered in evaluating our business and future
prospects:

We have limited operating history upon which you may evaluate us

      We launched our first vertical trade community in October 1995.
Accordingly, we have a limited operating history upon which you may evaluate us.
In addition, our revenue model is evolving. Currently, our revenues are
primarily generated from the sale of advertising on our vertical trade
communities. In the future, we expect to generate revenue from multiple sources,


                                       12
<PAGE>
 
including electronic commerce and business services. We may not be able to
sustain our current revenues or successfully generate electronic commerce or
business services revenue. If we do not generate such revenue, our business,
financial condition and operating results will be materially adversely affected.

We anticipate we will incur continued losses for the foreseeable future

      To date, we have not been profitable. We may never be profitable or, if we
become profitable, we may be unable to sustain profitability. We have incurred
significant losses since inception. We reported a net loss of $5.6 million for
the three months ended March 31, 1999. We expect to continue to incur
significant losses for the foreseeable future. As of March 31, 1999, our
accumulated deficit was $24.9 million. Our limited operating history makes
predicting our future operating results, including operating expenses,
difficult. Our revenues may not grow or may not even continue at their current
level.

We expect our operating expenses to increase

      Some of our expenses are fixed, including non-cancelable agreements,
equipment leases and real estate leases. If our revenues do not increase, we may
not be able to compensate by reducing expenses in a timely manner. In addition,
we plan to significantly increase our operating expenses to:

      o     launch additional vertical trade communities;

      o     increase our sales and marketing operations;

      o     enter into additional sponsorship agreements;

      o     broaden our customer support capabilities; and

      o     pursue marketing and distribution alliances.

      Expenses may also increase due to the potential impact of goodwill and
other charges resulting from completed and future acquisitions.

      Additionally, leading Web sites, browser providers and other Internet
distribution channels may begin to charge us to provide access to our products
and services. If any of these expenses are not accompanied by increased
revenues, our business, financial condition and operating results would be
materially adversely affected.

Fluctuations in our quarterly results may adversely affect our stock price

      We expect that our quarterly operating results will fluctuate
significantly due to many factors, including:

      o     the seasonality of our revenues;

      o     the uncertain adoption of the Internet as an advertising medium;

      o     potential dependence on development of the electronic commerce
            market;

      o     intense competition;

      o     our dependence on content providers;

      o     license fees payable to content providers;

      o     uncertain acceptance of our Internet content;

      o     management of our growth; and

      o     risks associated with potential acquisitions.

      Many of these factors are beyond our control.


                                       13
<PAGE>
 
      Due to the limited history of businesses relying on the Internet as a
commercial medium, we believe that period-to-period comparisons of our operating
results are not meaningful. Additionally, if our operating results in one or
more quarters do not meet the securities analysts' or our shareholders'
expectations, the price of our common stock could be materially adversely
affected.

Marketing and distribution alliances may not generate the expected number of new
customers or may be terminated

      We use marketing and distribution alliances with other Internet companies
to create traffic on our vertical trade communities and consequently, to
generate revenues. These marketing and distribution alliances allow us to link
our vertical trade communities to search engines such as those offered by
Excite, and on other Web sites such as AltaVista. The success of these
relationships depends on the amount of increased traffic we receive from the
alliance partners' Web sites. These arrangements may not generate the expected
number of new customers. We also cannot assure you that we will be able to renew
these marketing and distribution alliance agreements. If any of these agreements
are terminated, the traffic on our vertical trade communities could decrease or
our advertising revenues derived from the sales of advertising on co-branded
pages could decrease.

Acquisitions may disrupt or otherwise have a negative impact on our business

      We have made, and plan to continue to make, investments in complementary
companies, technologies and assets. Future acquisitions are subject to the
following risks:

      o     acquisitions may cause a disruption in our ongoing business,
            distract our management and other resources and make it difficult to
            maintain our standards, controls and procedures;

      o     we may acquire companies in markets in which we have little
            experience;

      o     we may not be able to successfully integrate the services, products
            and personnel of any acquisition into our operations;

      o     we may be required to incur debt or issue equity securities, which
            may be dilutive to existing shareholders, to pay for acquisitions;
            and

      o     our acquisitions may not result in any return on our investment and
            we may lose our entire investment.

The seasonality of our advertising revenues and usage causes our overall
revenues to be seasonal

      Some of our revenue is seasonal, which causes our revenues to be lower in
the second and third quarters of each calendar year. As a result, after the
announcement of our results for the second and third quarters or each calendar
year, our stock price may be lower than at other times of the year. We
experience seasonality in our advertising revenue because advertising and media
buying tends to be highest in the first and fourth quarters of each calendar
year. We also experience seasonality in our traffic. User traffic on our
vertical trade communities and the Web sites of our partners is lower during the
summer and year-end vacation and holiday periods, when business usage of the Web
and our services typically declines.

We currently rely heavily on advertising revenues and if our advertising
revenues decline our business would be adversely affected

      We currently rely on revenues generated from the sale of advertising on
our vertical trade communities for substantially all of our revenues. If we do
not continue to develop advertising and other sources of revenues, our business
may be materially adversely affected. Our ability to increase our advertising
revenues may depend, among other things, on many factors, including:

      o     advertisers' acceptance of the Internet as a legitimate advertising
            medium;

      o     the development of a large base of users on our vertical trade
            communities who possess demographic characteristics attractive to
            advertisers; and

      o     the expansion of our sales force.

      Other factors could also affect our revenues. For example, widespread use
of "filter" software programs that limit access to storefront advertising from
the Internet user's browser could reduce advertising on the Internet, which
would materially adversely affect our business, financial condition and
operating results.


                                       14
<PAGE>
 
Changes in industry advertising rates could adversely affect our revenues

      Changes in industry pricing practices for advertising rates could
materially adversely affect our revenues in the future. Currently, we base our
storefront advertising rates on a variety of factors including the maturity of
the particular vertical trade community, the number of storefronts and amount of
other advertising purchased and the length of the advertising contract. In the
future, advertising rates may be based on different parameters such as the
number of sales inquiries generated or visitors sent from our vertical trade
communities to advertisers' Web sites. These changes could materially adversely
affect our revenues.

Adoption of the Internet as an advertising medium is uncertain

      The growth of Internet advertising requires validation of the Internet as
an effective advertising medium. This validation has yet to fully occur.
Acceptance of the Internet among advertisers will also depend on growth in the
commercial use of the Internet. If widespread commercial use of the Internet
does not develop, or if the Internet does not develop as an effective and
measurable medium for advertising, our business, financial condition and
operating results could be materially adversely affected.

      No standards have been widely accepted to measure the effectiveness of
Internet advertising. If such standards do not develop, existing advertisers may
not continue their current levels of Internet advertising and advertisers who
are not currently advertising on the Internet may be reluctant to do so. Our
business, financial condition and operating results would be adversely affected
if the market for Internet advertising fails to develop or develops slower than
expected.

We may not develop significant revenues from electronic commerce, which could
adversely affect our future growth

      For the three months ended March 31, 1999, approximately 3% of our
revenues was generated from electronic commerce. If we do not generate increased
revenue from electronic commerce, our business, financial condition and
operating results could be materially adversely affected. To generate
significant electronic commerce revenues, we will have to continue to build or
license an electronic commerce platform.

Our long-term success depends on the development of the electronic commerce
market, which is uncertain

      If electronic commerce does not grow or grows slower than expected, our
business will suffer. Our long-term success depends on widespread
market-acceptance of electronic commerce.

      A number of factors could prevent such acceptance, including the
following:

      o     electronic commerce is at an early stage and buyers may be unwilling
            to shift their purchasing from traditional vendors to online
            vendors;

      o     the necessary network infrastructure for substantial growth in usage
            of the Internet may not be adequately developed;

      o     increased government regulation or taxation may adversely affect the
            viability of electronic commerce;

      o     insufficient availability of telecommunication services or changes
            in telecommunication services could result in slower response times;
            and

      o     adverse publicity and consumer concern about the security of
            electronic commerce transactions could discourage its acceptance and
            growth.

There is intense competition for the Internet products and services, advertising
and sales of goods and services that we offer

      Competition for Internet products and services, advertising and electronic
commerce is intense. We expect that competition will continue to intensify.
Barriers to entry are minimal, and competitors can launch new Web sites at a
relatively low cost. We compete for a share of a customer's advertising budget
with online services and traditional off-line media, such as print publications
and trade associations. Although to date we believe there are no companies with
a larger portfolio of vertical trade communities than ours, several companies
offer competitive vertical trade communities. We expect that additional
companies will offer competing vertical trade communities on a standalone or
portfolio basis.

      Our competitors may develop Internet products or services that are
superior to, or have greater market acceptance than, our solutions. If we are
unable to compete successfully against our competitors, our business, financial
condition and operating results will be adversely affected.


                                       15
<PAGE>
 
      Many of our competitors have greater brand recognition and greater
financial, marketing and other resources than ours. This may place us at a
disadvantage in responding to our competitors' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.

Concerns regarding security of transactions and transmitting confidential
information over the Internet may negatively impact our electronic commerce
business

      We believe that concern regarding the security of confidential information
transmitted over the Internet, such as credit card numbers, prevents many
potential customers from engaging in online transactions. If we do not add
sufficient security features to future product releases, our products may not
gain market acceptance or there may be additional legal exposure to us. We have
included basic security features in some of our products to protect the privacy
and integrity of customer data, such as password requirements for access to
portions of our vertical trade communities. We do not currently use
authentication technology, which requires passwords and other information to
prevent unauthorized persons from accessing a customer's information, or
encryption, which transforms information into a "code" designed to be unreadable
by third parties, to protect confidential information such as credit card
numbers. However, we intend to license encryption technology to protect
confidential transaction data.

      Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as electronic commerce becomes more prevalent (and
consequently becomes the focus of our development of direct marketing products),
our customers will become more concerned about security. If we do not adequately
address these concerns, this could materially adversely affect our business,
financial condition and operating results.

We may not have opportunities to enter into new partnerships or marketing and
distribution alliances

      We are interested in entering into additional partnerships with search
engine providers to increase traffic to our vertical trade communities, but we
cannot be assured that we will be able to enter into any new partnerships. If we
are unable to enter into new arrangements the traffic on our vertical trade
communities may not increase.

Our business depends on the growth of the Internet, which is uncertain

      Our market is new and rapidly evolving. Our business would be adversely
affected if Internet usage does not continue to grow. Internet usage may be
inhibited by a number of reasons, such as:

      o     infrastructure;

      o     security concerns;

      o     inconsistent quality of service; and

      o     lack of availability of cost-effective, high-speed service.

      If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our vertical
trade communities, could be adversely affected.

Our Internet content may not attract users with demographic characteristics
valuable to our advertisers

      Our future success depends upon our ability to deliver compelling Internet
content about various industries that will attract users with demographic
characteristics valuable to our advertising customers. If we are unable to
develop Internet content that attracts a loyal user base possessing demographic
characteristics attractive to advertisers, it could have a material adverse
effect on our business, financial condition and operating results. In addition,
we may be unable to anticipate or respond to rapidly changing buyer preferences
to attract enough users to our vertical trade communities. Internet users can
freely navigate and instantly switch among a large number of Web sites. Many of
these Internet sites offer original content. Thus, it is difficult for us to
distinguish our content and attract users.


                                       16
<PAGE>
 
We may not be able to maintain relationships with the third parties we depend
upon to provide the content for our vertical trade communities, which could
result in decreased traffic on the vertical trade communities and decreased
advertising revenue

      We rely on third parties, such as trade publications and news wires, to
provide some of the content for our vertical trade communities. It is critical
to our business that we maintain and build our existing relationships with
content providers. Many of our agreements with content providers are for initial
terms of one to two years. The content providers may choose not to renew the
agreements or may terminate the agreements early if we do not fulfill our
contractual obligations, including our payment obligations. If a significant
number of content providers terminate our agreements with them, it could result
in decreased traffic on our vertical trade communities and decreased advertising
revenue. Because our agreements with certain of our content providers are
nonexclusive, a competitor could offer content similar to or the same as ours.

The licensee fees we pay to content providers may increase

      If licensing fees increase, it could materially adversely affect our
business, financial condition and operating results. License fees to content
providers may increase as competition for such content increases. Our content
providers may not enter into new agreements with us on similar terms as our
current agreements.

If we do not develop the "VerticalNet" brand and our vertical trade community
brands our advertising revenues could decrease

      To be successful, we must establish and strengthen the brand awareness of
the "VerticalNet" brand as well as the brands associated with each individual
vertical trade community (e.g. wateronline.com). If our brand awareness is
weakened, it could decrease the attractiveness of our audiences to advertisers,
which could result in decreasing advertising revenues. We believe that brand
recognition will become more important in the future with the growing number of
Internet sites. Our brand awareness could be diluted, which could adversely
affect our business, financial condition and operating results if users do not
perceive our products and services to be of high quality.

We are growing rapidly and effectively managing our growth may be difficult

      We have grown and expect to continue to grow rapidly both by adding new
products and hiring new employees. This growth is likely to place a significant
strain on our resources and systems. To manage our growth, we must implement
systems and train and manage our employees.

      Many of our senior management have only recently joined us. Of our seven
executive officers, four have worked for us less than one year. We cannot assure
you that our management will be able to effectively or successfully manage our
growth.

We may not be able to protect our proprietary rights and we may infringe the
proprietary rights of others

      Proprietary rights are important to our success and our competitive
position. We have applied for several trademarks, none of which has been issued
to date. Although we seek to protect our proprietary rights, our actions may be
inadequate to protect any trademarks and other proprietary rights or to prevent
others from claiming violations of their trademarks and other proprietary
rights. We currently have two pending trademark applications. Generally, our
domain names for our vertical trade communities are not protectable as
trademarks because they are too generic. In addition, effective copyright and
trademark protection may be unenforceable or limited in certain countries, and
the global nature of the Internet makes it impossible to control the ultimate
destination of our work. We also license content from third parties and it is
possible that we could become subject to infringement actions based upon the
content licensed from those third parties. We generally obtain representations
as to the origin and ownership of such licensed content; however, this may not
adequately protect us. Any of these claims, with or without merit, could subject
us to costly litigation and the diversion of our technical and management
personnel.

We may not be able to acquire or maintain easily identifiable Web addresses or
prevent third parties from acquiring Web addresses similar to ours

      We currently hold various Internet Web addresses relating to our brand.
These Web addresses include wateronline.com, wirelessdesignonline.com,
pollutiononline.com and other Web addresses. We may not be able to prevent third
parties from acquiring Web addresses that are similar to our addresses, which
could materially adversely affect our business, financial condition and
operating results. The acquisition and maintenance of Web addresses generally is
regulated by governmental agencies and their designees. For example, in the
United States, the National Science Foundation has appointed Network Solutions,
Inc. as the exclusive registrar for the ".com," ".net" and ".org" generic
top-level addresses. The regulation of Web addresses in the United States and in
foreign countries is subject to change. We may not be able to acquire or
maintain relevant 


                                       17
<PAGE>
 
Web addresses in all countries where we conduct business. Furthermore, the
relationship between regulations governing such addresses and laws protecting
trademarks is unclear.

We may not be able to effect our growth strategy if we are not able to
consummate future acquisitions

      Our acquisition strategy is subject to the risk of not being able to
identify additional suitable acquisition candidates available for sale at
reasonable prices or on reasonable terms. Additionally, regardless of whether
suitable candidates are available, we may not be able to consummate future
acquisitions for other reasons such as the availability of capital. If we are
unable to consummate future acquisitions, our business, financial condition and
operating results could be adversely affected.

We may be subject to legal liability for publishing or distributing content over
the Internet

      We may be subject to legal claims relating to the content in our vertical
trade communities, or the downloading and distribution of such content. For
example, persons may bring claims against us if material that is inappropriate
for viewing by young children can be accessed from our vertical trade
communities. Claims could also involve matters such as 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. In addition, some of the content provided on our vertical trade
communities is drawn from data compiled by other parties, including governmental
and commercial sources, and we re-key the data. This data may have errors. If
our content is improperly used or if we supply incorrect information, it could
result in unexpected liability. Our insurance may not cover claims of this type,
or may not provide sufficient coverage. Our business, financial condition and
operating results could suffer a material adverse effect if costs resulting from
these claims are not covered by our insurance or exceed our coverage.

Risk of failure of our computer and communications hardware systems increases
without back-up facilities

      Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Any system interruptions that
cause our vertical trade communities to be unavailable to Web browsers may
reduce the attractiveness of our vertical trade communities to advertisers and
could materially adversely affect our business, financial condition and
operating results. We maintain most of our computer systems in two Web-hosting
facilities in New Jersey. However, we do not have back-up or redundant
facilities for our computer systems. Interruptions could result from natural
disasters as well as power loss, telecommunications failure and similar events.

Capacity limits on our technology, transaction processing system and network
hardware and software may be difficult to project and we may not be able to
expand and upgrade our systems to meet increased use

      As traffic in our vertical trade communities continues to increase, we
must expand and upgrade our technology, transaction processing systems and
network hardware and software. We may not be able to accurately project the rate
of increase in our vertical trade communities. In addition, we may not be able
to expand and upgrade our systems and network hardware and software capabilities
to accommodate increased use of our vertical trade communities. If we do not
appropriately upgrade our systems and network hardware and software, our
business, financial condition and operating results will be materially adversely
affected.

Our market is characterized by rapid technological change which we may not be
able to keep up with in a cost-effective way

      Our market is characterized by rapid technological change and frequent new
product announcements. Significant technological changes could render our
existing vertical trade community technology obsolete. If we are unable to
successfully respond to these developments or do not respond in a cost-effective
way, our business, financial condition and operating results will be materially
adversely affected. To be successful, we must adapt to our rapidly changing
market by continually improving the responsiveness, services and features of our
vertical trade communities and by developing new features to meet customer
needs. Our success will depend, in part, on our ability to license leading
technologies useful in our business, enhance our existing services and develop
new services and technology that address the needs of our customers. We will
also need to respond to technological advances and emerging industry standards
in a cost-effective and timely basis.

Our success is dependent on our key personnel who we may not be able to retain
and we may not be able to hire enough additional personnel to meet our hiring
needs

      We believe that our success will depend on continued employment of our
senior management team and key technical personnel. If one or more members of
our senior management team were unable or unwilling to continue in their present
positions, our business, financial condition and operating results could be
materially adversely affected. Most of our senior 


                                       18
<PAGE>
 
management do not have employment agreements. We carry key person life insurance
on certain, but not on all, of our senior management personnel.

      Our success also depends on having a highly trained sales force and
telesales group. Our telesales group was formed recently. We will need to
continue to hire additional personnel as our business grows. A shortage in the
number of trained salespeople could limit our ability to increase sales in our
existing vertical trade communities and to sell as we launch new vertical trade
communities.

      We plan to expand our employee base to manage our anticipated growth.
Competition for personnel, particularly for employees with technical expertise,
is intense. Our business, financial condition and operating results will be
materially adversely affected if we cannot hire and retain suitable personnel.

Our systems may not be Year 2000 compliant, which could cause our vertical trade
communities to be unavailable for a period of time after January 1, 2000, which
could in turn have a negative impact on our business, operating results and
financial position

      We may realize exposure and risk if the systems on which we are dependent
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software and
other equipment used internally. If our present efforts to address the Year 2000
compliance issues are not successful, or if distributors, suppliers and other
third parties with which we conduct business do not successfully address such
issues, our business, operating results and financial position could be
materially and adversely affected.

      In the event that our Web-hosting facilities are not Year 2000 compliant,
our production Web sites would be unavailable and we would not be able to
deliver services to our users. In the event that our production and operational
facilities that support our Web sites are not Year 2000 compliant, small
portions of our Web sites may become unavailable.

The interests of our controlling shareholders may conflict with our interests
and the interests of our other shareholders

      As a result of its stock ownership and board representation, Internet
Capital Group, LLC is in a position to affect significantly our corporate
actions such as mergers or takeover attempts in a manner that could conflict
with the interests of our public shareholders. Internet Capital Group owns
6,147,505 shares, or 36.6%, of common stock. Internet Capital Group also owns
warrants to purchase 119,656 shares of common stock. Two representatives of
Internet Capital Group remain on our board of directors.

Shares eligible for future sale by our current shareholders may adversely affect
our stock price

      If our shareholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, then the market price of our common stock could fall.
Restrictions under the securities laws and certain lock-up agreements limit the
number of shares of common stock available for sale in the public market. In
connection with our recent initial public offering, the holders of 11,653,064
shares of common stock and warrants and options exercisable into an aggregate of
505,704 shares of common stock have agreed not to sell any such securities for
180 days after the initial public offering without the prior written consent of
Lehman Brothers, the lead underwriter of the initial public offering. However,
Lehman Brothers may, in its sole discretion, release all or any portion of the
securities subject to such lock-up agreements. The agreements expire on August
9, 1999.

      The holders of 10,047,346 shares of common stock and warrants to purchase
235,871 shares of common stock have demand and piggy-back registration rights.
The exercise of such rights could adversely affect the market price of our
common stock. We have also filed a registration statement to register all shares
of common stock under our stock option and employee stock purchase plans. That
registration statement was effective on February 10, 1999 and shares issued upon
exercise of stock options and employee stock purchase plans will be eligible for
resale in the public market without restriction.

Anti-takeover provisions and our right to issue preferred stock could make a
third-party acquisition of us difficult

      VerticalNet is a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to
shareholders. Our articles of incorporation provide that our board of directors
may issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a staggered three
year term. The issuance of preferred stock and the existence of a classified
board could make it more difficult for a third-party to acquire us.

Our common stock price is likely to remain highly volatile

      The market price of our common stock has been and will likely continue to
be highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to 


                                       19
<PAGE>
 
resell their shares of our common stock following periods of volatility because
of the market's adverse reaction to such volatility. The trading prices of many
technology and Internet-related companies' stocks have reached historical highs
within the last 52 weeks and have reflected relative valuations substantially
above historical levels. During the same period, such companies' stocks have
also been highly volatile and have recorded lows well below such historical
highs. We cannot assure you that our stock will trade at the same levels of
other Internet stocks or that Internet stocks in general will sustain their
current market prices.

      Factors that could cause such volatility may include, among other things:

      o     actual or anticipated variations in quarterly operating results;

      o     announcements of technological innovations;

      o     new sales formats or new products or services;

      o     changes in financial estimates by securities analysts;

      o     conditions or trends in the Internet industry;

      o     changes in the market valuations of other Internet companies;

      o     announcements by us or our competitors of significant acquisitions,
            strategic partnerships or joint ventures;

      o     capital commitments;

      o     additions or departures of key personnel; and

      o     sales of common stock.

      Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

      Our exposure to market risk related changes in interest rates relates
primarily to our investment portfolio. We invest in instruments that meet high
credit quality standards, as specified in our investment policy. The policy also
limits the amount of credit exposure to any one issue, issuer and type of
investment.

      As of March 31, 1999, our investments consisted of $3.4 million that were
cash equivalents, $ 29.0 million having a maturity of less than one year, and
$17.5 million that had a maturity of greater than one year. Due to the average
maturity and conservative nature of our investment portfolio, a sudden change in
interest rates would not have a material effect on the value of the portfolio.
Management estimates that had the average yield of the Company's investments
decreased by 100 basis points, the Company's interest income for the quarter
ended March 31, 1999 would have decreased by less than $59,000 This estimate
assumes that the decrease occurred on the first day of 1999 and reduced the
yield of each investment instrument by 100 basis points. The impact on the
Company's future interest income, of future changes in investment yields will
depend largely on the gross amount of the Company's investments.

                           PART II. OTHER INFORMATION

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

      On February 10, 1999, the Company's Registration Statement on Form S-1
covering the Offering of 4,025,000 shares of the Company's Common Stock,
Commission file number 333-68053 was declared effective. The Offering commenced
on February 11, 1999, managed by Lehman Brothers, Hambrecht & Quist, Volpe Brown
Whelan & Company and Wit Capital Corporation as representatives of the several
underwriters named in the Registration Statement (the "Underwriters").

      The Underwriters exercised an over-allotment option to purchase an
additional 525,000 shares of the Company's common Stock. The total price to the
public for the shares offered and sold by the Company was $64,400,000.


                                       20
<PAGE>
 
      The amount of expenses incurred for the Company's account in connection
with the Offering are as follows:

                  Underwriting discounts and commissions     $4,508,000
                  Finders' fees                                      --
                  Expenses paid to or for the Underwriters           --
                  Other expenses                              1,604,686
                                                             ----------
                  Total expenses                             $6,112,686
                                                             ==========

      All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of the Company's common stock; or (iii) affiliates of the
Company.

      The net proceeds of the Offering to the Company (after deducting the
foregoing expenses) was $58,287,314. From the effective date of the Registration
Statement, the net proceeds have been used for the following purposes:

            Construction of plant, building and facilities   $        --
            Purchase and installation of machinery
              and equipment                                           --
            Purchase of real estate                                   --
            Acquisition of other business (including
              transaction costs)                                      --
            Repayment of indebtedness                                 --
            Working capital                                    1,331,454
            Temporary investments, including cash
              and cash equivalents                            10,457,327
            Other purposes (for which at least $100,000
              has been used), including:
                Investments, including debt instruments
                of the United States Government and its
                agencies and in high quality corporate
                issuers                                       46,498,533
                                                             -----------
                                                             $58,287,314
                                                             ===========

      All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates: (ii) persons owning ten
percent (10%) or more of the Company's common stock; or (iii) affiliates of the
Company

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

      On February, 7, 1999, the Annual Meeting of Shareholders of VerticalNet,
Inc. was held. Our common and preferred shareholders approved the following
matters:

      o     that the Second Amended and Restated Articles of Incorporation be
            amended to effect a reverse split of the Company's common stock at a
            ratio of 1.95 to 1;

      o     that the Employee Stock Purchase Plan, which provides for the
            issuance and sale of 300,000 shares of common stock (after giving
            effect to the reverse split), be ratified, adopted and approved;

      o     that the number of shares of common stock available for issuance
            upon awards granted under the 1996 Equity Compensation Plan be
            increased to 3,600,000 shares (after giving effect to the reverse
            split);

      o     that, effective upon the initial public offering, our amended and
            restated Articles of Incorporation be adopted and approved
            substantially in the form filed as an exhibit hereto;


                                       21
<PAGE>
 
      o     that, effective upon the initial public offering, our amended and
            restated Bylaws be approved and adopted substantially in the form to
            be filed as an exhibit hereto.

      The number of votes cast for, against and withheld from the approval of
each matter is set forth below:

Matter                                         For             Against  Withheld
------                                         ---             -------  --------
Approval of reverse split                   16,949,398            0            0

Ratification of Employee Stock Purchase
  Plan                                      16,818,350            0      131,037

Increase in Shares issuable under Option
  Plan                                      16,949,398            0            0

Ratification of Articles of Incorporation   16,949,398            0            0

Ratification of Bylaws                      16,949,397            0            0

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits.

      The following is a list of exhibits filed as part of this Report on Form
10-Q. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated parenthetically except for in
those situations where the exhibit number was the same as set forth below.


                                       22
<PAGE>
 
Exhibit
Number   Description
------   -----------

3.1      Amended and Restated Articles of Incorporation (1)

3.2      Amended and Restated Bylaws (1)

10.1     Amended and Restated 1996 Equity Compensation Plan (1) (2)

10.2     Employment Agreement with Mark L. Walsh (1) (2)

10.3     Employment Agreement with Barry E. Wynkoop (1) (2)

10.4     Share Purchase Agreement dated September 1, 1998, between Boulder
         Interactive Technology Services Co. and VerticalNet, Inc. (1)

10.5     Agreement and Plan of Merger dated September 30, 1998, among
         VerticalNet, Inc., Informatrix Acquisition Corp., Informatrix
         Worldwide, Inc. and the Stockholders of Informatrix Worldwide, Inc. (1)

10.6     Sponsorship Agreement dated June 30, 1998, between Excite!, Inc. and
         VerticalNet, Inc. (1)(3)

10.7     Internet Services Agreement dated as of January 19, 1999 by and between
         Compaq Computer Corporation and VerticalNet, Inc. (1)

10.8     Asset Purchase Agreement dated January 13, 1999 by and among
         VerticalNet, Inc., Coastal Video Communications Corp., Paul V. Michels
         and Philip P. Price (1)

10.9     Common Stock Purchase Warrant to purchase 20,513 shares of Common Stock
         dated November 25, 1998 issued to Progress Capital, Inc. (1)

10.10    Form of Common Stock Purchase Warrant dated November 25, 1998 issued in
         connection with the Convertible Note (1)

10.11    Form of Convertible Note dated November 25, 1998 (1)

10.12    Series A Preferred Stock Purchase Agreement dated as of September 12,
         1996 between Internet Capital Group, L.L.C. and Water Online, Inc. (1)

10.13    Series D Investor Rights Agreement dated as of May 8, 1998 by and among
         VerticalNet, Inc. and the Investors (1)

10.14    Registration Rights Agreement dated as of November 25, 1998 between the
         Company and the Convertible Note Holders (1)

11       Statement re: Computation of Per Share Earnings (included in notes to 
         financial statements)

21       Subsidiaries (1)

27*      Financial Data Schedule

*   Filed herewith.

(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
    (Registration No. 333-68053) filed with the Commission on November 27,
    1998 amended and incorporated herein by reference.

(2) Compensatory plans and arrangements for executives and others.

(3) Portions of this Exhibit have been omitted and filed separately with the
    Secretary of the Commission pursuant to the Registrant's Application
    Requesting Confidential Treatment under Rule 406 under the Act.

      (b) Reports on Form 8-K

None.


                                       23
<PAGE>
 
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: May 14, 1999                      VerticalNet, Inc.
                                        (Registrant)

                                        /s/  Mark L. Walsh
                                        -------------------------------------
                                        Mark L. Walsh
                                        President and Chief Executive Officer

                                        /s/  Gene S. Godick
                                        -------------------------------------
                                        Gene S. Godick
                                        Vice President of Finance and Chief 
                                        Financial Officer