<PAGE>   1
                       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, 2001

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)

<TABLE>
<S>                                                   <C>
      Pennsylvania                                        23-2815834
    (State or other                                    (I.R.S. Employer
    jurisdiction of                                   Identification No.)
    incorporation or
     organization)
</TABLE>

                                700 Dresher Road
                                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 Registrant's classes of
common stock, as of the latest practicable date:

As of April 30, 2001, 97,765,744 shares of the Registrant's common stock were
outstanding.
<PAGE>   2
                                     VERTICALNET, INC.

                                         FORM 10-Q
                      (For the Quarterly Period Ended March 31, 2001)

                                     TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
Part I. FINANCIAL INFORMATION

   Item 1.  Consolidated Financial Statements...................................      3
   Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations.................................     16
   Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........     36

Part II. OTHER INFORMATION

   Item 1.  Legal Proceedings...................................................     37
   Item 2.  Changes in Securities and Use of Proceeds...........................     37
   Item 3.  Defaults Upon Senior Securities.....................................     37
   Item 4.  Submission of Matters to a Vote of Security Holders.................     38
   Item 5.  Other Information...................................................     38
   Item 6.  Exhibits and Reports on Form 8-K....................................     38
</TABLE>


                                       2
<PAGE>   3
                               VERTICALNET, INC.

                           CONSOLIDATED BALANCE SHEETS
              (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    MARCH 31,         DECEMBER 31,
                                                                                      2001               2000
                                                                                   -----------        -----------
                                                                                   (unaudited)
<S>                                                                                <C>                <C>
Assets
Current assets:
    Cash and cash equivalents                                                      $    62,959        $   123,803
    Short-term investments                                                               4,374             21,349
    Accounts receivable, net of allowance for doubtful accounts of
       $2,280 in 2001 and $2,072 in 2000                                                34,234             31,932
    Prepaid expenses and other assets                                                   42,274             37,264
                                                                                   -----------        -----------
          Total current assets                                                         143,841            214,348
                                                                                   -----------        -----------
Property and equipment, net                                                             37,260             32,398
Net assets of discontinued operations                                                       --            215,000
Goodwill and other intangibles, net of accumulated amortization of
     $211,731 in 2001 and $149,015 in 2000                                             361,102            388,341
Long-term investments                                                                    3,257             22,861
Other investments                                                                      227,287             17,543
Other assets                                                                            12,300             32,793
                                                                                   -----------        -----------
          Total assets                                                             $   785,047        $   923,284
                                                                                   ===========        ===========

Liabilities and Shareholders' Equity
Current liabilities:
    Accounts payable                                                               $    11,308        $    10,821
    Accrued expenses                                                                    15,302             67,251
    Deferred revenues                                                                   69,677             57,323
    Other current liabilities                                                            2,148              1,597
                                                                                   -----------        -----------
          Total current liabilities                                                     98,435            136,992
                                                                                   -----------        -----------
Long-term debt                                                                             594                952
Other long-term liabilities                                                             16,837             22,630
Convertible notes                                                                       21,705             21,705
                                                                                   -----------        -----------
          Total liabilities                                                            137,571            182,279
                                                                                   -----------        -----------

Commitments and contingencies (see Note 8)

Minority interest                                                                           --             40,843
                                                                                   -----------        -----------

Series A 6.00% convertible redeemable preferred stock, $.01 par value 250,000
      shares authorized, 101,450 shares issued in 2001 and 2000 plus accrued
      dividends of $4,634 (liquidation value of $104,516) in 2001                       96,578             94,760
                                                                                   -----------        -----------


Shareholders' equity:
    Preferred stock $.01 par value, 9,750,000 shares authorized,
       none issued in 2001 and 2000                                                         --                 --
    Common stock $.01 par value, 1,000,000,000 shares
      authorized, 97,525,435 shares issued in 2001 and
      88,047,949 shares issued in 2000                                                     975                880
    Additional paid-in capital                                                       1,038,955          1,004,149
    Deferred compensation                                                                 (270)              (363)
    Accumulated other comprehensive loss                                               (13,521)           (14,370)
    Accumulated deficit                                                               (474,436)          (384,089)
                                                                                   -----------        -----------
                                                                                       551,703            606,207
    Treasury stock at cost, 656,356 shares in 2001 and 2000                               (805)              (805)
                                                                                   -----------        -----------
          Total shareholders' equity                                                   550,898            605,402
                                                                                   -----------        -----------
          Total liabilities and shareholders' equity                               $   785,047        $   923,284
                                                                                   ===========        ===========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>   4
                               VERTICALNET, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED MARCH 31,
                                                                   ----------------------------
                                                                      2001             2000
                                                                    --------        --------
                                                                           (unaudited)

<S>                                                                 <C>             <C>
Revenues                                                            $ 36,687        $ 12,863


Costs and Expenses:
Editorial and operational                                             13,439           4,262
Product development                                                    9,219           4,534
Sales and marketing                                                   25,032          10,153
General and administrative                                            18,044           6,740
Amortization expense                                                  44,271           9,586
Restructuring charge (see Note 6)                                      7,465              --
In-process research and development charge                                --          10,000
                                                                    --------        --------
Operating loss                                                       (80,783)        (32,412)
                                                                    --------        --------


Other income (expense)                                                (9,916)         79,875
Interest income (expense), net                                           874            (764)
                                                                    --------        --------

Income (loss) from continuing operations                             (89,825)         46,699

Discontinued operations:
    Loss from operations of the VerticalNet Exchanges segment             --          (4,606)
    Loss on disposal of the VerticalNet Exchanges segment               (522)             --
                                                                    --------        --------

Net income (loss)                                                    (90,347)         42,093

Preferred stock dividends and accretion                               (1,819)             --
                                                                    --------        --------

Income (loss) attributable to common shareholders                   $(92,166)       $ 42,093
                                                                    ========        ========


Basic net income (loss) per common share:
    Continuing operations                                           $  (0.99)       $   0.62
    Loss from discontinued operations                                     --           (0.06)
    Loss on disposal of discontinued operations                           --              --
                                                                    --------        --------
    Net income (loss) per common share                              $  (0.99)       $   0.56
                                                                    ========        ========

Weighted average common shares outstanding
    used in basic per share calculation                               92,650          74,805
                                                                    ========        ========

Diluted net income (loss) per common share:
    Continuing operations                                           $  (0.99)       $   0.49
    Loss from discontinued operations                                     --           (0.04)
    Loss on disposal of discontinued operations                           --              --
                                                                    --------        --------
    Net income (loss) per common share                              $  (0.99)       $   0.45
                                                                    ========        ========

Weighted average common shares outstanding
    used in diluted per share calculation                             92,650          98,229
                                                                    ========        ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>   5
                               VERTICALNET, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED MARCH 31,
                                                                                          ----------------------------
                                                                                            2001               2000
                                                                                           ---------        ---------
                                                                                                   (unaudited)

<S>                                                                                       <C>               <C>
Net income (loss)                                                                          $ (90,347)       $  42,093
Adjustments to reconcile net income (loss) to net cash used in operating activities:
    Depreciation, amortization and other noncash charges                                      50,124            8,127
    Write-down related to cost method investments                                              7,685               --
    Loss from equity method investments                                                        1,073               --
    Loss on disposal of discontinued operations                                                  522               --
    Net gain (loss) on investment                                                              2,188          (79,875)
    In-process research and development charge                                                    --           10,000
    Discontinued operations - working capital changes and noncash charges                         --          (10,293)
Change in assets, net of effect of acquisitions:
    Accounts receivable                                                                       (2,302)         (12,688)
    Prepaid expenses and other assets                                                          3,180              270
Change in liabilities, net of effect of acquisitions:
    Accounts payable                                                                             487           (1,252)
    Accrued expenses                                                                         (42,472)           2,230
    Deferred revenues                                                                         12,293           11,515
                                                                                           ---------        ---------
       Net cash used in operating activities                                                 (57,569)         (29,873)
                                                                                           ---------        ---------
Investing activities:
    Acquisitions, net of cash acquired                                                       (22,378)          (3,938)
    Purchase of available-for-sale investments                                                    --          (11,434)
    Purchase of cost and equity method company investments                                    (3,502)              --
    Proceeds from sale and redemption of available-for-sale investments                       17,200           52,129
    Restricted cash                                                                               --              (70)
    Discontinued operations-investing activities                                                  --          (21,823)
    Capital expenditures                                                                      (9,506)          (6,704)
                                                                                           ---------        ---------
       Net cash provided by (used in) investing activities                                   (18,186)           8,160
                                                                                           ---------        ---------
Financing activities:
    Principal payments on long-term debt and obligations under capital leases                   (574)            (389)
    Discontinued operations - financing activities                                                --           23,723
    Proceeds from the issuance of common stock                                                15,000               --
    Proceeds from exercise of stock options and employee stock purchase plan                     485            8,771
                                                                                           ---------        ---------
       Net cash provided by financing activities                                              14,911           32,105
                                                                                           ---------        ---------
Net increase (decrease) in cash                                                              (60,844)          10,392
Cash and cash equivalents--beginning of period                                               123,803            7,636
                                                                                           ---------        ---------
Cash and cash equivalents--end of period                                                   $  62,959        $  18,028
                                                                                           =========        =========
Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                                               $     622        $   3,117
                                                                                           =========        =========
Supplemental schedule of noncash investing and financing activities:
    Issuance of common stock as consideration for acquisitions                             $  21,290        $ 550,759
    Warrant exercises                                                                             --              653
    Preferred dividends and accretion                                                          1,819               --
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       5
<PAGE>   6



                               VERTICALNET, INC.

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                ADDITIONAL
                                                                     COMMON STOCK                PAID-IN            DEFERRED
                                                                SHARES         AMOUNT            CAPITAL          COMPENSATION
                                                                ------         ------            -------          ------------
<S>                                                        <C>               <C>               <C>                <C>
Balance, January 1, 2001                                        88,048       $       880       $ 1,004,149        $      (363)

Series A 6.00% convertible redeemable
   preferred stock dividends accrued and accretion                  --                --            (1,819)                --

Exercise of options                                                426                 4               172                 --

Shares issued through employee
    stock purchase plan                                            179                 2               307                 --

Shares issued pursuant to Sumitomo's investment                  2,763                28            14,972

Shares issued as consideration for
    acquisitions                                                 6,109                61            21,229                 --

Unearned compensation                                               --                --               (55)                52

Amortization of unearned compensation                               --                --                --                 41

Net loss                                                            --                --                --                 --

Other comprehensive income                                          --                --                --                 --
                                                           -----------       -----------       -----------        -----------
Balance, March 31, 2001 (unaudited)                             97,525       $       975       $ 1,038,955        $      (270)
                                                           ===========       ===========       ===========        ===========
</TABLE>

<TABLE>
<CAPTION>
                                                          ACCUMULATED OTHER                                              TOTAL
                                                            COMPREHENSIVE       ACCUMULATED           TREASURY        SHAREHOLDERS'
                                                                LOSS             DEFICIT              STOCK             EQUITY
                                                          -----------------     -----------           --------        -------------
<S>                                                       <C>                  <C>                <C>                <C>
Balance, January 1, 2001                                    $   (14,370)       $  (384,089)       $      (805)       $   605,402

Series A 6.00% convertible redeemable
   preferred stock dividends accrued and accretion                   --                 --                 --             (1,819)

Exercise of options                                                  --                 --                 --                176

Shares issued through employee
    stock purchase plan                                              --                 --                 --                309

Shares issued pursuant to Sumitomo's investment                                                                           15,000

Shares issued as consideration for
    acquisitions                                                     --                 --                 --             21,290

Unearned compensation                                                --                 --                 --                 (3)

Amortization of unearned compensation                                --                 --                 --                 41

Net loss                                                             --            (90,347)                --            (90,347)

Other comprehensive income                                          849                 --                 --                849
                                                            -----------        -----------        -----------        -----------
Balance, March 31, 2001 (unaudited)                         $   (13,521)       $  (474,436)       $      (805)       $   550,898
                                                            ===========        ===========        ===========        ===========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       6
<PAGE>   7
                               VERTICALNET, INC.
           CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                             Three months ended March 31,
                                             ---------------------------
                                                2001            2000
                                              --------        --------
                                                     (unaudited)

<S>                                           <C>             <C>
Net income (loss)                             $(90,347)       $ 42,093
Unrealized loss on investments                 (17,277)        (16,608)
Unrealized gain on forward sale                 19,293              --
Foreign currency translation adjustment         (1,167)             --
                                              --------        --------
Comprehensive income (loss)                   $(89,498)       $ 25,485
                                              ========        ========
</TABLE>


          See accompanying notes to consolidated financial statements.




                                       7


<PAGE>   8
                                VERTICALNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)


(1) VERTICALNET, INC. AND BASIS OF PRESENTATION

DESCRIPTION OF THE COMPANY

      VerticalNet, Inc. ("VerticalNet," "the Company," "we," "us" or other
similar expressions), through its subsidiaries, provides end-to-end e-commerce
solutions targeted at distinct business segments. We operate 59
industry-specific e-marketplaces through which we provide hosted e-commerce and
community capabilities for corporate divisions and small and medium sized
businesses, as well as offer software solutions to industry alliances and global
2000 enterprises. During the latter part of 2000 through April 26, 2001, we
provided these solutions through two strategic business units: VerticalNet
Markets and VerticalNet Solutions. On April 26, 2001, we announced our intention
to consolidate these two business units into a single operating segment.

       On January 31, 2001, we completed the sale of our VerticalNet Exchanges
("NECX") business unit, which focused on trading electronic components and
hardware in open and spot markets. The operating results of this unit have been
reflected as a discontinued operation in our consolidated financial statements.
The net assets of this unit at December 31, 2000 were reflected as net assets of
discontinued operations on our consolidated balance sheet.

      Our consolidated financial statements as of and for the three months ended
March 31, 2001 and March 31, 2000 have been prepared without audit pursuant to
the rules and regulations of the United States Securities and Exchange
Commission ("SEC"). In the opinion of management, the unaudited interim
consolidated financial statements that accompany these notes reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly our results of operations and cash flows for the three months
ended March 31, 2001 and March 31, 2000. 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 the SEC's rules and regulations relating to interim financial
statements. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 2000.

REVENUE RECOGNITION

       We generate revenue from three primary sources: e-enablement and
e-commerce; advertising and services; and software licensing and related
services.

       E-enablement and e-commerce revenues include storefront and e-commerce
center fees, Web site development fees and e-commerce fees. Storefront and
e-commerce center fees are recognized ratably over the period of the contract.
Web site development fees are recognized as the services are performed.
E-commerce fees in the form of transaction fees, percentage of sale fees or
minimum guaranteed fees are recognized upon receipt of payment. E-commerce fees
from educational courses are recognized in the period in which the course is
completed. E-commerce fees from books and other product sales are recognized in
the period in which the products are shipped. Auction transaction fees are
recognized when the auction is successfully concluded.

       Advertising and services revenues, including buttons and banners, are
recognized ratably over the period of the applicable contract. Newsletter
sponsorship revenues are recognized when the newsletters are e-mailed.
Advertising contracts generally do not extend beyond one year, although certain
contracts are for multiple years. We also enter into strategic co-marketing
agreements under which we develop co-branded Web sites. Revenues from hosting
and maintenance services under these co-marketing arrangements are


                                       8
<PAGE>   9
recognized ratably over the term of the contract. In the normal course of
business, we enter into "multiple-element" arrangements. We allocate revenue
under such arrangements based on the fair value of each element, to the extent
objectively determinable, and recognize revenue upon delivery or consummation of
the separable earnings process attributable to each element.

       Revenues from software licensing and related services are generally
accounted for under Statement of Position ("SOP") 97-2, Software Revenue
Recognition, and related guidance in the form of technical questions and answers
published by the American Institute of Certified Public Accountants' task force
on software revenue recognition. SOP 97-2 requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on vendor specific objective evidence of fair values of the elements. License
revenue allocated to software products generally is recognized upon delivery of
the software products or ratably over a contractual period if unspecified
software products are to be delivered during that period. Revenue allocated to
hosting and maintenance services is recognized ratably over the contract term
and revenue allocated to professional services is recognized as the services are
performed. If the professional services provided are essential to the
functionality or are for significant production, modification or customization
of the software products, both the software product revenue and service revenue
are recognized in accordance with the provisions of SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Under
SOP 81-1, revenues and costs are recognized based on the labor hours incurred to
date, compared to total estimated labor hours over the term of the contract
using the percentage of completion method.

       At March 31, 2001 and December 31, 2000, approximately $2.7 million and
$4.2 million included in the respective accounts receivable balance was unbilled
due to customer payment terms.

       Pursuant to the consensus reached by the Emerging Issues Task Force
("EITF") in Issue No. 99-17, Accounting for Advertising Barter Transactions,
barter transactions are recorded at the estimated fair value of the
advertisements or other services given, based on recent historical cash
transactions. Barter revenue is recognized when the advertising impressions or
other services are delivered to the customer and advertising expense is recorded
when the advertising impressions or other services are received from the
customer. If we receive the advertising impressions or other services from the
customer prior to our delivery of the advertising impressions, a liability is
recorded on the consolidated balance sheet. If we deliver the advertising
impressions to the customer prior to receiving the advertising impressions or
other services, a prepaid expense is recorded on the consolidated balance sheet.
For the three months ended March 31, 2001 and 2000, we recognized approximately
$2.1 million and $1.9 million of advertising revenues, respectively, and $2.4
million and $0.7 million of advertising expenses, respectively, from barter
transactions. We have recorded approximately $2.0 million and $2.3 million in
prepaid expenses related to barter transactions as of March 31, 2001 and
December 31, 2000, respectively.

ADOPTION OF NEW PRONOUNCEMENT

      Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the consolidated
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in other income (expense). If the
derivative is designated as a cash flow hedge, the effective portions of changes
in the fair value of the derivative are recorded in other comprehensive income
(loss) and are recognized in other income (expense) when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in other income (expense).

      We use derivative instruments to manage exposures to foreign currency and
security prices. Our objectives for holding derivatives are to minimize the
risks using the most effective methods to eliminate or reduce the impacts of
these exposures.


                                       9
<PAGE>   10
       In July 2000, we entered into forward sale contracts relating to a
security classified as an available-for-sale investment under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under these
contracts, we pledged the securities to the counterparty for a three-year period
in return for approximately $47.4 million of cash, which was net of the initial
cost of the transaction of approximately $5.0 million. At the conclusion of the
three-year period, we have the option of delivering either cash or the pledged
securities to satisfy the forward sale. However, we will not be required to
deliver shares in excess of those we pledged. The forward sale has been
designated as a cash flow hedge with corresponding gains and losses recorded in
other comprehensive income (loss). The amounts recorded in other comprehensive
income (loss) will be recognized in other income (expense) when the forward sale
is settled in July 2003. The unrealized gain on the forward sale as of December
31, 2000 of $29.8 million was previously recorded in other comprehensive income
(loss), and changed by $19.3 million during the three months ended March 31,
2001. The unrealized gain on the forward sale as of March 31, 2001 is $49.1
million and is reflected as a reduction of other long-term liabilities.

       We also have fixed obligations denominated in Euros which we have hedged
with foreign currency forwards to reduce the foreign currency fluctuation risk.
These foreign currency forward agreements are classified as fair value hedges.
The transition adjustment from adopting SFAS No. 133 for these agreements was
immaterial. During the three months ended March 31, 2001, we recorded
approximately $0.1 million in other income (expense) related to these foreign
currency forward contracts.

RECENT ACCOUNTING PRONOUNCEMENTS

       Issue No. 00-21, Accounting for Multiple-Element Revenue Arrangements, is
currently being discussed by the EITF. Issues being addressed by an EITF working
group include determining when elements of multiple-element arrangements should
be evaluated separately and allocating consideration to the individual elements.
We are closely monitoring the EITF's discussions on this issue. We do not
anticipate changes in our historical accounting policies, however, there can be
no assurance that final consensuses and guidance ultimately issued by the EITF
on this issue will not impact us in the future.

(2) ACQUISITIONS

VERTICALNET EUROPE

       Our ownership of VerticalNet Europe B.V. ("VerticalNet Europe") increased
from 56% to 72% on December 29, 2000 when VerticalNet Europe redeemed some of
its shares held by British Telecommunications, plc ("BT"). Due to minority
shareholder governance provisions in the original agreement, we were previously
accounting for VerticalNet Europe using the equity method. As a result of our
increased ownership, certain governance provisions regarding minority
shareholders were amended to give us control over VerticalNet Europe's
operations. Accordingly, we consolidated VerticalNet Europe in our consolidated
balance sheet at December 31, 2000 and began consolidating VerticalNet Europe's
operations starting January 1, 2001. Additionally, in December 2000, VerticalNet
Europe obtained full ownership of VerticalNet UK Ltd.

       During the three months ended March 31, 2001, our percentage ownership of
VerticalNet Europe increased to approximately 90%. VerticalNet Europe redeemed a
portion of its shares held by Internet Capital Group, Inc. ("ICG"), and ICG sold
the remaining portion directly to us for approximately $2.3 million in cash. We
also purchased a portion of BT's ownership of VerticalNet Europe for
approximately $6.4 million in cash and 4,993,173 shares of our common stock. The
shares of common stock issued to BT were registered under our acquisition shelf
registration statement. We also entered into a put and call agreement with BT
whereby we can buy their remaining 10% interest in VerticalNet Europe at any
time after closing and BT may sell its investment to us at any time after March
13, 2002. The fixed portion of the put and call price of approximately $13.5
million is included in other long-term liabilities on the consolidated balance
sheet based on our intent to issue common stock to settle the liability. The
amount is payable in Euros, therefore, we will mark the liability to market
quarterly. The variable component of the price based on the LIBOR rate will be
accrued quarterly through the date the put or call is exercised. The increase in
ownership 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
$20.0 million was allocated to goodwill and is being amortized over 36 months.

       During the three months ended March 31, 2001, we recognized approximately
$0.9 million in revenues from BT from various commercial and software licensing
contracts.

OTHER FIRST QUARTER 2001 ACQUISITIONS

       During the three months ended March 31, 2001, we purchased certain assets
from Commerx, Inc. as well as NetCommerce Corporation. These acquisitions were
accounted for as purchases and the excess of the purchase price over the fair
value of the tangible net assets acquired of approximately $2.2 million was


                                       10
<PAGE>   11
allocated to goodwill. The results of operations from these acquisitions are not
material to our financial position or results of operations.

(3) DISCONTINUED OPERATIONS

       On January 31, 2001, we completed the sale of our VerticalNet Exchanges
segment to Converge, Inc. ("Converge"), an independent marketplace that serves
the high-tech supply-chain community. VerticalNet Exchanges was comprised of
NECX.com LLC, a business purchased in December 1999, and its subsequent
acquisitions of R.W. Electronics, Inc. and F&G Capital, Inc. d/b/a American IC
Exchange ("AICE"). In consideration for the transaction, we received 10,371,319
shares of Series B convertible preferred stock and 1,094,751 shares of
non-voting common stock, representing approximately 18.0% and 1.9% of Converge's
equity at the closing of the transaction, respectively. We were also entitled to
receive $60.0 million of cash at closing, subject to adjustment based on a
comparison of NECX's net worth and working capital as of October 31, 2000 and as
of the closing date. Based on a preliminary calculation performed on January 31,
2001, the closing date, we paid $6.5 million to Converge. This cash payment was
subject to further adjustment based on a final calculation of NECX's closing
date net worth and working capital following a post-closing audit. We expect to
make an additional payment to Converge in the second quarter of 2001 based on
the final net worth and working capital adjustment calculation.

       The sale of NECX was treated as a nonmonetary exchange pursuant to the
guidance in Accounting Principles Board Opinion ("APB") No. 29, Accounting for
Nonmonetary Transactions, and EITF Issue No. 00-05, Determining Whether a
Nonmonetary Transaction is an Exchange of Similar Productive Assets.
Accordingly, we used the fair value of NECX of $215.0 million, as determined by
an independent appraisal, to value our investment in Converge. The investment in
Converge is being accounted for under the cost method of accounting for
investments. We recorded an estimated loss on disposal of $82.0 million during
the year ended December 31, 2000 which included an estimated loss from
operations of $9.0 million for the month of January 2001. During the three
months ended March 31, 2001, we recorded an additional $0.5 million loss on
disposal. Also in January 2001, in connection with the sale of NECX to Converge,
we settled AICE's remaining earnout provisions by issuing 1,101,549 shares of
our common stock valued at approximately $10.0 million, which amount had been
considered in calculating our original loss on disposal.

       The sale of NECX represents the disposal of a business segment.
Accordingly, the results of this segment have been shown separately as a
discontinued operation, and prior periods have been restated. The net assets of
the discontinued operation have been classified separately on the December 31,
2000 consolidated balance sheet.

      Revenues and losses from the discontinued operation are as follows:

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                                                         MARCH 31,
                                                  ------------------------
                                                    2001            2000
                                                  --------        --------
                                                     (in thousands)
<S>                                               <C>             <C>
Exchange transaction sales ................       $ 32,604        $ 99,044
Cost of exchange transaction sales ........         27,173          84,456
                                                  --------        --------
   Net exchange revenues ..................       $  5,431        $ 14,588
                                                  ========        ========

Loss from discontinued operations .........       $     --        $ (4,606)

Loss on disposal of discontinued operations       $   (522)       $     --
</TABLE>


                                       11
<PAGE>   12
The assets and liabilities of the VerticalNet Exchanges segment are as follows:

<TABLE>
<CAPTION>
                                            DECEMBER 31,
                                               2000
                                             ---------
                                           (in thousands)
<S>                                        <C>
Current assets .......................       $  27,573
Property and equipment, net ..........          22,809
Intangible assets ....................         155,680
Other non-current assets .............           9,424
Current liabilities ..................            (486)
                                             ---------
Net assets of discontinued operations        $ 215,000
                                             =========
</TABLE>

(4) INVESTMENTS

AVAILABLE-FOR-SALE

       As of March 31, 2001, our available-for-sale securities classified as
short-term include investments in corporate and government obligations with a
fair market value of $3.8 million and marketable equity securities of $0.6
million. Our marketable equity securities, which consist of investments in
publicly traded companies for which we do not have the ability to exercise
significant influence, are stated at fair market value based on quoted market
prices. Our investment in Ariba, Inc. ("Ariba") common stock of approximately
$3.3 million is classified as long-term due to a forward sale of the majority of
our shares.

       In July 1999, we acquired 414,233 shares of the Series C preferred stock
of Tradex Technologies, Inc. ("Tradex") for $1.0 million. In December 1999,
Tradex entered into an Agreement and Plan of Reorganization with Ariba. On March
10, 2000, pursuant to the terms of the Agreement and Plan of Reorganization, our
investment in Tradex was exchanged for 566,306 shares of Ariba's common stock,
of which 64,310 shares were placed in escrow for one year subsequent to the
transaction's closing. Based on the fair market value of Ariba's common stock on
March 10, 2000, we recorded an $85.5 million gain on the disposition of the
Tradex investment. After selling 140,000 shares in March 2000 at a loss of $5.6
million, we recorded a net investment gain of $79.9 million for the three months
ended March 31, 2000. In March 2001, 49,982 of our escrowed Ariba shares were
released, with the remaining 14,328 shares being held in escrow pending the
resolution of a dispute under the Agreement and Plan of Reorganization between
Tradex and Ariba. In light of the continued uncertainty around whether the Ariba
shares remaining in escrow will eventually be released to us, we recorded a $2.2
million loss on investment during the three months ended March 31, 2001 to
adjust the original investment gain recorded when the transaction closed. To the
extent the pending dispute is resolved in whole or in part in Tradex's favor, we
will subsequently record an additional adjustment.

COST METHOD INVESTMENTS

       At March 31, 2001 and December 31, 2000, investments held at cost were
approximately $221.3 million and $12.2 million, respectively. During the three
months ended March 31, 2001, we recorded a $7.7 million impairment charge, which
is included in other income (expense) for an other than temporary decline in the
fair value of several of these investments. During the three months ended March
31, 2001, we recognized revenue of approximately $1.4 million from commercial
arrangements with cost method investees, excluding revenue from Converge (see
Note 5).


EQUITY METHOD INVESTMENTS

       At March 31, 2001 and December 31, 2000, our equity method investments
were approximately $6.0 million and $5.4 million, respectively. Our loss from
equity method investments, which is included in other income (expense), is
approximately $1.1 million for the three months ended March 31, 2001. During the
three months ended March 31, 2001, we recognized revenue, net of proportional
eliminations of approximately $0.3 million from our equity method investees.
Operations for the three months ended March 31, 2001 and total assets as of
March 31, 2001 for our equity method investments were not material to our
operations or financial position.


                                       12
<PAGE>   13
(5) STRATEGIC RELATIONSHIPS

MICROSOFT

During the three months ended March 31, 2001, we continued to operate under the
original commercial agreement we entered into with Microsoft on March 29, 2000
(the "Original Microsoft Agreement"). Under this agreement, during the three
months ended March 31, 2001, we recognized approximately $14.8 million in
e-enablement and advertising revenue and approximately $4.4 million was expensed
for advertising, software licensing and support. On April 26, 2001, we entered
into a new agreement with Microsoft (the "New Microsoft Agreement"), which
terminated and replaced the Original Microsoft Agreement. Under the New
Microsoft Agreement, Microsoft prepaid to us $40.0 million for the upsell or
deployment of enablement products on their behalf through April 2002.
Additionally, under the New Microsoft Agreement, both companies have agreed to
work in good faith toward a separate agreement under which each will deploy an
additional $10.0 million in funds towards one anothers products or services in
furtherance of a market development plan.

       The $40.0 million payment to us under the New Microsoft Agreement
replaces the net cash flows we expected to receive under the Original Microsoft
Agreement of approximately $49.2 million in 2001 and $5.1 million in 2002, as
previously reported in Note 9 to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2000.

CONVERGE

       In December 2000, we entered into a three-year software licensing and
professional services contract with Converge, valued at approximately $108.0
million. Performance under the contract began in 2001 following the closing of
the NECX sale. The contract provides for aggregate cash payments to us of $43.0
million, $35.0 million and $30.0 million during the years ending December 31,
2001, 2002 and 2003, respectively. As of March 31, 2001, we have received $16.8
million from Converge, of which $5.9 million has been earned as revenue during
the three months ended March 31, 2001. The commercial agreement also includes a
commitment to link Converge with each of our 14 technology-focused
e-marketplaces.

(6) RESTRUCTURING CHARGES AND ASSET WRITE-DOWN

      In January 2001, we announced strategic and organizational initiatives
designed to realign business operations, eliminate acquisition-related
redundancies and reduce costs. As a result of these initiatives, we recorded
charges for terminations and other exit costs of approximately $4.5 million and
charges to write down assets of approximately $3.0 million. Of the total
charges, approximately $7.3 million were in the VerticalNet Markets segment,
with the balance being related to employee terminations in corporate support
functions. The $4.5 million of termination and other exit costs consisted of
severance benefits of approximately $2.9 million related to the termination of
approximately 230 employees and approximately $1.6 million of lease termination
costs and other exit costs associated with closing redundant facilities. The
$3.0 million asset write-down charges related primarily to the write-off of
goodwill and prepaid licenses for business operations exited within the
VerticalNet Markets segment as part of the business realignment, the write-off
of leasehold improvements and estimated losses on the disposal of assets at
closed facilities. We expect that these initiatives will result in cash savings
of approximately $10.0 million on an annualized basis. During the three months
ended March 31, 2001, cash payments for severance benefits and other exit costs
totaled approximately $2.0 million. Management expects these actions to be
substantially complete during 2001.

      Following is a table reflecting activity related to the aforementioned
initiatives. The remaining liability at March 31, 2001 is reflected in accrued
expenses.

<TABLE>
<CAPTION>
                                  (in thousands)

<S>                               <C>
Balance as of January 1, 2001       $    --
Charges                               4,476
Cash payments                        (2,032)
                                    -------
Balance as of March 31, 2001        $ 2,444
                                    =======
</TABLE>


                                       13
<PAGE>   14
      In April 2001, as part of our strategic and organizational initiatives, we
announced a second workforce reduction. Employee termination and related
facility closing costs will result in a one-time restructuring charge ranging
from approximately $5.0 million to $7.0 million in the second quarter of 2001.

(7) CAPITAL STOCK

COMMON STOCK

       On January 22, 2001, we sold approximately 2.8 million shares of our
common stock to Sumitomo for $15.0 million. Under the agreement, Sumitomo may
not transfer the purchased shares for one year from the closing date of the
transaction. Sumitomo was also granted limited demand and piggyback registration
rights exercisable after the first anniversary of the closing.

STOCK OPTIONS

       On March 16, 2001, we issued an aggregate grant of approximately 13.4
million stock options to our employees. These options vest quarterly over a two
year period.

(8) COMMITMENTS AND CONTINGENCIES

       In July 2000, we formed a Japanese joint venture, VerticalNet Japan, with
SOFTBANK E-COMMERCE CORP. Under the joint venture agreement, we have a maximum
aggregate obligation to contribute 800 million Yen to VerticalNet Japan, an
equity method investee. As of March 31, 2001, we had contributed approximately
400 million Yen ($3.6 million as of the dates of the contributions). As of
March 31, 2001, our remaining funding obligation to the joint venture through
the first two years of operations was approximately 400 million Yen
(approximately $3.2 million as of March 31, 2001).

       We are a party to various litigations and claims that arise in the
ordinary course of business. In the opinion of management, the ultimate
resolutions with respect to these actions will not have a materially adverse
effect on our financial position or results of operations.

(9) INCOME (LOSS) PER SHARE

       Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Dilutive net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period, including
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method) and the conversion of our 5 1/4%
convertible subordinated debentures and our Series A 6.00% convertible
redeemable preferred stock (using the if-converted method). Common equivalent
shares are excluded from the calculation if their effect is anti-dilutive.

       The following table sets forth the reconciliation between the weighted
average shares outstanding for basic and diluted net income (loss) per share
computations:

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                                                        MARCH 31,
                                                    ------------------
                                                    2001          2000
                                                    ----          ----
                                                      (in thousands)

<S>                                                 <C>          <C>
Weighted average shares outstanding - basic ....    92,650       74,805
                                                    ======

Effect of dilutive securities
  Options and warrants .........................                 17,674
  Convertible subordinated debt ................                  5,750
                                                                 ------
Weighted average shares outstanding - diluted...                 98,229
                                                                 ======
</TABLE>


                                       14
<PAGE>   15
The following table sets forth the computation of diluted net income (loss) per
share:

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                      MARCH 31,
                                                                                2001             2000
                                                                               --------        --------
                                                                        (in thousands, except per share data)
NUMERATOR FOR DILUTED NET INCOME (LOSS) PER SHARE CALCULATION
<S>                                                                     <C>                    <C>
Income (loss) from continuing operations ....................                  $(89,825)       $ 46,699
   Interest and amortization expense from
      convertible subordinated debt .........................                        --           1,702
Preferred stock dividends and accretion .....................                    (1,819)             --
                                                                               --------        --------
Income (loss) from continuing operations
   for the diluted loss per share calculation ...............                   (91,644)         48,401
Loss from discontinued operations ...........................                        --          (4,606)
Loss on disposal of discontinued operations .................                      (522)             --
                                                                               --------        --------
Income (loss) attributable to common shareholders ...........                  $(92,166)       $ 43,795
                                                                               ========        ========

Diluted net income (loss) per share:
         Continuing operations ..............................                  $  (0.99)       $   0.49
         Loss from discontinued operations ..................                        --           (0.04)
         Loss on disposal of discontinued
            operations ......................................                        --              --
                                                                               --------        --------
Diluted net income (loss) per share .........................                  $  (0.99)       $   0.45
                                                                               ========        ========
</TABLE>

(10) SEGMENT INFORMATION

             During the first quarter of 2001, management began evaluating the
financial operating performance of VerticalNet Markets and VerticalNet Solutions
as separate business units. Comparative information for the same quarter in the
prior year is not readily available. All prior segment information for
VerticalNet Exchanges has been classified as a discontinued operation.

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED MARCH 31, 2001
                              --------------------------------------------------------------
                              VERTICALNET      VERTICALNET      CORPORATE AND
                                MARKETS         SOLUTIONS      RECONCILING ITEMS     TOTAL
                              ----------       ----------      -----------        ---------
                                                      (in thousands)
<S>                           <C>              <C>             <C>                <C>
Revenues ...............       $  27,757        $   8,930          $    --        $  36,687
Net loss, excluding
   non-cash expenses
   and other non
   recurring items .....          (7,677)         (10,810)          (9,729)         (28,216)
Non-cash expenses,
   other non recurring
   items and preferred
   stock dividends .....         (12,162)         (39,352)         (12,436)         (63,950)
Loss attributable
   to common
   shareholders ........         (19,768)         (50,163)         (22,235)         (92,166)
Capital expenditures,
   including capitalized
   software costs ......           6,547            1,000            1,959            9,506
Segment assets .........         148,512          317,932          318,603          785,047
</TABLE>

             On April 26, 2001, we announced our intention to consolidate these
two business units into a single operating segment. We expect to begin reporting
as one segment starting in the second quarter of 2001, since we have already
taken significant measures to merge the employees and operations of the two
units together.


                                       15
<PAGE>   16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

             The information in this report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Words such as "may," "might," "will,"
"would," "should," "could," "project," "estimate," "pro forma," "predict,"
"potential," "strategy," "anticipate," "plan to," "believe," "continue,"
"intend," "expect" and words of similar expression (including the negative of
any of the foregoing) are intended to identify forward-looking statements.
Additionally, forward-looking statements in this report include statements
relating to trends in Internet usage, business-to-business e-commerce and
software and related services; the design, development and implementation of our
products; the strategies underlying our business objectives; the completion of
pending transactions; our anticipated performance of our obligations or the
anticipated performance of the obligations of those parties with which we have
contractual relationships; our sales and marketing strategies and efforts; the
value of our investments in other companies; our liquidity and capital
resources; and the impact of our acquisitions and investments on our business,
financial condition and operating results.

             Our forward-looking statements are not meant to predict future
events or circumstances and may not be realized because they are based upon
current expectations that involve risks and uncertainties. Actual results and
the timing of certain events may differ materially from those currently expected
as a result of these risks and uncertainties. Factors that may cause or
contribute to a difference between the expected or desired results and actual
results include, but are not limited to, changes in our evolving business
strategies and model; our ability to eliminate redundancies within our business
and to control expenses; the availability of and terms of equity and debt
financing to fund our business; competition in our target markets; changes in
prevailing interest rates; inflation; changes in costs of goods and services;
economic conditions in general and in our specific target markets; changes in
preferences and tastes of users, buyers and suppliers; demographic changes;
changes in, or failure to comply with, federal, state, local or foreign laws and
regulations; our ability to use and protect our intellectual property; and our
ability to attract and retain qualified personnel, as well as the risks
discussed in the section of this report entitled "Factors Affecting our Business
Condition." Given these uncertainties, investors are cautioned not to place
undue reliance on our forward-looking statements. We disclaim any obligation to
update these factors or to announce publicly the results of any revisions to any
of the forward-looking statements contained in this report to reflect future
events or developments.

             The following discussion and analysis of our financial condition
and results of operations should be read together with the consolidated
financial statements and the related notes included elsewhere in this report.

OVERVIEW

             Upon the closing of the sale of VerticalNet Exchanges ("NECX") to
Converge in January 2001, we continued to operate our two remaining segments:
VerticalNet Markets and VerticalNet Solutions. On April 26, 2001, we announced
our intention to consolidate these two business units into a single operating
segment. We expect to begin reporting as one segment starting in the second
quarter of 2001, since we have already taken significant measures to merge the
operations of the two units together.

             VerticalNet, through its subsidiaries, currently provides
end-to-end e-commerce solutions targeted at distinct business segments. We
operate 59 industry-specific e-marketplaces through which we provide hosted
e-commerce and community capabilities for corporate divisions and small and
medium sized businesses, as well as offer software solutions to industry
alliances and global 2000 enterprises. During the latter part of 2000 through
April 26, 2001, we provided these solutions through two strategic business
units: VerticalNet Markets and VerticalNet Solutions.

             We generate revenue from three primary sources: e-enablement and
e-commerce; advertising and services; and software licensing and related
services.


                                       16
<PAGE>   17
             E-enablement and e-commerce revenues include storefront and
e-commerce center fees, Web site development fees and e-commerce fees.
Storefront and e-commerce center fees are recognized ratably over the period of
the contract. Web site development fees are recognized as the services are
performed. E-commerce fees in the form of transaction fees, percentage of sale
fees or minimum guaranteed fees are recognized upon receipt of payment.
E-commerce fees from educational courses are recognized in the period in which
the course is completed. E-commerce fees from books and other product sales are
recognized in the period in which the products are shipped. Auction transaction
fees are recognized when the auction is successfully concluded.

             Advertising and services revenues, including buttons and banners,
are recognized ratably over the period of the applicable contract. Newsletter
sponsorship revenues are recognized when the newsletters are e-mailed.
Advertising contracts generally do not extend beyond one year, although certain
contracts are for multiple years. We also enter into strategic co-marketing
agreements under which we develop co-branded Web sites. Revenues from hosting
and maintenance services under these co-marketing arrangements are recognized
ratably over the term of the contract. In the normal course of business, we
enter into "multiple-element" arrangements. We allocate revenue under such
arrangements based on the fair value of each element, to the extent objectively
determinable, and recognize revenue upon delivery or consummation of the
separable earnings process attributable to each element.

             Revenues from software licensing and related services are generally
accounted for under Statement of Position ("SOP") 97-2, Software Revenue
Recognition, and related guidance in the form of technical questions and answers
published by the American Institute of Certified Public Accountants' task force
on software revenue recognition. SOP 97-2 requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on vendor specific objective evidence of fair values of the elements. License
revenue allocated to software products generally is recognized upon delivery of
the software products or ratably over a contractual period if unspecified
software products are to be delivered during that period. Revenue allocated to
hosting and maintenance services is recognized ratably over the contract term
and revenue allocated to professional services is recognized as the services are
performed. If the professional services provided are essential to the
functionality or are for significant production, modification or customization
of the software products, both the software product revenue and service revenue
are recognized in accordance with the provisions of SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Under
SOP 81-1, revenues and costs are recognized based on the labor hours incurred to
date, compared to total estimated labor hours over the term of the contract
using the percentage of completion method.

             For the three months ended March 31, 2001, revenues of
approximately $13.9 million, $13.9 million and $8.9 million were derived from
e-commerce and e-enablement; advertising and services; and software licensing
and related services, respectively. We are expecting significant software
licensing and professional services revenue growth with the signing of the
three-year software licensing and professional services agreement with Converge.

             In April 2001, we announced our strategy of focusing on the
creation of private marketplaces that connect large buyers to networks of
enabled suppliers, as well as our intention to consolidate our previously
established VerticalNet Markets and VerticalNet Solutions business units into a
single operating unit. In conjunction with this announcement, we concurrently
implemented a reduction in force that resulted in a decrease of approximately
25% of our full-time work force.

             In fiscal 2001, we intend to sustain our focus on balancing revenue
growth and achieving profitability. Over the last several months, we have
streamlined our operations by removing several unprofitable initiatives from our
business, and we expect to continue reviewing our operations and looking for
opportunities to reduce costs and improve our operating margins. We expect to
continue to streamline operations or reduce headcount if the revenues expected
from our product and service offerings do not materialize.

             At March 31, 2001, we had an accumulated deficit of $474.4 million.
The table below illustrates the loss from continuing operations attributable to
common shareholders (including preferred dividends) and loss attributable to
common shareholders, which includes discontinued operations, during the
specified periods:


                                       17
<PAGE>   18
<TABLE>
<CAPTION>
                                                     LOSS FROM
                                               CONTINUING OPERATIONS
                                                  ATTRIBUTABLE TO               LOSS ATTRIBUTABLE TO
PERIOD                                          COMMON SHAREHOLDERS              COMMON SHAREHOLDERS
------                                          -------------------              -------------------
                                                                   (in millions)

<S>                                             <C>                              <C>
Three months ended March 31, 2001............         $ 91.6                           $ 92.2
Year ended December 31, 2000 ................          207.6                            316.6
Year ended December 31, 1999 ................           52.6                             53.5
Year ended December 31, 1998 ................           13.6                             13.6
Year ended December 31, 1997 ................            4.8                              4.8
</TABLE>

             The losses from continuing operations and accumulated deficit have
resulted primarily from our lack of revenues relative to the costs of our
significant infrastructure expansion, the costs related to acquisitions,
including amortization expense and in-process research and development charges,
and other costs incurred for the development of e-marketplaces, horizontal
business services and software products, as well as sales and marketing for our
e-marketplaces and other businesses we have acquired. We expect to continue 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 should not be considered indicative of future performance. We may never
maintain or increase revenues or generate an operating profit.

SALE OF VERTICALNET EXCHANGES (NECX)

             On January 31, 2001, we completed the sale of our VerticalNet
Exchanges segment to Converge. VerticalNet Exchanges was comprised of NECX.com
LLC, a business purchased in December 1999, and its subsequent acquisitions of
R.W. Electronics, Inc. and F&G Capital, Inc. d/b/a American IC Exchange. In
consideration for the transaction, we received 10,371,319 shares of Series B
convertible preferred stock and 1,094,751 shares of non-voting common stock,
representing approximately 18.0% and 1.9% of Converge's equity, at the closing
of the transaction respectively. We were also entitled to receive $60.0 million
of cash at closing, subject to adjustment based on a comparison of NECX's net
worth and working capital as of October 31, 2000 and as of the closing date.
Based on a preliminary calculation performed on January 31, 2001, the closing
date, we paid $6.5 million to Converge. This cash payment was subject to further
adjustment based on a final calculation of NECX's closing date net worth and
working capital following a post-closing audit. We expect to make an additional
payment to Converge in the second quarter of 2001 based on the final net worth
and working capital adjustment calculation.

             We used the fair value of NECX of $215.0 million, as determined by
an independent appraisal, to record our investment in Converge. The investment
in Converge is being accounted for under the cost method of accounting for
investments.

             The sale of the VerticalNet Exchanges segment represents the
disposal of a business segment under Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Accordingly, results of this segment have been shown
separately as a discontinued operation, and all prior periods have been
restated.

RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
MARCH 31, 2000

             The following discussion and comparison regarding results of
continuing operations do not reflect the results of NECX.

             Revenues. Revenues were $36.7 million for the three months ended
March 31, 2001 and $12.9 million for the three months ended March 31, 2000. The
increase in revenues resulted primarily from:

                                       18
<PAGE>   19
            -     the original Microsoft commercial agreement, which was
                  primarily responsible for the increase in the number of
                  storefronts on our e-marketplaces from approximately 3,300 as
                  of March 31, 2000 to approximately 23,500 as of March 31,
                  2001; and

            -     the software licensing and related services revenue from the
                  VerticalNet Solutions business unit.

             At March 31, 2001 and December 31, 2000, we had deferred revenues
of $69.7 million and $57.3 million, respectively. Our deferred revenue balance
is primarily associated with e-enablement and advertising revenue. Approximately
$43.1 million of our deferred revenue balance at March 31, 2001 relates to our
commercial arrangement with Microsoft.

             Editorial and Operational Expenses. Editorial and operational
expenses consist primarily of salaries and benefits of operating and editorial
personnel, product costs (including costs of professional services provided to
customers), depreciation, amortization of internally developed software and
other related operating costs. Editorial and operational expenses were $13.4
million for the three months ended March 31, 2001 and $4.3 million for the three
months ended March 31, 2000. Expenses increased by:

            -     $1.7 million for salaries and benefits of operating and
                  editorial personnel;

            -     $5.0 million for direct product costs, including costs of
                  professional services provided to our VerticalNet Markets and
                  VerticalNet Solutions customers; and

            -     $2.4 million for other related operating costs.

             Increases were primarily attributable to additional personnel and
direct product costs. Additional personnel were required to provide services to
an increased number of customers as a result of our original Microsoft
arrangement, as well as maintaining the increasing number of features and
functionalities that have been added to our e-marketplaces and horizontal
business services. Direct product costs increased due to our growth in the asset
remarketing businesses in which, under certain circumstances, we take title to
the goods being sold as well as costs of professional services for our software
customers. We expect professional services costs to increase as we grow our
software business, specifically in relation to our contract with Converge.

             Product Development Expenses. Product development expenses consist
primarily of salaries and benefits, consulting expenses and related
expenditures. Product development expenses were $9.2 million for the three
months ended March 31, 2001 and $4.5 million for the three months ended March
31, 2000. Expenses increased by:

            -     $3.3 million for salaries and benefits;

            -     $1.2 million for consulting expenses; and

            -     $0.2 million for other expenditures.

             This increase in product development expenses resulted primarily
from increased staffing and consulting costs to develop and enhance the
features, content and services of our e-marketplaces, as well as developing
software products related to our VerticalNet Markets' community building
technology and development of the acquired technology of Tradeum and Isadra.
Product development is critical to attaining our goals. However, we do not
expect significant increases due to our ability to leverage our current product
development efforts upon the consolidation of the VerticalNet Markets and
VerticalNet Solutions segments.

             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 the costs of attending trade
shows. Sales and marketing expenses were $25.0 million for the three months
ended March 31, 2001 and $10.2 million for the three months ended March 31,
2000. Expenses increased by:


                                       19
<PAGE>   20
            -     $7.0 million for advertising, including barter expense;

            -     $5.8 million for salaries, commissions and benefits; and

            -     $2.0 million for travel and entertainment expenses (including
                  trade show attendance) and other expenses.

             These increases resulted primarily from an increased number of
sales and marketing personnel across our business units, increased sales
commissions and increased expenses related to promoting the new businesses and
services we have acquired or created.

             General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related costs for our executive,
administrative, finance, legal, human resources and business and corporate
development personnel, as well as support services and professional service
fees. General and administrative expenses were $18.0 million for the three
months ended March 31, 2001 and $6.7 million for the three months ended March
31, 2000. Expenses increased by:

            -     $5.1 million for salaries and benefits;

            -     $1.1 million for professional fees;

            -     $2.5 million for facility costs; and

            -     $2.6 million for other general and administrative costs.

             These increases resulted primarily from increased staffing levels,
higher facility costs, including those incurred as a result of newly acquired
businesses, and professional fees to support the growth of our infrastructure
and business operations.

             Amortization Expense. Amortization expense primarily reflects the
amortization of goodwill from purchase business combinations. Also included in
amortization expense is the amortization of identified intangible assets
acquired in such acquisitions and the amortization of deferred costs related to
the issuance of warrants and Series A preferred stock to Microsoft. The
amortization period for goodwill is 36 months, while the amortization period for
other intangible assets ranges from 24 to 36 months. Amortization expense was
$44.3 million (including $0.6 million of deferred cost amortization related to
Microsoft) for the three months ended March 31, 2001 and $9.6 million for the
three months ended March 31, 2000. The increase in amortization expense is
primarily attributable to our acquisition of Tradeum in March 2000.

             Restructuring Charge. During the three months ended March 31, 2001,
we recorded a $7.5 million restructuring charge related to employee
terminations, facility closures and asset write-downs (see Note 6 to our
consolidated financial statements).

             In-Process Research and Development Charge. In March 2000, we
incurred a one-time in-process research and development charge of $10.0 million
in connection with our acquisition of Tradeum.


                                       20
<PAGE>   21
         Other Income and Expenses. Other income (expense) includes the
following:

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                                                         MARCH 31,
                                                     2001        2000
                                                    -----        -----
                                                      (in millions)

<S>                                                 <C>          <C>
Net gain (loss) on investment (1) ...........       $(2.2)       $79.9
Write-down related to cost method investments        (7.7)          --
Equity in loss of affiliates ................        (1.1)          --
Other income and expense items ..............         1.1           --
                                                    -----        -----
                                                    $(9.9)       $79.9
                                                    =====        =====
</TABLE>

(1)  We acquired $1.0 million of equity in Tradex Technologies Inc. ("Tradex")
     in July 1999. In March 2000, Tradex was acquired by Ariba, Inc. ("Ariba")
     and we received 566,306 shares of Ariba, of which 64,310 shares were placed
     in escrow for one year subsequent to the transactions closing, in exchange
     for our shares of Tradex. We recorded an $85.5 million gain upon the
     receipt of the Ariba common stock and subsequently sold 140,000 shares in
     March 2000 at a loss of $5.6 million, resulting in a net investment gain of
     $79.9 million. In March 2001, 49,982 of our escrowed Ariba shares were
     released, with the remaining 14,328 shares being held in escrow pending the
     resolution of a dispute under the Agreement and Plan of Reorganization
     between Tradex and Ariba. In light of the continued uncertainty around
     whether the Ariba shares remaining in escrow will eventually be released to
     us, we recorded a $2.2 million loss on investment during the three months
     ended March 31, 2001 to adjust the original investment gain recorded when
     the transaction closed. To the extent the pending dispute is resolved in
     whole or in part in Tradex's favor, we will subsequently record an
     additional adjustment.

             Interest Income (Expense), Net. Interest income (expense), net
includes income from temporarily invested cash and cash equivalents and from
investments and expenses related to our financing obligations. Net interest
income was $0.9 million (net of $0.8 million of expense) for the three months
ended March 31, 2001 and net interest expense was $0.8 million (net of $1.0
million of income) for the three months ended March 31, 2000. Interest income
increased as a result of the cash we received from the issuance of Series A
preferred stock in April 2000 and the forward sale of our Ariba investment in
July 2000. 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. Interest expense decreased during the period due to the conversion of a
portion of our outstanding convertible debt during April 2000.

             Preferred Stock Dividends. For the three months ended March 31,
2001, preferred stock dividends and accretion were approximately $1.8 million.
As of March 31, 2001, cumulative dividends of $6.1 million have been earned by
the holder of our Series A preferred stock. In August 2000, dividends of $1.5
million were paid to Microsoft through the issuance of additional shares of our
Series A Preferred Stock. The remaining $4.6 million remains payable as of March
31, 2001. The dividends may be paid in cash, additional shares of Series A
Preferred Stock or common stock, at our option.

LIQUIDITY AND CAPITAL RESOURCES

             As of March 31, 2001, our primary source of liquidity consisted of
cash, cash equivalents and highly liquid, high-quality debt instruments. We
intend to make the majority of such funds readily available for operating
purposes. At March 31, 2001, we had cash and cash equivalents and short-term
investments totaling $67.3 million, compared to $145.2 million at December 31,
2000.

             Net cash used in operating activities was $57.6 million for the
three months ended March 31, 2001. Net cash used in operating activities
consisted of net operating losses, an increase in accounts receivable and a
decrease in accrued expenses, offset by increases in deferred revenues and
accounts payable and decreases in


                                       21
<PAGE>   22
prepaid expenses and other assets. Approximately $33.1 million of the accrued
expenses decrease related to our obligations resulting from our sale of NECX.

             Net cash used in investing activities was $18.2 million for the
three months ended March 31, 2001. Cash from investing activities include the
sale and maturities of available-for-sale securities of $17.2 million. Cash used
in investing activities included capital expenditures and capitalized software
costs of $9.5 million, acquisitions of $22.4 million, net of cash acquired, and
investments made in companies accounted for under the equity or cost method of
$3.5 million. The capital expenditures consisted primarily of the purchase of
office furniture, computer hardware, communications equipment and costs
capitalized in connection with the internal development of software. We have
generally funded our capital expenditures through funds generated from
operations and the use of capital leases and expect to continue to do so in the
foreseeable future.

             Net cash provided by financing activities was $14.9 million for the
three months ended March 31, 2001. Net cash provided by financing activities
consists of net proceeds from the issuance of common stock to Sumitomo of $15.0
million and net proceeds from the exercise of employee stock options and stock
purchase plan transactions of $0.5 million. Cash used in financing activities
include payments made for capital leases of $0.6 million. Due to current market
conditions, proceeds from the exercise of employee stock options and stock
purchase plan transactions are not expected to increase.

             In July 2000, we formed a Japanese joint venture, VerticalNet
Japan, with Softbank. As of March 31, 2001, we have made contributions of
approximately $3.6 million. Our remaining maximum funding obligation is
approximately 400 million Yen (approximately $3.3 million as of May 1, 2001) to
the joint venture through its first two years of operations.

             We operate in an industry that is rapidly evolving and extremely
competitive. Recently, many Internet based businesses, including some within the
business-to-business e-commerce industry, have experienced difficulty in raising
additional capital necessary to fund operating losses and ongoing investments in
strategic relationships. Valuations of public companies operating in the
Internet business-to-business e-commerce sector have declined significantly
since the first quarter of 2000. During the year ended December 31, 1999 and in
the first quarter of 2000, we announced several acquisitions, the most
significant of which was Tradeum, that were financed principally with shares of
our common stock and valued based on the price of our common stock at that time.
It is reasonably possible that our accounting estimates with respect to the
useful life and ultimate recoverability of goodwill and other intangible assets
could change in the near term and that the effect of such changes on the
consolidated financial statements could be material. While we currently believe
that the recorded amount of goodwill and other intangible assets is not
impaired, a significant write-down or write-off may be required in the future.

             Although we have taken significant measures to reduce operating
costs, we expect to continue utilizing cash resources to fund operating losses,
acquisitions, strategic investments, technologies and the infrastructure
necessary to support our business initiatives. We believe that our current level
of liquid assets and the expected cash flows from contractual arrangements will
be sufficient to finance our capital requirements and anticipated operating
losses for at least the next 12 months. However, to the extent our current level
of liquid assets proves to be insufficient, we may need to obtain additional
debt or equity financing. Our contractual arrangements include a three-year
software licensing and professional services agreement with Converge for
approximately $108.0 million with remaining expected cash flows of $26.2
million, $35.0 million and $30.0 million in 2001, 2002 and 2003, respectively
(see Note 5 to our consolidated financial statements). Under the new Microsoft
agreement signed on April 26, 2001, Microsoft prepaid to us $40.0 million for
the upsell or deployment of enablement products on their behalf through April
2001. The $40.0 million payment to us under the new Microsoft agreement replaces
the net cash flows we expected to receive under the original Microsoft agreement
(net of cash payments that we were required to make to Microsoft) of
approximately $49.2 million in 2001 and $5.1 million in 2002, as previously
reported in Note 9 to our consolidated financial statements in our Annual Report
on Form 10-K for the year ended December 31, 2000. Additionally, we may, if the
capital markets present attractive opportunities, attempt to raise cash through
the sale of debt or equity. We can provide no assurance that our liquid assets
will be sufficient to fund


                                       22
<PAGE>   23
our operations or that we will be successful in obtaining any required or
desired financing either on acceptable terms or at all.

ACQUISITIONS

             We intend to continue to pursue acquisitions that complement our
existing products and services. We evaluate prospective acquisitions by
assessing whether the business or asset broadens the scope of services we offer,
enhances our presence in existing or new markets, offers technology that would
allow us to better serve our clients or offers the opportunity to enhance
profitability.

RECENT ACCOUNTING PRONOUNCEMENTS

             Issue No. 00-21, Accounting for Multiple-Element Revenue
Arrangements, is currently being discussed by the EITF. Issues being addressed
by an EITF working group include determining when elements of multiple-element
arrangements should be evaluated separately and allocating consideration to the
individual elements. We are closely monitoring the EITF's discussions on this
issue. We do not anticipate changes in our historical accounting policies,
however, there can be no assurance that final consensuses and guidance
ultimately issued by the EITF on this issue will not impact us in the future.

                    FACTORS AFFECTING OUR BUSINESS CONDITION

             Our limited operating history and evolving revenue model make it
difficult to predict our future operating results and evaluate our future
prospects.

             We launched our first e-marketplace in October 1995. This
relatively limited operating history, together with our evolving revenue model
and rapid changes in our target markets, makes predicting our future operating
results and evaluating our future prospects very difficult. For the three months
ended March 31, 2001, an overwhelming percentage of our overall revenues were
generated from VerticalNet Markets' operations, primarily from sales of
storefronts, e-commerce centers and advertising on our e-marketplaces. In the
foreseeable future, we expect to continue generating a significant percentage of
our overall revenues from these sources, while generating additional revenues
from software licensing and related services. We may not be able to sustain our
current revenues or generate additional revenues as expected. If we do not
sustain our current revenues or generate additional revenues in each of our
current revenue streams, our business, financial condition and operating results
will suffer.

             We may never generate operating profit.

             As of March 31, 2001, our accumulated deficit was $474.4 million.
For the three months ended March 31, 2001, we sustained a $92.2 million loss
attributable to common shareholders (including preferred stock dividends). We
expect to incur operating losses for the foreseeable future. We may never
generate an operating profit or, even if we do become profitable from operations
at some point, we may be unable to sustain that profitability.

             We may not develop significant revenues from software licensing and
related services, which could adversely affect our future revenue growth and
ability to achieve profitability.

             One of the many challenges we face in growing future revenues and
achieving profitability is successfully refocusing our efforts on developing,
enhancing and promoting our software solutions and related services. If we do
not generate significant additional revenues from software licensing and related
services, our business, financial condition and operating results will be
impaired. Our ability to generate additional revenues depends on the overall
demand for software solutions and related services, as well as general economic
and business conditions. Suppressed demand for software solutions and related
services caused by a weakening economy may result in less revenue growth than
expected or even a decline in revenues. We cannot assure you that we will be
able to develop, enhance or promote our software solutions and related services
effectively, whether as a result of general economic conditions or otherwise.


                                       23
<PAGE>   24
             If we cannot reduce or contain our expenses, our operating results
will suffer.

             Our limited operating history and our evolving revenue model make
it difficult to predict our future operating expenses. If we cannot reduce or
contain our expenses, our operating results will suffer. Some of our expenses
are fixed, including those related to non-cancelable agreements, equipment
leases and real estate leases. In addition, as we continually refine our
business strategies, we may find it necessary to increase operating expenses to
achieve our business goals. However, we may not be successful in identifying and
eliminating redundancies within our business, as well as in streamlining our
overall operations as necessary to reduce our expenses, so as to offset any such
increases in our operating expenses.

             Fluctuations in our quarterly operating results may cause our stock
price to decline.

             Our quarterly operating results are difficult to forecast and could
vary significantly. We believe that period-to-period comparisons of our
operating results are not meaningful and should not be relied on as indicators
of future performance. If our operating results in a future quarter or quarters
do not meet the expectations of securities analysts or investors, the price of
our common stock may fall.

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

            -     anticipated lengthy sales cycles for our products;

            -     the size and timing of individual license transactions;

            -     intense and increased competition in our target markets;

            -     our ability to develop, introduce and market new products and
                  services, as well as enhancements to our existing products and
                  services, on a timely basis;

            -     the level of demand for our products and services;

            -     risks associated with past and future acquisitions;

            -     management of our growth; and

            -     the seasonality of our revenues and user traffic.

If we generate additional revenues from software licensing and related services
as intended, our quarterly operating results will be substantially dependent on
orders booked and shipped in that quarter. Any delay in the recognition of
revenue for any of our license transactions could likewise cause significant
variations in our quarterly operating results and could cause our revenues to
fall significantly short of anticipated levels.

             In the course of our business, we may acquire securities of
privately-held companies with whom we form strategic relationships. Our
quarterly operating results may also fluctuate significantly due to accounting
rules governing the treatment of these securities. Specifically, before the
market value of these securities becomes readily determinable as a result of
being tradable in a public market, they are carried on our consolidated balance
sheet at cost. However, if these non-public securities become salable in the
public market as a result of a transaction in which such securities are
exchanged for public securities, accounting rules require us to record a
non-operating gain or loss equal to the difference between our cost and the
market value of the public securities received, regardless of whether we sell or
retain the securities. Our holdings in public securities are then marked to
market at the end of each quarter. If the market value of an equity security we
own becomes readily determinable and we sell that security, we will realize a
gain or loss on the transaction. These non-recurring gains or losses may occur
from time to time and could cause significant fluctuations in our quarterly
results. Similarly, our quarterly results may also fluctuate if we determine
that a decline in the fair value of one of our equity positions is other than
temporary, which would require us to write


                                       24
<PAGE>   25
down or write off the carrying value of those securities. During the three
months ended March 31, 2001, we recorded an aggregate of $7.7 million in
impairment charges for other than temporary declines in the fair value of
several of our cost method investments.

             If our strategic relationships with Microsoft and Converge do not
provide the benefits we expect, our business will be materially and adversely
affected.

             If we are ultimately unable, for any reason, to realize the
benefits we expect from our strategic relationships with Microsoft and Converge,
our business, financial condition and results of operations will be materially
and adversely affected. We believe these relationships are critical to our
success because they offer the possibility for further acceptance and validation
of our business strategy and model and opportunities to generate additional
revenues in each of our current revenue streams: software licensing and related
services; e-commerce and e-enablement; and advertising and services. In
particular, the Microsoft relationship has offered the possibility of additional
users of our e-marketplaces, whereas the Converge relationship is our first
material software development and license transaction with a private exchange.
However, we may never generate any significant additional revenues or realize
any of the other benefits expected from these relationships. For example, if we
fail to enter into other material software development and licensing
transactions, our financial condition and operating results will be adversely
affected.

             To reap any such benefits, we must first fulfill our obligations in
these relationships, which include, among other things, building and deploying
enablement products in the case of Microsoft, and providing software
maintenance, professional services and support services for the licensed
software and for platform and community building, in the case of Converge.
Meeting these obligations has required, and may continue to require, substantial
resources on our part, including retraining existing employees and hiring
additional personnel. It may also be necessary for our management and other key
personnel to divert their attention from other aspects of our business in order
to focus on our implementation of these relationships and to ensure that our
other strategic relationships take them into account. Additionally, if we fail
to meet the performance goals established under the Converge relationship,
Converge may avoid paying any further license and development fees to us and we
will need to pay additional material amounts to Converge. Accordingly, if we
fail to realize the anticipated benefits from these relationships, the resulting
material adverse effect on our business would be magnified by our dedication of
substantial resources to these relationships, the loss of revenues and the
payment of monetary penalties.

             We anticipate lengthy sales and implementation cycles for our
software offerings.

             We anticipate our sales cycles for some of our non-hosted software
offerings to average approximately six to nine months. In selling our products,
we are asking potential customers in many cases to change their established
business practices and conduct business in new ways. In addition, potential
customers must generally consider additional issues, such as product benefits,
ease of installation, ability to work with existing computer systems,
functionality and reliability, before committing to purchase our products.
Additionally, we believe that the purchase of our products is often
discretionary and generally involves a significant commitment of capital and
other resources by a customer, which frequently requires approval at a number of
management levels within the customer organization. Likewise, the implementation
and deployment of our products requires a significant commitment of resources by
our customers and our professional services organization. The challenges we face
in attempting to obtain commitments and approvals from our customers may be
exacerbated by worsening economic conditions in general and in our target
markets, as well as by competition from other software solution providers whose
brands, products and services may be better known to, and more widely accepted
by, potential customers than ours.

             We expect to rely on third parties to implement our products.

             We expect to rely increasingly on third parties to implement our
products at customer sites. If we are unable to establish and maintain
effective, long-term relationships with implementation providers, or if these
providers do not meet the needs or expectations of our customers, our business
would be seriously harmed. As a result of the limited resources and capacities
of many third-party implementation providers, we may be unable to establish or
maintain relationships with third parties having sufficient resources to provide
the


                                       25
<PAGE>   26
necessary implementation services to support our needs. If these resources are
unavailable, we will be required to provide these services internally, which
would significantly limit our ability to meet our customers' implementation
needs. A number of our competitors have significantly more well-established
relationships with third parties that we may potentially partner with. As a
result, these third parties may be more likely to recommend competitors'
products and services rather than our own. In addition, we would not be able to
control the level and quality of service provided by our implementation
partners.

             New versions and releases of our products may contain errors or
defects.

             Our products may contain undetected errors or failures when first
introduced or as new versions are released. This may result in loss of, or delay
in, market acceptance of our products. We have in the past discovered software
errors in new releases and new products after their introduction. We have
experienced delays in release, lost revenues and customer frustration during the
period required to correct these errors. We may in the future discover errors
and defects in new releases or new products after they are shipped or released.

             Our target markets are evolving and characterized by rapid
technological change, which we may not be able to keep pace with.

             The markets for our products and services are evolving and
characterized by rapid technological change, changing customer needs, evolving
industry standards and frequent new product and service announcements. The
introduction of products employing new technologies and emerging industry
standards could render our existing products or services obsolete or
unmarketable. If we are unable to respond to these developments successfully or
do not respond in a cost-effective way, our business, financial condition and
operating results will suffer. To be successful, we must continually improve and
enhance the responsiveness, services and features of our e-marketplaces and
introduce and deliver new product and service offerings and new releases of
existing products. We may fail to improve or enhance our e-marketplaces or
introduce and deliver new releases or new offerings on a timely and
cost-effective basis or at all. In addition, we have experienced delays in
improving and enhancing our e-marketplaces and in introducing and delivering new
product offerings and releases in the past. If we experience similar delays in
the future, or if our improvements, enhancements, offerings or releases do not
achieve market acceptance, we could experience a delay or loss of revenues and
customer dissatisfaction. Our success will also depend in part on our ability to
acquire or license third party technologies useful in our business, which we may
not to be able to do.

             We may ultimately be unable to compete in the markets for the
products and services we offer.

             The markets for our products and services are intensely
competitive. Increased competition may result in reduced margins and loss of
market share, either of which would seriously harm our business. We expect the
intensity of competition in our target markets to increase as the amount of
e-commerce transacted over the Internet grows, current competitors expand their
product and service offerings and new competitors enter the market.

             Examples of increased competition we expect to face include the
following:

            -     Several companies offer competitive e-marketplaces and
                  supplier enablement applications. We expect that additional
                  companies will offer competing e-marketplaces on a standalone
                  or portfolio basis because competitors can launch new Web
                  sites at a relatively low cost. We also compete for a share of
                  a customer's advertising budget with online services and
                  traditional offline media, such as print publications and
                  trade associations.

            -     As we implement our strategy regarding licensing e-commerce
                  and e-marketplace software and providing related services, we
                  are facing competition from software companies whose products
                  or services compete with a particular aspect of the solution
                  we provide, as well as several major enterprise software
                  developers.


                                       26
<PAGE>   27
             Many of our competitors have longer operating histories, greater
brand recognition and greater financial, technical, marketing and other
resources than we do, and may have well-established relationships with our
existing and prospective customers. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives. Our
competitors may also develop products or services that are superior to, or have
greater market acceptance than, ours. If we are unable to compete successfully
against our competitors, our business, financial condition and operating results
would be negatively impacted.

             We may not realize any return on, and may even suffer a complete
loss of, our equity interests in Converge and our strategic partners.

             Our sale of NECX resulted in our becoming the largest stockholder
in Converge, which is a privately-held company. Additionally, we are
increasingly asked to acquire equity interests, generally ranging from $0.5
million to $3.0 million in any given instance, in companies with whom we form
strategic relationships. We may never realize any return on our equity interests
in Converge or these other entities. In fact, we may suffer a complete loss of
these equity interests, which would materially and adversely affect our
business, financial condition and operating results. Our ability to realize a
return on any of these equity positions is far from certain, given that these
companies have limited financial and other resources, yet are subject to many of
the same risks and uncertainties that we face in our business, including limited
operating histories, evolving revenue models and uncertain market acceptance of
their products and services. Moreover, we are often unable to require terms and
conditions related to equity interests in our strategic partners (e.g., board
membership or observer rights) that are particularly favorable to us vis-a-vis
other investors. Allocating our financial resources to these types of strategic
relationships, rather than reinvesting those funds directly in our own business,
may ultimately cause our business to suffer.

             Acquisitions may negatively impact our business.

             We have grown, and plan to continue to grow, our business through
acquisitions that complement our existing products and services. If we are
unable to complete future acquisitions, our business, financial condition and
operating results could be negatively impacted. We may not be able to identify
additional suitable businesses that are available for sale at reasonable prices
or on reasonable terms. Even if we are able to identify appropriate acquisition
candidates, we may not be able to negotiate the terms of any acquisition
successfully, finance the acquisition or integrate the acquired business
(including its products, services, technologies or personnel) into our existing
business operations.

             Our acquisition strategy is also subject to numerous other risks
including, without limitation, the following:

            -     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;

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

            -     we may not be able to retain key employees from acquired
                  companies, and may face competition from employees that leave
                  before or after an acquisition is complete;

            -     to pay for acquisitions, we may be required to incur debt,
                  issue equity securities, which may be dilutive to existing
                  shareholders, or spend cash, which would negatively impact our
                  liquidity and could impair our ability to fund our operations;

            -     we may not realize any return on our investment in the
                  acquired companies and may even lose our entire investment and
                  incur significant additional losses;

            -     our share price could decline following the market's reaction
                  to our acquisitions;


                                       27
<PAGE>   28
            -     our amortization expense will increase as a result of
                  acquisitions; and

            -     our interest deductions may be disallowed for federal income
                  tax purposes.

             If our advertising revenues decline, our business would suffer.

             We currently rely on revenues generated from the sale of
advertising on our e-marketplaces for a material portion of our revenues. If we
are not able to increase or even maintain our current level of advertising
revenues, our business may suffer. Our ability to increase or maintain our
advertising revenues depends on many factors, including, without limitation:

            -     general economic conditions and their impact on demand for
                  online advertising;

            -     acceptance of the Internet as a legitimate, effective and
                  measurable medium for advertising and e-commerce;

            -     the development of a large base of users on our e-marketplaces
                  who possess demographic characteristics attractive to
                  advertisers;

            -     changes in industry pricing practices for advertising; and

            -     the evolving focus of our sales and marketing efforts.

             Other factors could also adversely affect our advertising revenues
and, thus, impair our business, financial condition and operating results. For
example, widespread use of "filter" software programs that limit access to our
storefronts and other hosted solutions from the Internet user's browser could
deter companies from advertising on the Internet. Additionally, no standards
have been widely accepted to measure the effectiveness of Internet advertising.
If such standards do not develop, companies may not continue their current
levels of Internet advertising, or if they are not currently advertising on the
Internet, they may be reluctant to do so.

             For some of our customers, we provide extended payment terms over
the length of the contract, rather than collecting the entire payment up front.
To the extent that these amounts are not collected, our advertising revenues,
bad debt expense and cash flows may be negatively impacted. We also have barter
arrangements where we provide banner advertisements, storefronts and newsletter
sponsorships to some of our customers in exchange for advertising on their Web
sites or in their publications. If our barter arrangements do not continue, our
advertising revenues may decline. For the three months ended March 31, 2001,
approximately $2.1 million, or 5.7%, of our reported revenue, was generated by
barter advertising arrangements.

             The content on our e-marketplaces may not attract a significant
number of users with demographic characteristics valuable to advertisers.

             Our future success depends in part upon our ability to deliver
compelling Internet content that will attract a significant number of users with
demographic characteristics valuable to advertisers. Our inability to deliver
Internet content that attracts a loyal user base with demographic
characteristics attractive to advertisers could impair our business, financial
condition and operating results. We face the challenge of delivering content
that is attractive to users in an environment characterized by rapidly changing
user preferences, as well as the ease with which users can freely navigate and
instantly switch among a large number of Web sites, many of which offer content
that may be more attractive than ours. If we cannot consistently anticipate or
respond quickly to changes in user preferences or distinguish our content from
that offered on other Web sites, we may never attract a significant number of
users with demographic characteristics that advertisers are seeking.


                                       28
<PAGE>   29
             Our failure to build and maintain relationships with third-party
content providers may impair our operating results.

             We have relied on, and expect to rely increasingly on, third
parties such as freelance authors, trade publications and news wires to provide
content for our e-marketplaces. It is critical to our business that we maintain
and build existing and new relationships with content providers. However, we may
not be able to do so, which could result in decreased traffic on our
e-marketplaces and decreased advertising revenues. Many of our agreements with
content providers are for initial terms of one to two years. Content providers
may choose not to renew the agreements or terminate the agreements early if we
do not fulfill our contractual obligations. Moreover, like our existing
agreements with some of our content providers, our new and renewal agreements
for third-party content may be non-exclusive, which means that competitors may
offer the same content we offer or similar content. Additionally, the terms of
any new or renewal agreements we enter into may be less favorable to us than our
existing agreements. In particular, as competition for content increases, the
licensing fees we pay to our content providers may correspondingly increase,
which would negatively impact our operating results.

             If we do not develop the "VerticalNet" brand and our other brands,
our revenues could decrease.

             To be successful, we must establish and strengthen the awareness of
the "VerticalNet" brand and our other brands. If our brand awareness is
weakened, it could decrease the attractiveness of our products and services to
our suppliers, buyers and users, which could result in decreased revenues. We
believe that brand recognition will become increasingly important in the future
with the growing number of Internet sites and e-commerce solution providers. If
customers do not begin to associate secondary meaning with our brands, then our
ability to gain market share will be diminished, which could impair our
business, financial condition and operating results.

             If we are unable to provide our suppliers, buyers and users with
accurate product information, our e-commerce strategy will not succeed.

             To enable suppliers to conduct e-commerce through our
e-marketplaces, we currently are responsible for loading suppliers' product
information into our database and categorizing the information for search
purposes. This process entails a number of risks, including dependence on our
suppliers to provide us in a timely manner with accurate, complete and current
information about their products and to update this information promptly when it
changes. The actual loading of these products in our database may be delayed,
depending upon a number of factors, including the formatting of the data
provided to us and our ability to further automate and expand our operations to
load this data accurately in our product database.

             We are generally obligated under our supplier agreements to load
and update product data into our database within a specified period of time
following its delivery. While we intend to further automate the loading and
updating of supplier data on our system, we may not be able to do so in a timely
manner, in part because achieving the highest level of this automation is
dependent upon our suppliers' automating their delivery of product data to us.
If our suppliers do not provide us in a timely manner with accurate, complete
and current information about the products we offer, our database may not be
useful to our customers and users and may even expose us to liability. Although
we screen our suppliers information before we make it available to our
customers and users, we cannot guarantee that the product information available
in our database will always be accurate, complete and current, or comply with
governmental regulations. Any resulting exposure to liability or decreased
adoption and use of our e-marketplaces could reduce our revenues and therefore
have a negative effect on our business, results of operations and financial
condition.

             If our suppliers do not provide professional, safe and timely
delivery of products to customers, our business will be harmed.

             We rely on our suppliers to deliver products to customers in a
professional, safe and timely manner. If our suppliers do not deliver products
to customers in this manner, then our service will not meet user expectations
and our reputation and brand will be damaged. In addition, deliveries that are
nonconforming, late or are not accompanied by information required by applicable
law or regulations could expose us to


                                       29
<PAGE>   30
liability or result in decreased adoption and use of our e-marketplaces, which
could have a negative effect on our business, results of operations and
financial condition. In some instances, we bear the responsibility for product
refunds and returns and the risk of non-collectibility of accounts receivable
from our customers.

             Managing our rapid growth effectively is difficult.

             We have rapidly and significantly expanded our operations by adding
new products and services, hiring new employees and acquiring new businesses.
This growth has placed, and is expected to continue to place, a significant
strain on our resources and systems. To manage our growth, we must implement
systems and train and manage our employees. If we fail to implement systems,
train and manage our employees or integrate our recent and future acquisitions
successfully, our business, financial condition and operating results could be
negatively impacted.

             Our business is susceptible to numerous risks associated with
international operations.

             We are subject to a number of risks and uncertainties associated
with our international business activities. These risks and uncertainties
generally include:

            -     difficulties in the enforcement of contractual obligations and
                  intellectual property rights, including licensing rights,
                  against foreign entities or in foreign jurisdictions;

            -     currency exchange rate fluctuations and higher duty rates;

            -     unexpected changes in regulatory requirements;

            -     tariffs, import and export controls and regulations and other
                  trade barriers;

            -     longer accounts receivable payment cycles and difficulties in
                  collecting accounts receivable;

            -     increased costs and difficulties in managing and staffing
                  international operations;

            -     compliance with applicable United States and foreign laws,
                  especially import/export requirements;

            -     potentially adverse tax consequences, including restrictions
                  on the repatriation of earnings;

            -     the costs and burdens of complying with a wide variety of
                  foreign laws and differing trade customs and practices;

            -     political instability; and

            -     potential transportation delays.

             These factors may have a negative effect on current and future
international operations and, consequently, on our business, results of
operations and financial condition.

             Our international operations are difficult to manage and may not
succeed.

             We have undertaken several international initiatives, including
VerticalNet Europe and our VerticalNet Japan joint venture with SOFTBANK
E-COMMERCE CORP., and have hired senior management to oversee our international
operations. We intend to strengthen our presence in our target international
markets. However, this strategy may fail if we cannot create or sustain
international demand for our evolving business model and the products and
services we offer. Moreover, in entering into our target international markets,
we have partnered with companies who have experience and relationships in those
markets. However, as we pursue our strategy of strengthening our global
presence, we have increased our


                                       30
<PAGE>   31
control over some of the initiatives we have undertaken. Thus, we are
increasingly becoming less dependent on our joint venture partners that have
more experience and relationships than we do in these markets. Our relative lack
of experience and relationships could adversely affect our international
operations, which would in turn negatively impact our overall business,
financial condition and operations. Pursuing this strategy will likewise
continue to require significant management attention and financial resources and
could have a similar negative effect.

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

             The performance of our computer and communications hardware systems
is critical to our business and reputation, as well as our ability to process
transactions, provide high quality customer service and attract and retain
customers, suppliers, users and strategic partners. Any system interruptions
that cause our e-marketplaces and other hosted applications to be unavailable
may reduce their attractiveness to users, buyers and suppliers and could impair
our business, financial condition and operating results. We do not currently
have back-up or redundant facilities for our computer or communications hardware
systems.

             Our interests may conflict with those of Internet Capital Group,
our largest shareholder, which may affect our business strategy and operations
negatively.

             As a result of its stock ownership and board representation,
Internet Capital Group is in a position to affect our business strategy and
operations, including corporate actions such as mergers or takeover attempts, in
a manner that could conflict with the interests of our public shareholders. At
May 1, 2001, Internet Capital Group beneficially owned 25,318,644 shares, or
approximately 25.7%, of our common stock, which includes 250,000 shares of our
common stock underlying $5.0 million of our 5 1/4% convertible subordinated
debt, and 478,624 shares of our common stock underlying warrants issued to
Internet Capital Group prior to our initial public offering. Two representatives
of Internet Capital Group are members of our board of directors. We may compete
with Internet Capital Group for Internet-related opportunities as it seeks to
expand its number of business-to-business assets, in part through acquisitions
and investments. Internet Capital Group, therefore, may seek to acquire or
invest in companies that we would find attractive. While we may partner with
Internet Capital Group on future acquisitions or investments, we have no current
contractual obligations to do so. We do not have any contracts or other
understandings that would govern resolution of this potential conflict. This
competition, and the potential conflict posed by the designated directors, may
deter companies from partnering with us and may limit our business
opportunities.

             Additionally, in order to avoid registration under the Investment
Company Act of 1940, Internet Capital Group may need to own more than 25% of our
voting securities. If its ownership interest falls below 25%, Internet Capital
Group may need to purchase additional voting securities to return to an
ownership interest of at least 25% in order to avoid having to register as an
investment company. The possible need of Internet Capital Group to maintain a
25% ownership position could adversely influence its decisions regarding actions
that may otherwise be in the best interests of our public shareholders.

             Additionally, significant changes in Internet Capital Group's
ownership of our common stock could adversely affect our common stock's market
price. For example, rather than purchase additional voting securities as
described in the preceding paragraph, Internet Capital Group may choose to
liquidate its position entirely to avoid having to register as an investment
company. If Internet Capital Group sells all or part of its investment in us,
whether to comply with the Investment Company Act of 1940, to raise additional
capital or otherwise, then the market price of our common stock could fall.

             Our success depends 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
needs.

             We believe that our success depends on continued employment of our
senior management team. 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. As of May 1, 2001, only one member of our executive management team
had an employment agreement.


                                       31
<PAGE>   32
             Our success also depends on having a highly trained technical
staff, sales force and customer service organization. We will need to continue
to hire personnel with the skill sets necessary to operate our business as we
refine our business strategies and as our business grows. Competition for
personnel, particularly for employees with technical expertise, is intense. A
shortage in the number of trained technical personnel, salespeople and customer
service professionals could limit our ability to design, develop and implement
our products, increase sales of our existing products and services and make new
sales as we offer new products and services. Ultimately, our business, financial
condition and operating results will be impaired if we cannot hire and retain
suitable personnel.

             Our success depends on the development of the e-commerce market,
which is uncertain.

             Business-to-business e-commerce is a new and emerging business
practice that remains largely untested in the marketplace and depends on the
increased acceptance and use of the Internet as a medium of commerce. If
e-commerce does not grow or grows more slowly than expected, our business will
suffer. Our long-term success depends on widespread market acceptance of
e-commerce.

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

            -     buyers may be unwilling to shift their purchasing from
                  traditional vendors to online vendors;

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

            -     buyers and suppliers may be unwilling to use online vendors
                  due to security and confidentiality concerns;

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

            -     insufficient availability of, or changes in, telecommunication
                  services could result in slower response times or inconsistent
                  service quality;

            -     online transactions generally lack the human contact that
                  offline transactions offer; and

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

             Security risks and concerns may deter the use of the Internet for
conducting e-commerce.

             The secure transmission of confidential information over the
Internet is essential to maintaining customer and supplier confidence. Concerns
regarding security of transactions and transmitting confidential information
over the Internet may negatively impact our business. We believe that concerns
regarding the security of confidential information transmitted over the
Internet, such as credit card numbers, prevent 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 we
may incur additional legal exposure. 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 e-marketplaces. We
currently use authentication technology, which requires passwords and other
information to prevent unauthorized persons from accessing a supplier's
information. We also use encryption technology, which transforms information
into a "code" designed to be unreadable by third parties, to protect
confidential information such as credit card numbers in commerce transactions.

             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


                                       32
<PAGE>   33
liability. We may be required to make significant investments and efforts to
protect against or remedy security breaches. Additionally, as e-commerce becomes
more prevalent, our suppliers will become more concerned about security. Our
failure to address these concerns adequately could impair our business,
financial condition and operating results.

             Limited Internet infrastructure may harm our business.

             The significant growth of Internet traffic over a relatively short
period of time has caused frequent periods of decreased Internet performance,
delays and, in some cases, system outages. These problems are caused by
limitations inherent in the technology infrastructure supporting the Internet
and the internal networks of Internet users. If our existing or potential
suppliers and users experience frequent outages or delays on the Internet, our
business may grow more slowly than we expect or even decline. Our ability to
grow our business is limited by and depends upon the reliability of both the
Internet and the internal networks of our existing and potential suppliers,
buyers and users. If improvements in the infrastructure supporting both the
Internet and the internal networks of our users, buyers and suppliers are not
made timely, we may have difficulty obtaining new customers or maintaining our
existing ones, either of which could reduce our potential revenues and have a
negative impact on our business, results of operations and financial condition.

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

             Proprietary rights are important to our success and our competitive
position. We may be unable to register, maintain and protect our proprietary
rights adequately or to prevent others from claiming violations of their
proprietary rights. As of May 9, 2001, we own and use 16 trademarks registered
with the United States Patent and Trademark Office ("PTO"). Additionally, we
have 29 applications for registration of various trademarks pending with the
PTO. Outside of the United States, as of May 9, 2001, we own and use 5
trademarks registered with various foreign patent and trademark offices and have
2 applications pending with foreign patent and trademark offices. Likewise, as
of May 9, 2001, we have 11 patent applications with PTO and we own 2,267 domain
names. Lastly, as of May 9, 2001, we have 3 copyrights registered with the
Library of Congress ("LOC") and 8 applications for registration of various
copyrights pending with the LOC. Generally, our domain names for our
e-marketplaces cannot be protected as trademarks because they are considered
"generic" under applicable law. In addition, effective copyright, trademark,
patent and trade secret protection may be unavailable 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, which makes it 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
and indemnification from those third parties; however, this may not adequately
protect us. Any of these claims, regardless of their merit, could subject us to
costly litigation and the diversion of our technical and management personnel.

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

             Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content they offer. We may be subject
to legal claims relating to the content on our e-marketplaces, or the
downloading and distribution of such content. Claims could also involve matters
such as defamation, invasion of privacy and copyright infringement. In addition,
some of the content provided on our e-marketplaces 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
materially if costs resulting from these claims are not covered by our insurance
or exceed our coverage.

             We may be exposed to product liability and other commercial claims.

             We face potential liability for claims based on the nature of the
products that we sell and distribute, including claims for breach of warranty,
product liability, misrepresentation, violation of governmental


                                       33
<PAGE>   34
regulations and other commercial claims. Most of the manufacturers whose
products we distribute have warranties on those products. We pass that warranty
through to our customers whenever possible. However, in some instances we bear
the risk of loss of revenue from the product sale if a purchaser does not pay
for a defective product. Although we maintain general liability insurance, our
insurance may not cover some claims or penalties, is subject to policy limits
and exclusions and may not adequately indemnify us or our employees from any
civil, governmental or criminal liability. Furthermore, this insurance may not
be available at commercially reasonable rates in the future. Any liability not
covered by our insurance or in excess of our insurance coverage could have a
negative effect on our business, financial condition and operating results.

             We are subject to government regulation that exposes us to
potential liability and negative publicity.

             We currently rely upon our suppliers to meet all packaging,
distribution, labeling, hazard and health information notices to purchasers,
record keeping and licensing requirements applicable to our business during the
entire transaction. However, our reliance on our suppliers may not be sufficient
to protect our legal interests. For example, if we are held to be a seller or a
distributor of regulated products because we took legal title, we may have
inadvertently violated some governmental regulations by not having the
appropriate license or permit. We are unable to verify that our suppliers have
in the past complied, or will in the future comply, with all governmental or
other legal requirements that may be applicable to our sales. We could be fined
or exposed to potentially severe civil or criminal liability, including monetary
fines and injunctions, and we could receive potential negative publicity, if the
applicable governmental regulatory requirements have not been, or are not being,
fully met by our suppliers or by us directly. Negative publicity, fines and
liabilities could also occur if an unqualified person, or even a qualified
supplier, lacks the appropriate license or permits to sell, use or ship, or
improperly receives a dangerous or unlicensed product through us. We do not
maintain any reserve for potential liabilities resulting from government
regulation.

             It is also possible that a number of laws and regulations may be
adopted or interpreted in the United States and abroad with particular
applicability to the Internet. These laws and regulations may, for example,
cover issues such as user privacy, freedom of expression, pricing, content and
quality of products and services, taxation, advertising, intellectual property
rights, access charges and information security. The enactment of such laws
could have a negative effect on our business, financial condition and operating
results.

             We may not have sufficient cash flow from operations to service our
debt.

             As of March 31, 2001, we had approximately $22.3 million in long
term debt (including our outstanding 5 1/4% convertible subordinated
debentures). Currently, we are not generating sufficient cash flow from our
operations to satisfy our annual debt service payment obligations. If we are
unable to satisfy our debt service requirements, substantial liquidity problems
could result, which would negatively impact our future prospects.

             We may require additional capital for our operations, which we may
not be able to raise or, even if we do, could have dilutive and other negative
effects on our shareholders.

             We currently anticipate that our cash on hand, current investments
(including equity interests in other entities) and other available funds will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. However, we cannot assure that
these resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements during this period. We may need, or
find it advantageous, to raise additional funds in the future to fund our
growth, pursue sales and licensing opportunities, develop new or enhanced
products and services, respond to competitive pressures or acquire complementary
businesses, technologies or services.

             If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our shareholders will
be reduced and shareholders may experience additional dilution. These securities
may also have powers, preferences and rights that are senior to those of the
rights of our common stock. We cannot be certain that additional financing will
be available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
operations adequately, promote our brand identity, take advantage of acquisition
opportunities, develop or


                                       34
<PAGE>   35
enhance products or services or respond to competitive pressures. Any inability
to do so could have a negative effect on our business, financial condition and
results of operations.

             Shares eligible for future sale by our current or future
shareholders may cause our stock price to decline.

             If our shareholders or optionholders sell substantial amounts of
our common stock in the public market, including shares issued in connection
with completed or future acquisitions or upon the exercise of outstanding
options and warrants, then the market price of our common stock could fall.

             As of May 1, 2001, the holders of up to approximately 27,353,408
shares of common stock, warrants to purchase 2,127,038 shares of common stock
and 101,450 shares of Series A preferred stock, which are convertible into
approximately 1,167,770 shares of common stock, have demand and/or piggyback
registration rights. Under the terms of the Series A preferred stock, we may
elect to pay the dividends payable thereunder by issuing shares of Series A
preferred stock or shares of common stock, rather than paying cash dividends. As
of March 31, 2001, cumulative dividends of $6.1 million had been earned by the
holder of our Series A preferred stock, of which $1.5 million were paid in the
form of additional shares of Series A preferred stock and the remainder of which
are accrued and remain payable. The shares of common stock underlying any
dividended shares of Series A preferred stock and any dividended shares of
common stock are also subject to demand and piggyback registration rights. The
exercise of such rights could adversely affect the market price of our common
stock.

             We have filed a shelf registration statement to facilitate our
acquisition strategy, as well as registration statements to register shares of
common stock under our stock option and employee stock purchase plans. Shares
issued pursuant to existing or future shelf registration statements, upon
exercise of stock options and in connection with our employee stock purchase
plan 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 our
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 stock market in general, and the market for stocks of
Internet-related and technology companies in particular, have been highly
volatile. The market price of our common stock and our daily trading volume have
been, and will likely continue to be, similarly volatile. Investors may not be
able to 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, many of these
companies' stocks have also recorded lows well below their historical highs. Our
stock may not trade at the same levels as other Internet-related or technology
stocks.

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

            -     general economic conditions, including suppressed demand for
                  technology and related services;

            -     actual or anticipated variations in quarterly operating
                  results;

            -     announcements of technological innovations;


                                       35
<PAGE>   36
            -     new products or services;

            -     changes in financial estimates by securities analysts;

            -     conditions or trends in business-to-business usage of the
                  Internet or the software and related services industry;

            -     changes in the market valuations of other Internet or
                  technology companies;

            -     failure to meet analysts' or investors' expectations;

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

            -     capital commitments;

            -     additions or departures of key personnel; and

            -     sales of common stock or instruments convertible into common
                  stock.

             Many of these factors are beyond our control. These factors may
cause the market price of our common stock to fall, regardless of our operating
performance.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

             We are exposed to risks associated with interest rate changes and
changes in the market value of our investments.

             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 quality credit standards, as specified in our
investment policy. The policy also limits the amount of credit exposure we may
have to any one issue, issuer or type of investment.

             As of March 31, 2001, our portfolio of investments included $63.0
million in cash and cash equivalents and $3.8 million in available-for-sale debt
instruments included in short-term investments. Due to the conservative nature
of our investment portfolio, we believe that a sudden change in interest rates
would not have a material effect on the value of the portfolio. We estimate that
if the average yield of our investments had decreased by 100 basis points, our
interest income for the three months ended March 31, 2001 would have decreased
by less than $17,000. This estimate assumes that the decrease occurred on the
first day of the year and reduced the yield of each investment instrument by 100
basis points. The impact on our future interest income and future changes in
investment yields will depend largely on the gross amount of our investment
portfolio.

             Investment Risk. We invest in equity instruments of privately-held
companies for business and strategic purposes. These investments are included in
other investments and are accounted for under the cost method when ownership is
less than 20% and we do not have the ability to exercise significant influence
over operations. For these investments in privately-held companies, our policy
is to regularly review the assumptions underlying the operating performance and
cash flow forecasts in assessing the recoverability of the carrying values. We
identify and record impairment losses on long-lived assets when events and
circumstances indicate that such assets might be impaired. During the three
months ended March 31, 2001, we recorded a $7.7 million impairment charge for
other than temporary declines in fair value of several of our cost method
investments. Since our initial investment, certain of these investments in
privately-held companies have become marketable equity securities upon the
investees' completion of initial public offerings


                                       36
<PAGE>   37
or the acquisition of the investee by a public company. Such investments, most
of which are in the Internet industry, are subject to significant fluctuations
in fair market value due to the volatility of the stock market. As of March 31,
2001, the fair market value of these investments included in short-term and
long-term investments was $3.8 million.

             In connection with Ariba's acquisition of Tradex Technologies,
Inc., we received Ariba common stock. In July 2000, we entered into forward sale
contracts relating to our investment in Ariba. Under these contracts, we pledged
our shares of Ariba's common stock to the counterparty for a three-year period
in return for approximately $47.4 million of cash. At the conclusion of the
three-year period, we have the option of delivering either cash or the pledged
Ariba shares to satisfy the forward sale. However, we will not be required to
deliver shares in excess of those we pledged. If we choose to deliver Ariba
shares to satisfy the forward sale, the number of Ariba shares to be delivered
at maturity may vary depending on the then market price of Ariba's common stock.
We have only limited involvement with derivative financial instruments and do
not use them for trading purposes. Our risk of loss in the event of
nonperformance by the counterparty under the forward sales contract is not
considered to be significant. Although the forward sales contract exposes us to
market risk, fluctuations in the fair value of these contracts are mitigated by
expected offsetting fluctuations in the value of the pledged securities.


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

             We are not a party to any material legal proceedings.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

            (a) None.

            (b) None.

            (c) During the quarter ended March 31, 2001, we issued the following
unregistered securities pursuant to the following transactions:

            -     On January 1, 2001, we issued 1,101,549 shares of our common
                  stock valued at approximately $10.0 million upon the
                  settlement of an earnout agreement related to our acquisition
                  of American IC Exchange.

            -     On January 8, 2001, we issued 14,000 shares of our common
                  stock valued at approximately $55,000 upon the settlement of
                  an earnout agreement related to our acquisition of TextileWeb.

            -     On January 22, 2001, we issued 2,763,388 shares of our common
                  stock to Sumitomo Corporation in exchange for $15.0 million in
                  cash pursuant to the terms of the Amended and Restated Common
                  Stock Purchase Agreement, dated December 19, 2000, between
                  Sumitomo Corporation and us.

These transactions were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The transactions were privately negotiated
and did not include any general solicitation or advertising. Each purchaser
represented that he, she, or it was acquiring the shares without a view to
distribution and was afforded an opportunity to review all publicly filed
documents and to ask questions and receive answers from our officers.

             (d) Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

            (a) None.


                                       37
<PAGE>   38
            (b) As of March 31, 2001, cumulative dividends of $4.6 million had
been earned by, but not yet paid to, the holder of our Series A preferred stock.

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

             No matters were submitted to a vote of security holders during the
quarter ended March 31, 2001.


ITEM 5.  OTHER INFORMATION

             None.

ITEM 6.  EXHIBITS  AND REPORTS ON FORM 8-K

            (a)  Exhibits.

                 None.

            (b)  Reports on Form 8-K.

                 -  On January 17, 2001, we filed our Current Report on Form
                    8-K, dated December 19, 2000, regarding (a) our execution of
                    a definitive agreement to sell NECX.com LLC to Converge,
                    Inc.; (b) our execution of an amended and restated common
                    stock purchase agreement under which we agreed to sell $15.0
                    million of our common stock to Sumitomo Corporation; (c) our
                    agreement to increase our ownership position in VerticalNet
                    Europe to 77%; and (d) the appointment of Michael J. Hagan
                    to the position of President and Chief Executive Officer
                    (Items 5 and 7).

                 -  On February 15, 2001, we filed our Current Report on Form
                    8-K, dated January 31, 2001, in which we reported on (a) our
                    sale of NECX.com LLC to Converge, Inc.; and (b) the
                    completion of our sale of common stock to Sumitomo
                    Corporation, as well as included pro forma financial
                    information (Items 2, 5 and 7).

                 -  On March 14, 2001, we filed our Current Report on Form 8-K,
                    dated March 13, 2001, regarding the increase in our
                    ownership position in VerticalNet Europe to 90% (Item 5).


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<PAGE>   39
                                   SIGNATURES

              Pursuant to the requirements of Section 13 or 15(d) 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, in
Horsham, Pennsylvania, on May 14, 2001.

                                      VERTICALNET, INC.


                                      By: /s/ MICHAEL J. HAGAN
                                          ------------------------------
                                          Michael J. Hagan
                                          President and Chief Executive Officer

                                      By: /s/ GENE S. GODICK
                                          --------------------------------------
                                          Gene S. Godick
                                          Executive Vice President and
                                              Chief Financial Officer


                                       39