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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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(Mark One)

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2003

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: 0-26811

NexPrise, Inc.

(Exact name of Registrant as specified in its charter)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction
of incorporation or organization) |  | 77-0465496
(I.R.S. Employer
Identification Number)

5950 La Place Court, Suite 200
Carlsbad, CA 92008
760-804-1333
(Address, including zip code, and telephone
number, including area code, of Registrants principal
executive offices)

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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [  ]  No [X]

On June 30, 2003, 3,226,471 shares of the registrants common stock,
$.0002 par value per share, were issued and outstanding.



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TABLE OF CONTENTS



|                           |                                                                                               |                                            |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                           |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                           |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                           |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                           |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                           | Item 3. Qualitative and Quantitative Disclosure about Market Risk                            
|                           | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION
|                           | Item 1. Legal Proceedings                                                                    
|                           | Item 2. Changes in Securities and Use of Proceeds                                            
|                           | Item 3. Defaults upon Senior Securities                                                      
|                           | Item 4. Submission of Matters to a Vote of Securities Holders                                
|                           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                 
|EXHIBIT INDEX             
|EXHIBIT 31                
|EXHIBIT 32                



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##### Table of Contents



NEXPRISE, INC.
FORM 10-Q

TABLE OF CONTENTS

|                             |  |                                                                                       |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                       |  | Page
|                             |  |                                                                                       |  |     
|PART I FINANCIAL INFORMATION |  |                                                                                      
|Item 1.                      |  | Unaudited Consolidated Financial Statements:                                          |  |     
|                             |  | Balance Sheets as of June 30, 2003 and December 31, 2002                              |  | 3   
|                             |  | Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002    |  | 4   
|                             |  | Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002              |  | 5   
|                             |  | Notes to Consolidated Financial Statements                                            |  | 6   
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|Item 3.                      |  | Qualitative and Quantitative Disclosure about Market Risk                             |  | 26  
|Item 4.                      |  | Controls and Procedures                                                               |  | 26  
|PART II OTHER INFORMATION    |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                     |  | 27  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                             |  | 27  
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 27  
|Item 4.                      |  | Submission of Matters to a Vote of Securities Holders                                 |  | 28  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 28  
|SIGNATURE                    |  | 29                                                                                   
|EXHIBIT INDEX                |  | 30                                                                                   

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NEXPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

|                                           |                                                                                                |                                            |        |           |        |              |        |          |        | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | --------- | ------ | ------------ | ------ | -------- | ------ | 
|                                           |                                                                                                |                                            |        | June 30,  |        | December 31,
|                                           |                                                                                                |                                            |        | 2003      |        | 2002        
|                                           |                                                                                                |                                            |        |           |        |             
|                                           |                                                                                                |                                            |        | unaudited |        | (1)         
|ASSETS                                     |                                                                                                |                                            |        |           |        |              |        |         
|Current assets:                            |                                                                                                |                                            |        |           |        |              |        |         
|                                           | Cash and cash equivalents                                                                      |                                            | $      | 1,284     |        |              | $      | 3,225    |       
|                                           | Short-term investments                                                                         |                                            |        | 7,050     |        |              |        | 7,050    |       
|                                           | Accounts receivable - net of reserves of $101 and $102                                         |                                            |        | 222       |        |              |        | 560      |       
|                                           | Prepaid expenses                                                                               |                                            |        | 177       |        |              |        | 671      |       
|                                           | Other current assets                                                                           |                                            |        | 331       |        |              |        | 841      |       
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       
|                                           |                                                                                                | Total current assets                       |        |           | 9,064  |              |        |          | 12,347 | 
|Property and equipment, net                |                                                                                                |                                            | 149    |           |        |              | 339    |         
|Intangible assets, net                     |                                                                                                |                                            | 7,660  |           |        |              | 9,150  |         
|Other long-term assets, net                |                                                                                                |                                            | 1,092  |           |        |              | 1,168  |         
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       
|                                           |                                                                                                | Total assets                               |        | $         | 17,965 |              |        | $        | 23,004 | 
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                |                                            |        |           |        |              |        |         
|Current liabilities:                       |                                                                                                |                                            |        |           |        |              |        |         
|                                           | Accounts payable                                                                               |                                            | $      | 96        |        |              | $      | 160      |       
|                                           | Accrued compensation                                                                           |                                            |        | 628       |        |              |        | 646      |       
|                                           | Accrued expenses                                                                               |                                            |        | 1,288     |        |              |        | 2,374    |       
|                                           | Deferred revenue                                                                               |                                            |        | 1,241     |        |              |        | 711      |       
|                                           | Accrued liabilities relating to discontinued operations                                        |                                            |        |          |        |              |        | 336      |       
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       
|                                           |                                                                                                | Total current liabilities                  |        |           | 3,253  |              |        |          | 4,227  | 
|Notes payable                              |                                                                                                |                                            | 11,843 |           |        |              | 11,843 |         
|Commitments and contingencies (see Note 9) |                                                                                                |                                            |        |           |        |              |        |         
|Stockholders equity:                      |                                                                                                |                                            |        |           |        |              |        |         
|                                           | Preferred stock, no par value: 2,500 shares
authorized: none issued or outstanding             |                                            |        |          |        |              |        |         |       
|                                           | Common stock, $.0002 par value; 175,000 shares
authorized; 3,230 shares issued and outstanding |                                            |        | 10        |        |              |        | 10       |       
|                                           | Additional paid-in capital                                                                     |                                            |        | 631,765   |        |              |        | 631,764  |       
|                                           | Deferred compensation                                                                          |                                            |        | (247      | )      |              |        | (416     | )     
|                                           | Accumulated deficit                                                                            |                                            |        | (628,811  | )      |              |        | (624,576 | )     
|                                           | Accumulated other comprehensive income                                                         |                                            |        | 152       |        |              |        | 152      |       
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       
|                                           |                                                                                                | Total stockholders equity                 |        |           | 2,869  |              |        |          | 6,934  | 
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       
|                                           |                                                                                                | Total liabilities and stockholders equity |        | $         | 17,965 |              |        | $        | 23,004 | 
|                                           |                                                                                                |                                            |        |           |        |              |        |          |       



|(1) |  | Derived from December 31, 2002 audited consolidated financial statements.
See accompanying notes to consolidated financial statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

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NEXPRISE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

|                                                                                             |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |       | 
|-------------------------------------------------------------------------------------------- | -------------------------------------------- | - | ------------ | ---- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------- | ----- | 
|                                                                                             |                                              |   | Three Months |      |                  |   |        |       |      |   |       
|                                                                                             |                                              |   | Ended        |      | Six Months Ended
|                                                                                             |                                              |   | June 30,     |      | June 30,        
|                                                                                             |                                              |   |              |      |                 
|                                                                                             |                                              |   | 2003         |      | 2002             |   | 2003   |       | 2002
|                                                                                             |                                              |   |              |      |                  |   |        |       |     
|Net revenues                                                                                 |                                              | $ | 1,002        |      |                  | $ | 653    |       |      | $ | 1,723  |       |   | $ | 1,327   |      
|Costs and expenses                                                                           |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |      
|                                                                                             | Cost of product licenses and services        |   |              | 305  |                  |   |        | 424   |      |   |        | 586   |   |   |         | 741   | 
|                                                                                             | Cost of amortization of purchased technology |   |              | 491  |                  |   |        | 221   |      |   |        | 982   |   |   |         | 441   | 
|                                                                                             | Research and development                     |   |              | 556  |                  |   |        | 1,560 |      |   |        | 1,350 |   |   |         | 3,359 | 
|                                                                                             | In process research and development          |   |              |     |                  |   |        |      |      |   |        |      |   |   |         | 399   | 
|                                                                                             | Sales and marketing                          |   |              | 954  |                  |   |        | 1,589 |      |   |        | 1,921 |   |   |         | 3,260 | 
|                                                                                             | General and administrative                   |   |              | 917  |                  |   |        | 1,457 |      |   |        | 1,616 |   |   |         | 3,180 | 
|                                                                                             | Restructuring & settlement benefit           |   |              | (493 | )                |   |        |      |      |   |        | (493  | ) |   |         |      | 
|                                                                                             |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |      
|Total costs and expenses                                                                     |                                              |   | 2,730        |      |                  |   | 5,251  |       |      |   | 5,962  |       |   |   | 11,380  |      
|                                                                                             |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |      
|Operating loss                                                                               |                                              |   | (1,728       | )    |                  |   | (4,598 | )     |      |   | (4,239 | )     |   |   | (10,053 | )    
|Interest expense                                                                             |                                              |   | (189         | )    |                  |   | (192   | )     |      |   | (378   | )     |   |   | (369    | )    
|Interest income and other, net                                                               |                                              |   | 128          |      |                  |   | 74     |       |      |   | 161    |       |   |   | 94      |      
|Investment losses                                                                            |                                              |   | (113         | )    |                  |   | (1,131 | )     |      |   | (113   | )     |   |   | (2,480  | )    
|                                                                                             |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |      
|Loss from continuing operations                                                              |                                              |   | (1,902       | )    |                  |   | (5,847 | )     |      |   | (4,569 | )     |   |   | (12,808 | )    
|Gain from discontinued operations                                                            |                                              |   | 334          |      |                  |   |       |       |      |   | 334    |       |   |   |        |      
|                                                                                             |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |      
|Net loss                                                                                     |                                              | $ | (1,568       | )    |                  | $ | (5,847 | )     |      | $ | (4,235 | )     |   | $ | (12,808 | )    
|                                                                                             |                                              |   |              |      |                  |   |        |       |      |   |        |       |   |   |         |      
|Basic and diluted loss per share from continuing operations                                  |                                              | $ | (0.59        | )    |                  | $ | (1.83  | )     |      | $ | (1.42  | )     |   | $ | (4.05   | )    
|Basic and diluted gain per share from discontinued operations                                |                                              | $ | 0.10         |      |                  | $ |       |       |      | $ | 0.10   |       |   | $ |        |      
|Basic and diluted net loss per share                                                         |                                              | $ | (0.49        | )    |                  | $ | (1.83  | )     |      | $ | (1.32  | )     |   | $ | (4.05   | )    
|Weighted average common shares outstanding
in computing basic and diluted net loss per
share |                                              |   | 3,226        |      |                  |   | 3,194  |       |      |   | 3,226  |       |   |   | 3,161   |      

See accompanying notes to consolidated financial statements

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NEXPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                            |                                                           |                                                  |        |                          |        |      |         |        |        |  
|--------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------ | ------ | ------------------------ | ------ | ---- | ------- | ------ | ------ | -
|                                                                            |                                                           |                                                  |        | For the Six Months Ended
|                                                                            |                                                           |                                                  |        |                         
|                                                                            |                                                           |                                                  |        | 2003                     |        | 2002
|                                                                            |                                                           |                                                  |        |                          |        |     
|                                                                            |                                                           |                                                  |        | (In thousands)          
|Operating Activities                                                        |                                                           |                                                  |        |                          |        |      |         |       
|Net loss                                                                    |                                                           | $                                                | (4,235 | )                        |        | $    | (12,808 | )     
|Adjustments
to reconcile net loss to net cash used in operating activities: |                                                           |                                                  |        |                          |        |      |         |       
|                                                                            | - Depreciation                                            |                                                  |        | 221                      |        |      |         | 1,029  |       
|                                                                            | - Amortization of other intangible assets                 |                                                  |        | 1,490                    |        |      |         | 1,348  |       
|                                                                            | - Amortization of deferred stock-based compensation       |                                                  |        | 169                      |        |      |         | 187    |       
|                                                                            | - Restructuring and settlement benefit                    |                                                  |        | (493                     | )      |      |         |       |       
|                                                                            | - Investment losses                                       |                                                  |        | 113                      |        |      |         | 2,480  |       
|                                                                            | - Gain from retirement of convertible Notes               |                                                  |        | (100                     | )      |      |         |       |       
|                                                                            | - Non-cash charges related to stock-option grants         |                                                  |        |                         |        |      |         | 3      |       
|Changes
in operating assets and liabilities:                                |                                                           |                                                  |        |                          |        |      |         |       
|                                                                            | - Accounts receivable                                     |                                                  |        | 338                      |        |      |         | 523    |       
|                                                                            | - Prepaid expenses                                        |                                                  |        | 494                      |        |      |         |       |       
|                                                                            | - Other current assets                                    |                                                  |        | 510                      |        |      |         | 150    |       
|                                                                            | - Other long term assets                                  |                                                  |        | (37                      | )      |      |         | (564   | )     
|                                                                            | - Accounts payable                                        |                                                  |        | (64                      | )      |      |         | (15    | )     
|                                                                            | - Accrued compensation                                    |                                                  |        | (18                      | )      |      |         | (181   | )     
|                                                                            | - Accrued expenses                                        |                                                  |        | (493                     | )      |      |         | (1,686 | )     
|                                                                            | - Deferred revenue                                        |                                                  |        | 530                      |        |      |         | 173    |       
|                                                                            | - Accrued liabilities relating to discontinued operations |                                                  |        | (336                     | )      |      |         | (201   | )     
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|                                                                            |                                                           | Net cash used in operating activities            |        |                          | (1,911 | )    |         |        | (9,562 | )
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|Investing Activities                                                        |                                                           |                                                  |        |                          |        |      |         |       
|Purchase of property and equipment                                          |                                                           |                                                  | (31    | )                        |        |      |        |       
|Purchases of short-term investments                                         |                                                           |                                                  |       |                          |        |      | (24,401 | )     
|Sale and maturities of short-term investments                               |                                                           |                                                  |       |                          |        |      | 20,352  |       
|Decrease in restricted cash                                                 |                                                           |                                                  |       |                          |        |      | 520     |       
|Cash acquired on purchase of Infoprise                                      |                                                           |                                                  |       |                          |        |      | 1,029   |       
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|                                                                            |                                                           | Net cash used in investing activities            |        |                          | (31    | )    |         |        | (2,500 | )
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|Financing Activities                                                        |                                                           |                                                  |        |                          |        |      |         |       
|Principal payments on capital lease obligations                             |                                                           |                                                  |       |                          |        |      | (114    | )     
|Net proceeds from issuance of ESPP, stock options and common stock          |                                                           |                                                  | 1      |                          |        |      | 22      |       
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|                                                                            |                                                           | Net cash provided (used) in financing activities |        |                          | 1      |      |         |        | (92    | )
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|Foreign currency translation                                                |                                                           |                                                  |       |                          |        |      | 72      |       
|Net decrease in cash and cash equivalents                                   |                                                           |                                                  | (1,941 | )                        |        |      | (12,082 | )     
|Cash and cash equivalents at beginning of period                            |                                                           |                                                  | 3,225  |                          |        |      | 13,565  |       
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|Cash and cash equivalents at end of period                                  |                                                           |                                                  | 1,284  |                          |        |      | 1,483   |       
|                                                                            |                                                           |                                                  |        |                          |        |      |         |       
|Supplemental disclosure of noncash activities:                              |                                                           |                                                  |        |                          |        |      |         |       
|Issuance of shares in connection with the acquisition of Infoprise          |                                                           | $                                                |       |                          |        | $    | 794     |       
|Deferred stock based compensation related to the stock options assumed in   |                                                           |                                                  |        |                          |        |      |         |       
|connection with the acquisition of Infoprise                                |                                                           | $                                                |       |                          |        | $    | (316    | )     
|Issuance of convertible notes relating to Infoprise acquisition             |                                                           | $                                                |       |                          |        | $    | 3,040   |       

See accompanying notes to consolidated financial statements

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NEXPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note 1. Description of Business

NexPrise, Inc. (the Company or NexPrise or we), formerly known as
Ventro Corporation and Chemdex Corporation, is a seller of business process
applications and provides solutions and services that enable discrete
manufacturing companies to address their specific business challenges. These
solutions complement and expand on currently installed enterprise systems and
allow for the continuous process improvements required to meet customers
changing business demands.

As of June 30, 2003, the Company had working capital of approximately $5.8
million and stockholders equity of approximately $2.9 million. During the
three months ended June 30, 2003, the Company used cash and cash equivalents in
operating activities of approximately $1.2 million, an increase of
approximately $500,000 from the $700,000 used in the three months ended March
31, 2003. The increase in cash used in operating activities in the three months
ended June 30, 2003 was primarily due to a non-trade receivable of
approximately $500,000 collected in the three months ended March 31, 2003 that
was not repeated. Management believes it has sufficient working capital to
support the Companys planned activities through 2003 and beyond.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated. While the quarterly financial information is unaudited, the
financial statements included in this Form 10-Q reflect all adjustments
(consisting of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the date of
the interim balance sheet. The results for the interim periods are not
necessarily indicative of the results for the entire year. The consolidated
balance sheet as of December 31, 2002 has been derived from the audited
consolidated balance sheet as of that date. The information included in this
report should be read in conjunction with the Companys Form 10-K for the year
ended December 31, 2002.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the prior years financial statements have been
reclassified to conform to the current year presentation.

Revenue Recognition

Revenue is made up primarily of subscriptions of bundled term licenses,
post contract support and, in most cases, hosting services. The Company
recognizes such revenue using the subscription method, whereby the initial
and renewal amounts are recognized ratably over the period of the license
during which the services are expected to be provided. In instances where
maintenance is bundled with license of software products, such maintenance
terms are typically one year. Revenue for training or consulting services that
are not bundled with a subscription is recognized based on achievement of
billable milestones as written in the contract or upon contract completion and
currently makes up less than 10% of overall revenue. Perpetual license revenue
is recognized using the residual method described in Statement of Position
(SOP) No. 98-9 for arrangements in which licenses are sold with multiple
elements. We allocate revenues on these licenses based upon the fair value of
each undelivered element (for example, undelivered maintenance and support,
training and consulting). The determination of fair value is based upon vendor
specific objective evidence (VSOE). VSOE of the fair value of maintenance
for license agreements with and without stated renewal rates is based on the
Companys price list. VSOE of the fair value of maintenance for license
agreements that do not include stated renewal rates is determined by reference
to the price paid by the Companys customers when maintenance is sold
separately. Past history has shown that the rate the Company charges for
maintenance on license agreements with a stated renewal rate is similar to the
rate the Company charges for maintenance on license agreements without a stated
renewal rate. VSOE for training or consulting is based upon separate

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sales of these services. When software services are considered essential
or the arrangement involves significant customization or modification of the
software, both the net license and service revenues under the arrangement are
recognized under the percentage of completion method of contract accounting,
based on input measures of hours, or upon completion of services. Assuming all
other revenue recognition criteria are met, the difference between the total
arrangement fee and the amount deferred for each undelivered element is
recognized as license revenue. Our perpetual arrangements may include initial
maintenance extending over a period of time with no renewal rate, which
requires perpetual license revenue to be taken ratably over the contract
period.

NexPrise had not yet established VSOE for maintenance prior to March 31,
2003, and therefore is recognizing the revenue from license agreements entered
into prior to March 31, 2003 ratably over the maintenance period. NexPrise
established VSOE in the three months ended June 30, 2003. Approximately 13% of
the revenue recognized for the three months ended June 30, 2003 consisted of
perpetual license revenue that was recognized when the software was delivered
and not ratably over the contract. Approximately 8% of the revenue recognized
for the three months ended June 30, 2003 consisted of consulting and training.
The remaining 79% of the revenue recognized for the three months ended June 30,
2003 consisted of revenue being recognized ratably over the contract term and
is made up of bundled subscriptions and perpetual licenses with maintenance
sold prior to the establishment of VSOE for maintenance.

Our revenue recognition policy is in accordance with SOP No. 97-2,
Software Revenue Recognition, as amended, and Staff Accounting Bulletin (SAB)
101. For all arrangements, we determine whether evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and collection
is probable. If any of these criteria are not met, revenue recognition is
deferred until such time as all of the criteria are met.

Net Income (Loss) Per Share

Net income (loss) per share is presented in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, which requires dual presentation of basic earnings per
share (EPS) and diluted EPS.

Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common shares and
potentially dilutive shares outstanding during the period.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123. SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transition guidance and disclosure provisions of SFAS 148
are effective for the Companys financials statements issued for 2003.

The Company has elected to follow Accounting Principles Board Opinion No.
25 (APB 25),Accounting for Stock Issued to Employees, in accounting for its
employee stock options. No compensation expense is recognized for share
purchase rights granted under the Companys employee stock options and employee
stock purchase plan. Had compensation cost for the Companys employee stock
options and employee stock purchase plan been determined based on fair value at
the grant date consistent with SFAS 123, the Companys net loss and earnings
loss per share would have been reduced to the pro forma amounts indicated
below:

|                                                                                                                          |             |   |                    |       |                  |   |         |       |      |   |         |       |   |   |          |       |  
|------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------ | ----- | ---------------- | - | ------- | ----- | ---- | - | ------- | ----- | - | - | -------- | ----- | -
|                                                                                                                          |             |   | Three Months Ended |       | Six Months Ended
|                                                                                                                          |             |   | June 30,           |       | June 30,        
|                                                                                                                          |             |   | 2003               |       | 2002             |   | 2003    |       | 2002
|                                                                                                                          |             |   |                    |       |                  |   |         |       |     
|Net loss                                                                                                                  |             |   | ($1,568            | )     |                  |   | ($5,847 | )     |      |   | ($4,235 | )     |   |   | ($12,808 | )    
|Add: intrinsic value compensation expense                                                                                 |             |   | 85                 |       |                  |   | 101     |       |      |   | 169     |       |   |   | 187      |      
|Less: total stock based employee
compensation expense determined under fair
value based method for all awards, net of
tax |             |   | (2,104             | )     |                  |   | (2,599  | )     |      |   | (4,331  | )     |   |   | (5,760   | )    
|                                                                                                                          |             |   |                    |       |                  |   |         |       |      |   |         |       |   |   |          |      
|Pro-forma net loss                                                                                                        |             | $ | (3,587             | )     |                  | $ | (8,345  | )     |      | $ | (8,397  | )     |   | $ | (18,381  | )    
|                                                                                                                          |             |   |                    |       |                  |   |         |       |      |   |         |       |   |   |          |      
|Weighted-average shares used in computing
basic and diluted net loss per common
share                                     |             |   | 3,226              |       |                  |   | 3,194   |       |      |   | 3,226   |       |   |   | 3,161    |      
|                                                                                                                          |             |   |                    |       |                  |   |         |       |      |   |         |       |   |   |          |      
|Basic and diluted earnings loss per share:                                                                                |             |   |                    |       |                  |   |         |       |      |   |         |       |   |   |          |      
|                                                                                                                          | As reported |   | $                  | (0.49 | )                |   | $       | (1.83 | )    |   | $       | (1.32 | ) |   | $        | (4.05 | )
|                                                                                                                          | Pro forma   |   | $                  | (1.11 | )                |   | $       | (2.61 | )    |   | $       | (2.60 | ) |   | $        | (5.81 | )

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Concentration of Credit Risk and Significant Customers

The Companys customer base consists of businesses located primarily in
North America. The Company maintains allowances for potential credit losses and
historically, such losses have been within managements expectations. Revenue
and accounts receivable by customers comprising more than 10% of total amounts
are as follows:

|           |  |                     |    |                   |  |                  |    |              |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|---------- |  | ------------------- | -- | ----------------- |  | ---------------- | -- | ------------ |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|           |  | % of Total revenues |    |                  
|           |  |                     |    | % of Net accounts
|           |  | Three Months Ended  |    | Six Months Ended  |  | receivable as of
|           |  |                     |    |                   |  |                 
|           |  | June 30             |    | June 30           |  | June 30,         |    | December 31,
|           |  |                     |    |                   |  |                  |    |             
|           |  | 2003                |    | 2002              |  | 2003             |    | 2002         |  | 2003 |    | 2002
|           |  |                     |    |                   |  |                  |    |              |  |      |    |     
|Customer A |  |                     |    |                   |  |                  | 15 | %            |  |      | 11 | %    |  |  | 15 | % |  |  |    |   |  |  |    |  
|Customer B |  |                     | 25 | %                 |  |                  | 13 | %            |  |      | 20 | %    |  |  | 14 | % |  |  |    |   |  |  | 30 | %
|Customer C |  |                     | 20 | %                 |  |                  | 12 | %            |  |      | 16 | %    |  |  | 12 | % |  |  |    |   |  |  |    |  
|Customer D |  |                     |    |                   |  |                  |    |              |  |      |    |      |  |  |    |   |  |  | 38 | % |  |  | 21 | %
|Customer E |  |                     |    |                   |  |                  | 11 | %            |  |      |    |      |  |  | 11 | % |  |  |    |   |  |  |    |  
|Customer F |  |                     |    |                   |  |                  |    |              |  |      |    |      |  |  |    |   |  |  | 14 | % |  |  |    |  
|Customer G |  |                     |    |                   |  |                  |    |              |  |      |    |      |  |  |    |   |  |  | 15 | % |  |  |    |  

Long Lived Assets

The Company reviews property, plant and equipment, goodwill and purchased
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. Our asset
impairment review assesses the fair value of the assets based on the future
cash flows the assets are expected to generate. An impairment loss is
recognized when estimated undiscounted future cash flows expected to result
from the use of the asset, plus net proceeds expected from disposition of the
asset (if any), are less than the carrying value of the asset. This approach
uses our estimates of future market growth, forecasted revenue and costs,
expected periods the assets will be utilized and appropriate discount rates.
When an impairment is identified, the carrying amount of the asset is reduced
to its estimated fair value. Effective January 1, 2002, in conjunction with
the implementation of SFAS No. 142, goodwill is no longer amortized and
potential impairment of goodwill and purchased intangible assets with
indefinite useful lives is evaluated using the specific guidance provided by
SFAS No. 142. This impairment analysis is performed at least annually. Also
effective January 1, 2002, potential impairment of long-lived assets other than
goodwill and purchased intangible assets with indefinite useful lives is
evaluated using the guidance provided by SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.

Note 3. Comprehensive Loss

SFAS No. 130, Reporting Comprehensive Income,establishes standards of
reporting and display of comprehensive income and its components of net loss
and Other Comprehensive Income. Other Comprehensive Income refers to
revenues, expenses, gains and losses that are not included in net income (loss)
but rather are recorded directly in stockholders equity. The components of
comprehensive loss for the three and six months ended June 30, 2003 and 2002
were as follows (in thousands):

|                                                           |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                           |  | Three Months Ended |        | Six Months Ended
|                                                           |  |                    |        |                 
|                                                           |  | June 30            |        | June 30         
|                                                           |  |                    |        |                 
|                                                           |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                                                           |  |                    |        |                  |  |      |        |     
|Net Loss                                                   |  | $                  | (1,568 | )                |  | $    | (5,847 | )    |  | $ | (4,235 | ) |  | $ | (12,808 | )
|Unrealized gains (losses) on available for sale securities |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |        |  
|Foreign exchange translation                               |  |                    |       |                  |  |      | (1     | )    |  |   |       |   |  |   | 72      |  
|                                                           |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |         |  
|Comprehensive Loss                                         |  | $                  | (1,568 | )                |  | $    | (5,848 | )    |  | $ | (4,235 | ) |  | $ | (12,736 | )
|                                                           |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |         |  

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Note 4. Goodwill and Purchased Intangibles

SFAS 142, Goodwill and Other Intangible Assets, requires that we evaluate
on an annual basis (or whenever events occur which may indicate possible
impairment) whether any portion of our recorded intangible assets is impaired.
This analysis requires management to make a series of critical assumptions to
(1) evaluate whether any impairment exists, and (2) measure the amount of
impairment.

Subsequent to the adoption of SFAS 142, identifiable intangible assets
with definite lives will continue to be amortized over their useful lives and
will be reviewed for impairment in accordance with SFAS 144 when impairment
indicators exist. These assets are shown as intangible assets on the face of
the balance sheet and are as follows (in thousands):

|                               |  |               |        |                   |  |             |        |        |  |              |       |             |  |   |        |  |  |   |        |   |  |   |       | 
|------------------------------ |  | ------------- | ------ | ----------------- |  | ----------- | ------ | ------ |  | ------------ | ----- | ----------- |  | - | ------ |  |  | - | ------ | - |  | - | ----- | 
|                               |  | June 30, 2003 |        | December 31, 2002
|                               |  |               |        |                  
|                               |  | Gross         |        |                   |  |             |        |        |  |              |       | Gross       |  |   |        |  |  |   |        |  
|                               |  | Carrying      |        | Accumulated       |  |             |        |        |  | Carrying     |       | Accumulated |  |   |        | 
|                               |  | Amount        |        | Amortization      |  | Net Balance |        | Amount |  | Amortization |       | Net Balance
|                               |  |               |        |                   |  |             |        |        |  |              |       |            
|NexPrise purchased technology  |  | $             | 7,600  |                   |  | $           | (2,353 | )      |  | $            | 5,247 |             |  | $ | 7,600  |  |  | $ | (1,431 | ) |  | $ | 6,169 | 
|NexPrise in-process R&D        |  |               | 2,300  |                   |  |             | (2,300 | )      |  |              |      |             |  |   | 2,300  |  |  |   | (2,300 | ) |  |   |      | 
|NexPrise trade name            |  |               | 1,700  |                   |  |             | (1,628 | )      |  |              | 72    |             |  |   | 1,700  |  |  |   | (1,204 | ) |  |   | 496   | 
|NexPrise non-compete agreement |  |               | 500    |                   |  |             | (320   | )      |  |              | 180   |             |  |   | 500    |  |  |   | (236   | ) |  |   | 264   | 
|                               |  |               |        |                   |  |             |        |        |  |              |       |             |  |   |        |  |  |   |        |   |  |   |       | 
|Total NexPrise intangibles     |  |               | 12,100 |                   |  |             | (6,601 | )      |  |              | 5,499 |             |  |   | 12,100 |  |  |   | (5,171 | ) |  |   | 6,929 | 
|InfoPrise purchased technology |  |               | 2,234  |                   |  |             | (73    | )      |  |              | 2,161 |             |  |   | 2,234  |  |  |   | (13    | ) |  |   | 2,221 | 
|InfoPrise in-process R&D       |  |               | 399    |                   |  |             | (399   | )      |  |              |      |             |  |   | 399    |  |  |   | (399   | ) |  |   |      | 
|                               |  |               |        |                   |  |             |        |        |  |              |       |             |  |   |        |  |  |   |        |   |  |   |       | 
|Total InfoPrise intangibles    |  |               | 2,633  |                   |  |             | (472   | )      |  |              | 2,161 |             |  |   | 2,633  |  |  |   | (412   | ) |  |   | 2,221 | 
|                               |  |               |        |                   |  |             |        |        |  |              |       |             |  |   |        |  |  |   |        |   |  |   |       | 
|Total intangible assets        |  | $             | 14,733 |                   |  | $           | (7,073 | )      |  | $            | 7,660 |             |  | $ | 14,733 |  |  | $ | (5,583 | ) |  | $ | 9,150 | 
|                               |  |               |        |                   |  |             |        |        |  |              |       |             |  |   |        |  |  |   |        |   |  |   |       | 

NexPrise will continue to amortize the intangible asset balance of
approximately $7.7 million over the remaining useful lives of the intangible
assets. NexPrise purchased technology is amortized based on forecasted revenue
over 5 years. InfoPrise purchased technology is amortized based on forecasted
revenue over 3 years. The NexPrise and InfoPrise purchased technology assets
will be fully amortized in the three months ended December 31, 2005 under the
current amortization schedule. The NexPrise trade name and non-compete
intangible assets are amortized using a straight line method over 2 and 3 year
periods, respectively. The trade name asset will be fully amortized in the
three months ended September 30, 2003 under the current amortization schedule.
The non-compete asset will be fully amortized in the three months ended
September 30, 2004 under the current amortization schedule. The amortization
of purchased intangible assets was approximately $745,000 and $1.5 million in
the three and six months ended June 30, 2003 and $2.3 million in fiscal 2002,
which included $399,000 of in-process research and development. Estimated
intangible amortization expense for the years ended December 31, 2003 and 2004
are $2.6 million and $2.9 million, respectively.

Note 5. Business Combinations

In February 2002 NexPrise acquired privately held InfoPrise, Inc.
(InfoPrise), a provider of data management solutions located in Carlsbad,
California. As consideration for the acquisition, which was accounted for
using the purchase method, NexPrise agreed to issue unsecured convertible
promissory notes with a face value of $3,040,000 due 2007. The notes bear
interest at a rate of 6% and are convertible into the Companys common stock at
$18.75 per share. The Company also issued 139,790 shares of NexPrise common
stock and assumed InfoPrises outstanding stock options, which may result in
the issuance of up to approximately 64,666 shares of NexPrise common stock. An
independent valuation study was commissioned to value the intangible assets
associated with the InfoPrise purchase and facilitate the purchase accounting.

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The following table summarizes the forms of consideration and their fair
values (in thousands):

|                                          |  |   |       | 
|----------------------------------------- |  | - | ----- | 
|Convertible promissory note               |  | $ | 3,040 | 
|Restricted stock (92,565 shares)          |  |   | 361   | 
|Employee stock options assumed            |  |   | 117   | 
|Liabilities assumed and transaction costs |  |   | 125   | 
|                                          |  |   |       | 
|Total purchase consideration              |  | $ | 3,643 | 
|                                          |  |   |       | 

A summary of the InfoPrise purchase transaction is shown below (in
thousands):

|                                    |  |   |       | 
|----------------------------------- |  | - | ----- | 
|Tangible assets                     |  | $ | 1,010 | 
|Developed technology                |  |   | 2,234 | 
|In process research and development |  |   | 399   | 
|                                    |  |   |       | 
|                                    |  | $ | 3,643 | 
|                                    |  |   |       | 

The following unaudited pro forma information shows the results of
operations of the Company for the six months ended June 30, 2002 as if the
business combinations with NexPrise and InfoPrise had occurred at the beginning
of the period. In process research and development charges of $399,000 are
included for the six months ended June 30, 2002. This data is not indicative
of the results of operations that would have arisen if the business
combinations had occurred at the beginning of the respective periods and is not
intended to be indicative of future results of operations (in thousands except
per share data).

|                           |  |                  |         |  
|-------------------------- |  | ---------------- | ------- | -
|                           |  | Six months ended
|                           |  | June 30, 2002   
|                           |  |                 
|Revenue                    |  | $                | 1,327   |  
|Net loss                   |  | $                | (12,908 | )
|Per Share:                 |  |                  |         |  
|Basic and diluted net loss |  | $                | (4.08   | )

Note 6. Balance Sheet Details

Other Current Assets

Other current assets of $331,000 and $841,000 as of June 30, 2003 and
December 31, 2002, respectively, are comprised primarily of prepaid royalties,
current deposits and other receivables.

Other Long-term Assets

Other long-term assets are comprised of the following (in thousands):

|                                                                                            |                              |   |          |       |              |   |     |       | 
|------------------------------------------------------------------------------------------- | ---------------------------- | - | -------- | ----- | ------------ | - | --- | ----- | 
|                                                                                            |                              |   | June 30, |       | December 31,
|                                                                                            |                              |   | 2003     |       | 2002        
|                                                                                            |                              |   |          |       |             
|Deposits and other                                                                          |                              | $ | 382      |       |              | $ | 323 |      
|Deferred debt offering costs, net of accumulated
amortization of $485 and $461 respectively |                              |   | 130      |       |              |   | 154 |      
|Employee notes receivable and accrued interest                                              |                              |   | 80       |       |              |   | 78  |      
|Long-term investments, cost method                                                          |                              |   | 500      |       |              |   | 613 |      
|                                                                                            |                              |   |          |       |              |   |     |      
|                                                                                            | Total other long-term assets |   | $        | 1,092 |              |   | $   | 1,168 | 
|                                                                                            |                              |   |          |       |              |   |     |      

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Note 7. Equity Investments

The following table outlines the Companys equity investments in its
marketplace companies as of June 30, 2002 and 2003 (in thousands, except
percentage data):

|                        |  |          |       |             |  |             |       |                |  |            |     |  |  |  |    |  
|----------------------- |  | -------- | ----- | ----------- |  | ----------- | ----- | -------------- |  | ---------- | --- |  |  |  | -- | -
|                        |  | Carrying |       |             |  |             |       |                |  |            |     |  |  | 
|                        |  | Value at |       |             |  |             |       | Carrying Value |  | Percentage
|                        |  | December |       | Equity Loss |  | at June 30, |       | Ownership at  
|Activity in 2002        |  | 31, 2001 |       | of Investee |  | 2002        |       | June 30, 2002 
|                        |  |          |       |             |  |             |       |               
|Amphire                 |  | $        | 412   |             |  | $           | 382   |                |  | $          | 30  |  |  |  | 33 | %
|Ketera (fka MarketMile) |  |          | 2,621 |             |  |             | 1,911 |                |  |            | 710 |  |  |  | 23 | %

|                        |  |                  |   |                   |  |            |     |  
|----------------------- |  | ---------------- | - | ----------------- |  | ---------- | --- | -
|                        |  |                  |   |                   |  | Percentage
|                        |  | Carrying Value   |   | Ownership at June
|                        |  | at June 30, 2003 |   | 30, 2003         
|                        |  |                  |   |                  
|Amphire                 |  | $                | 0 |                   |  |            | 0   | %
|Ketera (fka MarketMile) |  |                  | 0 |                   |  |            | 0.5 | %

In March 2003, Ketera (fka MarketMile) secured an additional round of
funding that NexPrise did not participate in. As a result, NexPrises
ownership percentage of Ketera has decreased to 0.5%.

The investment loss in the three months ended June 30, 2003, reflects a
write-down of approximately $113,000 for impairment deemed to be other than
temporary of an investment accounted for using the cost method. The investment
losses of approximately $1.1 million and $2.5 million in the three and six
months ended June 30, 2002, respectively, consist of equity losses in the
marketplace companies in which we had a significant ownership percentage and
approximately $186,000 of write-downs taken in the three months ended March 31,
2002, for impairment deemed to be other than temporary of an investment
accounted for using the cost method.

Note 8. Convertible Notes

In February 2002 NexPrise issued unsecured, convertible promissory notes
due in 2007 with a face value of $3,040,000, a common stock conversion price of
$18.75 and interest rate of 6% in connection with the acquisition of InfoPrise.
As of June 30, 2003, no amount of the notes had been converted into NexPrise
common stock. In April 2000, NexPrise issued $250 million of convertible
subordinated notes due in 2007, bearing annual interest at 6% and convertible
at the option of the holder into the Companys common stock at a price of
$1,361.70 per share. The Company subsequently repurchased $241.2 million of
these notes during 2001. Approximately $8.8 million of the convertible
subordinated notes remained outstanding as of June 30, 2003 and December 31,
2002.

Note 9. Contingencies

In 2001, several class action lawsuits, including one derivative suit,
were filed and served on the Company alleging that the Company and certain
individuals made false and misleading statements concerning our business model
and earnings for fiscal 2000. The Company is also a defendant in the initial
public offering class action suits filed against issuers and the investment
banks alleging that the offering documents were false and misleading. Although
we believe that we have meritorious defenses to the actions and intend to
defend the suits vigorously, we cannot predict with certainty the outcome of
these lawsuits. Our defense against such lawsuits will be costly and will
require a significant commitment of time and resources by our senior
management. Although the Company has insurance to cover these claims, the
recovery of all future costs is not assured. The Company has also been served
with a stockholder derivative action but is named solely as a nominal defendant
against whom no recovery is sought.

A subtenant has attempted to renegotiate its sublease agreement with us.
We have drawn upon the subtenants security deposit to cover our expenses to
date. If we are unable to successfully resolve this situation our sublease
income may not be enough to pay what we may be liable for in ongoing lease
payments. The Company has accrued for expected additional costs as a result of
the potential loss of this sublease income.

The Company is a party to various claims in the ordinary course of
business. Although the results of litigation and claims cannot be predicted
with certainty, the Company believes the final outcome of such matters will not
have a material adverse effect on the Companys financial position, results of
operations or cash flows.

Discontinued Marketplace Companies Formerly Known as Promedix and Chemdex

11



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Contracts with Promedix and Chemdex customers and suppliers contained, in
some cases, cancellation notification periods longer than the Company provided.
In some cases, shorter notification periods caused inconvenience to customers
and suppliers, and the Company has been notified by several suppliers that
discontinuing the marketplace represents a breach of Promedix contractual
obligations. Additionally, two customers of Chemdex have informed the Company
that they did not receive notice of the termination of their contracts within
the contractually required time period. However, as of June 30, 2003, no
customer or supplier of Promedix or Chemdex had filed a formal complaint with
the Company.

Government Regulations

In addition to regulations applicable to businesses generally, the Company
is or may be subject to direct regulation by governmental agencies which
includes numerous laws and regulations generally applicable to the chemical,
pharmaceutical, controlled substances, human and biological reagents, medical
and in vitro devices, nuclear chemical businesses and environmental spills, as
well as U.S. import and export controls and import controls of other countries.
While the shutdown of Chemdex, Promedix and SpecialtyMD may limit future
regulatory and product liability risks, until all statutes of limitation have
expired, certain legal risks will remain.

The Company relied on its suppliers to comply with applicable local, state
and federal laws regarding the labeling and the dissemination of information on
any products sold that may be hazardous or present a health threat to the user.
If these suppliers have failed, or we have failed, to maintain the requisite
records irrespective of the actions of the suppliers, or if either of us had
failed to adequately comply with labeling and information dispensing
requirements of local, state or federal laws, then the Company may be held
legally responsible, since Company held title to these products, and could be
subject to governmental penalties or fines, as well as private lawsuits to
enforce these laws.

Finally, the Company has relied upon its suppliers to obtain appropriate
approvals for products regulated by the FDA and to comply with the requirements
relating to those approvals and products. The failure of suppliers to obtain or
comply with those approvals, or the failure of the product advertising or
labeling to be consistent with the FDA approval for the products, or other
failures by the products themselves, or our failure to keep regulatory records
required by the FDA, such as complaint files, could result in costly product
recalls, significant fines and judgments, civil and criminal liabilities and
negative publicity.

In February 2001, the Company received a subpoena from the U.S. Department
of Justice, Drug Enforcement Administration, for certain billing, invoice, and
shipping records concerning sales to an unaffiliated purchaser. Other than the
foregoing, the Company is unaware of any current investigations, inquiries,
citations, fines or allegations of violations or non-compliance relating to
regulatory requirements pending by government agencies or by third parties
against us. It is possible, however, that there may be such investigations or
allegations that the Company is not aware of or future investigations or
allegations. The risk that any noncompliance may be discovered in the future is
currently unknown. Although any potential impact on the Company for
noncompliance cannot currently be established, it could result in significant
civil or criminal penalties, including monetary fines and injunctions, for
noncompliance and negative publicity, and seriously harm our business,
revenues, results of operations and financial condition.

Indemnification

The Company sells software licenses and services to its customers under
contracts which the Company refers to as Software License and Service
Agreements (each an SLSA). Each SLSA contains the relevant terms of the
contractual arrangement with the customer, and generally includes certain
provisions for indemnifying the customer against losses, expenses, and
liabilities from damages that may be incurred by or awarded against the
customer in the event the Companys software or services are found to infringe
upon a patent, copyright, trade secret, trademark, or other proprietary right
of a third party. The SLSA generally limits the scope of remedies for such
indemnification obligations in a variety of industry-standard respects,
including but not limited to certain product usage limitations and
geography-based scope limitations and a right to replace an infringing product
or modify it to make it non-infringing. If the Company cannot address the
infringement by replacing the product or services, or modifying the product or
services, the Company is allowed to cancel the license or services and return
the fees paid by the customer. The Company requires its employees to sign a
proprietary information and inventions assignment agreement, which assigns the
rights in its employees development work to the Company.

To date, the Company has not had to reimburse any of its customers for any
losses related to these indemnification provisions and no material claims are
outstanding as of June 30, 2003. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for
certain infringement cases under the SLSA, the Company cannot determine the
maximum amount of potential future payments, if any, related to such
indemnification provisions. There can be no assurance that potential future
payments will not have a material adverse effect on the Companys business,
results of operations or financial condition.

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Note 10. Accrued Expenses

Accrued expenses were comprised of the following as of June 30, 2003 and
December 31, 2002 (in thousands):

|                            |  |      |       |      |  |   |       | 
|--------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                            |  | 2003 |       | 2002
|                            |  |      |       |     
|Accrued marketing expenses  |  | $    | 16    |      |  | $ | 16    | 
|Accrued consulting expenses |  |      | 83    |      |  |   | 93    | 
|Accrued interest payable    |  |      | 315   |      |  |   | 296   | 
|Accrued professional fees   |  |      | 202   |      |  |   | 253   | 
|Accrued restructuring costs |  |      |      |      |  |   | 505   | 
|Other accrued liabilities   |  |      | 672   |      |  |   | 1,211 | 
|                            |  |      |       |      |  |   |       | 
|                            |  | $    | 1,288 |      |  | $ | 2,374 | 
|                            |  |      |       |      |  |   |       | 

Note 11. Deferred Stock-Based Compensation

In connection with the acquisition of InfoPrise completed in February
2002, the Company assumed the outstanding options granted under the InfoPrise
stock option plans. The Company recorded deferred compensation of $132,293 for
the difference between the exercise price of the unvested options assumed and
the fair value of the common stock underlying those options as of the date the
acquisition was consummated. That charge is being amortized over the remaining
vesting period of the options. Additionally, the Company recorded deferred
compensation of $184,178 with respect to the issuance of restricted common
stock. That charge is being amortized over the remaining vesting period of the
stock.

The Company recognized $169,000 and $187,000 in stock compensation expense
for the six months ended June 30, 2003 and 2002, respectively.

Note 12. Settlement, Restructuring and Discontinued Operations

During the year ended December 31, 2001, the Company took actions to
improve efficiencies and reduce operating costs, including employee and
contractor terminations, consolidation of facilities, settlements of various
disputes and termination of leases. The net of these charges was reported as a
component of loss from continuing operations.

The Company paid approximately $12,000 in severance payments during the
quarter ended March 31, 2003. In the quarter ending June 30, 2003, the Company
reversed an accrual related to the Companys cancellation of a contract as part
of a restructuring in 2001. The reversal was made in accordance with Company
policy, as two years have passed since the related activity ceased and no
actual charges have been, or are now expected to be, paid. At June 30, 2003,
and December 31, 2002, the Company had restructuring accruals and reserves of
$0 and $505,000, respectively. An analysis of activity is as follows (in
thousands):

|                              |  |   |      |  
|----------------------------- |  | - | ---- | -
|Accruals at December 31, 2002 |  | $ | 505  |  
|Activity                      |  |   | (12  | )
|                              |  |   |      |  
|Accruals at March 31, 2003    |  | $ | 493  |  
|                              |  |   |      |  
|Activity                      |  |   | (493 | )
|                              |  |   |      |  
|Accruals at June 30, 2003     |  | $ |     |  
|                              |  |   |      |  

During the three months ended June 30, 2003 the Company reversed an
accrual of $334,000 related to an estimated liability accrued upon the
Companys cancellation of a contract that had been part of operations
discontinued in 2000 and which ceased functioning in 2001. The reversal was
made in accordance with Company policy, as two years have passed since the
related activities ceased and no actual charges have, or are now expected to
be, paid.

Note 13. Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds SFAS 4 and SFAS 64 related to classification of gains and
losses on debt extinguishment such that most debt extinguishment gains and
losses will no longer be classified as extraordinary. FASB 145 also

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amends SFAS 13 with respect to sale-leaseback transactions. We adopted
SFAS 145 on January 1, 2003 and have reported a gain on the extinguishment of
debt in the three months ended June 30, 2003 as other income in the results of
operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses significant
issues relating to the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities, and nullifies the guidance in Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).SFAS 146 requires that the initial liability for costs
associated with exit and disposal activities be measured at fair value and
prohibits the recognition of a liability based solely on an entitys commitment
to a plan. The provisions of SFAS 146 are effective for exit and disposal
activities initiated after December 31, 2002. Retroactive application of SFAS
146 is prohibited and, accordingly, liabilities recognized prior to the initial
application of SFAS 146 should continue to be accounted for in accordance with
EITF 94-3 or other applicable pre-existing guidance. The Company does not
believe that the adoption of SFAS 146 will have a material impact on its
financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45). FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a rollforward of the entitys product warranty
liabilities. NexPrise will apply the recognition provisions of FIN 45
prospectively to guarantees issued after December 31, 2002. The disclosure
provisions of FIN 45 were effective for financial statements beginning with the
first quarter of calendar year 2003. The Company does not believe that the
adoption of FIN 45 will have a material impact on the consolidated financial
position and results of operations.

In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables.EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. NexPrise is currently evaluating the
effect that the adoption of EITF Issue No. 00-21 will have on its results of
operations and financial condition.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities that
possess certain characteristics. FIN 46 requires that if a business enterprise
has a controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. The Company does not have any ownership in
any variable interest entities as of June 30, 2003. The Company will apply the
consolidation requirements of FIN 46 in future periods should interest in a
variable interest entity be acquired.

In April 2003, the FASB issued SFAS 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. The statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contacts and for
hedging activities. This statement amends Statement 133 for decisions made as
part of the Derivatives Implementation Group process that effectively required
amendments to Statement 133, in connection with other Board projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative. The adoption
of this Statement is not expected to have a significant impact on the Companys
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities. Previously, many of those financial
instruments were classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not believe that the adoption of SFAS 150 will have a
material impact on the Companys consolidated financial statements.

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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

The following Managements Discussion and Analysis of Results of
Operations and Financial Condition contains forward-looking statements. In some
cases, readers can identify forward-looking statements by terminology such as
may, will, should, could, expects, plans, anticipates,
believes, estimates, predicts, potential, or continue. These
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from those stated herein. Although management of NexPrise believes
that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, performance, or
achievements. For further information, refer to Managements Discussion and
Analysis and the Risk Factors section of NexPrises Annual Report on Form 10-K
and the section entitled Risk Factors in this Form 10-Q.

Overview

We are a seller of business process applications and collaborative
solutions for program management and quote management. Our revenue primarily
consists of subscriptions of bundled licenses, post contract support and, in
most cases, hosting services and also includes perpetual licenses.

In 2001, we significantly restructured our operations and focused on a new
business direction. We exited the business of building and servicing
business-to-business marketplaces and entered the business of providing
collaborative and business process automation software solutions. In August
2001, while doing business under the name Ventro Corporation, we acquired
privately-held NexPrise, Inc., a company with an advanced collaborative
software solution and an established customer base located in Santa Clara,
California. Later in the year we reorganized our management team and Board of
Directors and took measures to reduce commitments and operating expenses and
conserve cash. In 2001, the Company incurred a net charge of $16.5 million in
connection with restructurings and settlements. In January 2002, we changed our
name to NexPrise, Inc.

On February 4, 2002, we acquired privately-held InfoPrise, a provider of
data management solutions located in Carlsbad, California. As consideration
for the acquisition, we issued to InfoPrises stockholders an aggregate of
139,790 shares of NexPrise common stock together with unsecured 6% promissory
notes convertible into the Companys common stock, due in 2007, with a face
value of $3,040,000 and a per share common stock conversion price of $18.75.
We also assumed InfoPrises outstanding stock options, which may result in the
issuance of up to approximately 64,000 shares of common stock if all of the
assumed options are exercised. As of June 30, 2003, 1,820 of these options had
been exercised. All operating results presented for periods following the above
date are derived from the combined operations of NexPrise and InfoPrise. We
expect to incur operating losses on a quarterly basis for at least the next 12
months as we continue to develop and enhance our technology and service
offerings and build our customer base.

Critical Accounting Policies

Use of Estimates.Managements discussion and analysis of its financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its
more significant estimates and assumptions used in the preparation of its
consolidated financial statements

Revenue Recognition.Revenue is made up primarily of subscriptions of
bundled term licenses, post contract support and, in most cases, hosting
services. The Company recognizes such revenue using the subscription method,
whereby the initial and renewal amounts are recognized ratably over the period
of the license during which the services are expected to be provided. In
instances where maintenance is bundled with license of software products, such
maintenance terms are typically one year. Revenue for training or consulting
services that are not bundled with a subscription is recognized based on
achievement of billable milestones as written in the contract or upon contract
completion and currently makes up less than 10% of overall revenue. Perpetual
license revenue is recognized using the residual method described in Statement
of Position (SOP) No. 98-9 for arrangements in which licenses are sold with
multiple elements. We allocate revenues on these licenses based upon the fair
value of each undelivered element (for example, undelivered maintenance and
support, training and consulting). The determination of fair value is based
upon vendor specific objective evidence (VSOE). VSOE of the fair value of
maintenance for license agreements with and without stated renewal rates is
15Table of Contents

based on the Companys price list. VSOE of the fair value of maintenance
for license agreements that do not include stated renewal rates is determined
by reference to the price paid by the Companys customers when maintenance is
sold separately. Past history has shown that the rate the Company charges for
maintenance on license agreements with a stated renewal rate is similar to the
rate the Company charges for maintenance on license agreements without a stated
renewal rate. VSOE for training or consulting is based upon separate sales of
these services. When software services are considered essential or the
arrangement involves significant customization or modification of the software,
both the net license and service revenues under the arrangement are recognized
under the percentage of completion method of contract accounting, based on
input measures of hours, or upon completion of services. Assuming all other
revenue recognition criteria are met, the difference between the total
arrangement fee and the amount deferred for each undelivered element is
recognized as license revenue. Our perpetual arrangements may include initial
maintenance extending over a period of time with no renewal rate, which
requires perpetual license revenue to be taken ratably over the contract
period.

Until VSOE was established for maintenance in the three months ended June
30, 2003, perpetual license revenue was taken ratably over the term of the
maintenance period. In the three months ended June 30, 2003, we established
VSOE for maintenance. Approximately 13% of the reported revenue for that
period is made up of perpetual licenses recognized upon delivery of the
software. Our revenue recognition policy is in accordance with Statement of
Position No. 97-2 (SOP 97-2), Software Revenue Recognition,as amended, and
Staff Accounting Bulletin 101. For all arrangements, we determine whether
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection is probable. If any of these criteria are not met,
revenue recognition is deferred until such time as all of the criteria are met.

Consolidations. The various interests that we have acquired in companies
are accounted for under three broad methods: consolidation, the equity method
and the cost method. The applicable accounting method is generally determined
based on our voting interest in a company.

Companies that NexPrise directly or indirectly controls are accounted for
under the consolidation method of accounting. Under this method, a companys
accounts are reflected within NexPrises Consolidated Financial Statements. All
significant inter-company accounts and transactions are eliminated.

Entities where NexPrise can exercise significant influence, but not
control, are accounted for under the equity method of accounting. Whether or
not NexPrise exercises significant influence with respect to a company depends
on an evaluation of several factors including, among others, representation on
the companys board of directors and ownership level, generally 20% to 50%
interest in the voting securities of the company including voting rights
associated with NexPrise holdings in common, preferred and other convertible
instruments in the company. Under the equity method of accounting, our share of
the earnings or losses of these companies are included in the equity income
(loss) section of our Consolidated Statements of Operations.

Companies not consolidated or accounted for under the equity method are
accounted for under the cost method of accounting. Under this method,
NexPrises share of the earnings or losses of these companies is not included
in its Consolidated Statements of Operations. The Company periodically
evaluates the carrying value of its investments for impairment.

The fair value of the remaining long-term investment is dependent on the
performance of the entity in which the Company has invested, as well as
volatility inherent in the external markets for this investment. In assessing
potential impairment for this investment the Company considers these factors as
well as forecasted financial performance of its investee. If these forecasts
are not met the Company may have to record additional impairment charges not
previously recognized.

Long Lived Assets. The Company reviews property, plant and equipment,
goodwill and purchased intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable. Our asset impairment review assesses the fair value of the
assets based on the future cash flows the assets are expected to generate. An
impairment loss is recognized when estimated undiscounted future cash flows
expected to result from the use of the asset, plus net proceeds expected from
disposition of the asset (if any) are less than the carrying value of the
asset. This approach uses our estimates of future market growth, forecasted
revenue and costs, expected periods the assets will be utilized and appropriate
discount rates. When an impairment is identified, the carrying amount of the
asset is reduced to its estimated fair value. During 2003 we will continue to
evaluate our intangible assets for impairment as events and circumstances
warrant. Among other circumstances, a material deterioration in the future
cash flows expected from these assets due to lower than planned revenue or a
decline in the Companys market capitalization could be indicators of
impairment and lead to write-offs.

Legal.The Company is involved in certain claims and litigation related
to its operations, including ordinary, routine litigation incidental to its
business. Management reviews and determines which liabilities, if any, arising
from these claims and litigation could have a material adverse effect on the
Companys consolidated financial position, liquidity, results of operations or
properties. In reviewing these claims and litigation, management assesses the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of accruals
required, if any, for these contingencies is
16Table of Contentsmade after analysis of each matter, which includes discussion with counsel
retained in such matter. The required accruals may change in the future due to
new developments in a matter or changes in strategies to resolve that matter,
including changes in litigation defense and settlement strategies. If a change
in circumstances resulted in a materially adverse outcome or judgment against
NexPrise, NexPrise could be required to expend cash intended to fund operations
in defense of the Company and might then have an insufficient amount of cash to
meet other obligations.Results of OperationsRevenues.NexPrise reported $1,002,000 and $1,723,000 of revenue for the
three and six months ended June 30, 2003, an increase of 53% over the $653,000
reported for the three months ended June 30, 2002 and 30% over the $1,327,000
reported for the six months ended June 30, 2002. The increase was driven by
products and services sold to new customers as well as increased capacity sold
to existing customers. The revenue is made up primarily of bundled
subscriptions and maintenance and licenses for the Companys collaborative
commerce and business process automation solutions generated subsequent to our
August 8, 2001 acquisition of privately-held NexPrise, Inc. and our February
2002 acquisition of privately-held InfoPrise, Inc. Approximately 79% of the
revenue recognized for the three months ended June 30, 2003 consisted of
revenue being recognized ratably over the contract term and is made up of
bundled subscriptions and perpetual licenses, with maintenance, sold prior to
the establishment of VSOE for maintenance. Approximately 13% of the revenue
recognized for the three months ended June 30, 2003 consisted of perpetual
license revenue recognized when the software was delivered and not ratably over
the contract. Approximately 8% of the revenue recognized for the three months
ended June 30, 2003 consisted of consulting and training. Revenue for the
three and six months ended June 30, 2002 was substantially all bundled
subscriptions to term licenses with maintenance and, in most cases, included hosting.Cost of Product Licenses and Services.The cost of product licenses and
services was $305,000 and $586,000 in the three and six months ended June 30,
2003, a decrease of 28% and 21% from the $424,000 reported in the three months
ended June 30, 2002 and $741,000 reported in the six months ended June 30,
2002. These costs consisted primarily of outsourced hosting services for our
customers, personnel and other expenses associated with providing maintenance
and technical support services and royalties payable to third parties whose
software is incorporated in the NexPrise solution. The decrease was primarily
due to lower hosting, maintenance and technical support services expenses
realized when the Company rationalized its hosting environment in the second
half of 2002.Cost of Amortization of Purchased Technology.Amortization of the
developed technology intangible assets acquired in the purchases of NexPrise in
August 2001 and InfoPrise in February 2002 was $491,000 and $982,000 in the
three and six months ended June 30, 2003, an increase of 122% for each period.
These assets are being amortized based on forecast revenue and will be fully
amortized in 2005.Research and Development.Research and development (R&D) expenses
consist primarily of personnel and other expenses associated with developing,
updating, and enhancing software. R&D expenses were approximately $556,000 and
$1.4 million during the three and six months ended June 30, 2003, a decrease of
64% from the $1.6 million reported for the three months ended June 30, 2002,
and 59% from the $3.4 million reported for the six months ended June 30, 2002.
The decrease resulted from a $191,000 reversal of an estimated liability
originally accrued in 2001 and reductions in workforce. The accrual reversal
was made on the basis that, consistent with Company policy, two years had
passed since that estimated liability had been accrued and no actual charges
related to that liability had been, or are now expected to be, paid. To date,
all software development costs have been expensed in the period incurred. We
believe that continued investments in research and development are required to
remain competitive.In Process Research and Development.The Company expensed $399,000 of
acquired in-process research and development for the six months ended June 30,
2002. No such expenses were incurred during any of the other reported periods.
The in-process research and development was acquired as a result of the
purchase of InfoPrise in February 2002. The Company determined the amount of
in process research and development through an independent valuation performed
in connection with the allocation of the InfoPrise purchase price.Sales and Marketing.Sales and marketing expenses consist primarily of
payroll and related expenses for personnel engaged in enterprise sales
activities and enterprise account management, as well as travel and promotional
expenses. Sales and marketing expenses were approximately $954,000 and $1.9
million during the three and six months ended June 30, 2003, a decrease of 40%
from the $1.6 million reported for the three months ended June 30, 2002 and 41%
from the $3.3 million reported for the six months ended June 30, 2002. The
decrease was driven by reductions in workforce and reduced spending on
marketing programs. The Company expects sales and marketing expenses in future
quarters to increase as investments are made in the personnel and programs
needed to acquire new customers.General and Administrative.General and administrative expenses consist
primarily of salaries, fees for professional services and facilities expenses.
General and administrative expenses were approximately $917,000 and $1.6
million for the three and six months17Table of Contentsended June 30, 2003, a decrease of 37% from the $1.5 million reported for
the three months ended June 30, 2002 and of 49% from the $3.2 million reported
for the six months ended June 30, 2002. The decrease was driven by reductions
in infrastructure costs and reductions in workforce.Restructuring & Settlement.In the three months ended June 30, 2003, the
Company reversed a restructuring and settlement accrual related to the
Companys cancellation of a contract as part of a restructuring in 2001. The
reversal was made in accordance with Company policy, as two years have passed
since the related activity ceased and no actual charges have been, or are now
expected to be, paid. The reversal resulted in a credit of $493,000 being
reported on the restructuring line of the statement of operations.Interest Expense.Interest expense was $189,000 and $378,000 in the three
and six months ended June 30, 2003, a decrease of 1.6% from the $192,000
reported for the three months ended June 30, 2002 and an increase of 2% from
the $369,000 reported in the six months ended June 30, 2002. Interest expense
consists primarily of interest related to convertible subordinated notes issued
in April 2000, the convertible promissory note issued in association with the
purchase of InfoPrise in February 2002 and, to a lesser extent, financed
equipment and other financing arrangements. With respect to the subordinated
notes, approximately $265,000 is payable semi-annually in arrears on April 1
and October 1 of each year for interest on the notes that remain outstanding at
June 30, 2003. In addition, the remaining deferred offering costs of
approximately $175,000 related to the subordinated notes are being amortized as
interest expense ratably over the term of the subordinated notes. With respect
to the InfoPrise convertible promissory note, approximately $73,000 is payable
annually on each anniversary of the issuance of the promissory note, with the
balance of interest owed due at maturity. See Note 8 for further details on
the outstanding notes.Interest Income and Other, Net.Interest income and other, net, was
$128,000 and $161,000 in the three and six months ended June 30, 2003, an
increase of $54,000 from the $74,000 reported for the three months ended June
30, 2002 and of $67,000 from the $94,000 reported for the six months ended June
30, 2002. Interest income and other, net, has been derived primarily from
earnings on investments in cash equivalents and short-term investments. The
increase in the three months ended June 30, 2003 is due to the reversal of
estimated taxes associated with the gain from retirement of bonds in 2001. All
tax returns have been filed and no liability was incurred. The increase in the
six months ended June 30, 2003 is due to the aforementioned reversal and the
fact that a $72,000 foreign exchange loss was incurred in 2002 that was not
incurred in 2003.Investment Losses.Investment loss for the three and six months ended June
30, 2003 was $113,000, a 90% decrease from the $1.1 million reported for the
three months ended June 30, 2002 and 95% decrease from the $2.5 million
reported for the six months ended June 30, 2002. The 2003 loss is a write-down
for impairment deemed to be other than temporary of an investment accounted for
using the cost method. The investment loss of $1.1 million reported in the
three months ended June 30, 2002 reflects equity losses in the marketplace
companies in which we had a significant ownership percentage. The investment
loss of $2.5 million reported for the six months ended June 30, 2002 reflects
equity losses of $2.3 in the marketplace companies in which we had a
significant ownership percentage in and a $186,000 write-down for impairment
deemed to be other than temporary of an investment accounted for using the cost
method. The book value of the remaining investment was approximately $500,000
as of June 30, 2003. The remaining investment is accounted for using the cost
method.Loss from continuing operations.As a result of the changes described
above, the net loss from continuing operations was approximately $1.6 million
and $4.2 million for the three and six months ended June 30, 2003, a decrease
of 73.2% from the $6.0 million net loss reported for the three months ended
June 30, 2002 and of 67% from the $12.8 million reported for the six months
ended June 30, 2002.Gain from discontinued operations.In the quarter ended June 30, 2003,
the Company reversed an accrual of $334,000 related to an estimated liability
accrued upon the Companys cancellation of a contract that had been part of
operations discontinued in 2000 and which ceased functioning in 2001. The
reversal was made in accordance with Company policy, as two years have passed
since the related activities ceased and no actual charges have, or are now
expected to be, paid.Liquidity and Capital ResourcesAs of June 30, 2003 NexPrise had approximately $8.3 million of cash, cash
equivalents, short-term investments and restricted cash; working capital was
approximately $5.8 million.Net cash used in operating activities was approximately $1.9 million for
the six months ended June 30, 2003 compared to $9.5 million of net cash used in
operating activities for the six months ended June 30, 2002. Net cash used in
operating activities for the six months ended June 30, 2003 is primarily
attributable to the net loss for the period less non-cash expenses. Non-cash
items primarily consisted of depreciation and amortization of $1.7 million. The
cash flows used in operating activities were partially offset by decreases in
accounts receivable, prepaid expenses and other current assets.18Table of ContentsNet cash used in investing activities totaled $31,000 for the six months
ended June 30, 2003, compared to net cash used in investing activities of $2.5
million for the six months ended June 30, 2002. During the six months ended
June 30, 2002, the Company had net sales and maturities of approximately $4.0
million of short-term investments, received cash of approximately $1.0 million
as part of the acquisition of InfoPrise and a decrease in restricted cash of
$520,000.Net cash used in financing activities was $100,000 for the six months
ended June 30, 2002 and resulted primarily from the principal payments on our
capital lease obligations. This lease was paid in full as of June 30, 2002.Management believes the Company has adequate cash to sustain operations at
least through 2003 and is managing its business to achieve positive cash flow
utilizing existing assets. During 2002 the Company continued to reduce ongoing
operating expenses by renegotiating its lease commitments, reducing purchases
of other services and making workforce reductions. It is managements belief
that the adjustments to spending that have been made, combined with receipts
expected from customer contracts currently in place and new customer contracts
expected to be signed in 2003 and thereafter will provide the additional
resources required to achieve positive cash flow. We are committed to the
successful execution of our operating plan and will take further action as
necessary to align our operations and reduce expenses.Although we expect our existing cash, cash equivalent and investment
balances together with our anticipated cash flows from operations to be
sufficient to meet our working capital and operating resource expenditure
requirements for at least the next 12 months, higher than anticipated expenses
or lower than anticipated receipts may result in lower cash, cash equivalents
and investments balances than presently anticipated and we may find it
necessary to obtain additional equity or debt financing. In the event
additional financing is required, we may not be able to raise it on acceptable
terms or at all.Contractual ObligationsThe following table summarizes the companys contractual obligations and
commercial commitments as of June 30, 2003 (in thousands):

|                              |  |                        |        |         |  |           |     |           |  |               |     |  |  |   |        |  |  |   |   | 
|----------------------------- |  | ---------------------- | ------ | ------- |  | --------- | --- | --------- |  | ------------- | --- |  |  | - | ------ |  |  | - | - | 
|                              |  | Payments Due by Period
|                              |  |                       
|                              |  |                        |        |         |  | Remainder |     |           |  |               |     |  |  |   |        |  |  |  
|Contractual Obligations       |  | Total                  |        | of 2003 |  | 1-3 Years |     | 3-5 Years |  | After 5 Years
|                              |  |                        |        |         |  |           |     |           |  |              
|Long-term debt                |  | $                      | 11,843 |         |  | $         |    |           |  | $             |    |  |  | $ | 11,843 |  |  | $ |  | 
|Hosting agreement             |  |                        | 208    |         |  |           | 208 |           |  |               |    |  |  |   |       |  |  |   |  | 
|Operating leases (a)          |  |                        | 1,372  |         |  |           | 730 |           |  |               | 422 |  |  |   | 220    |  |  |   |  | 
|                              |  |                        |        |         |  |           |     |           |  |               |     |  |  |   |        |  |  |   |   | 
|Total contractual
obligations |  | $                      | 13,423 |         |  |           | 938 |           |  | $             | 422 |  |  | $ | 12,063 |  |  | $ |  | 
|                              |  |                        |        |         |  |           |     |           |  |               |     |  |  |   |        |  |  |   |   | 

(a)  Operating lease has not been offset by expected sublease income of
approximately $617,000

Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following cautionary statements and elsewhere
in this Quarterly Report on Form 10-Q. If any of the following risks were to
occur, our business, financial condition or results or operations would likely
suffer. In addition to other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating NexPrise and its business
because such factors currently may have significant impact on NexPrises
business, operating results and financial condition.

An investment in our securities involves significant risks, including
those described below. These risks relate to our ability to generate revenues
and gain operating efficiencies, our history of losses, significant changes,
our ability to hire and retain key personnel, our reliance on the hosted
environment and technology provided by others, the possible delisting of our
common stock, the need to respond to rapid technological change and legal
claims against us.

Our actual results may differ materially from those expressed in any
forward-looking statement as a result of certain factors, including but not
limited to those set forth below and included in other portions of this
document.

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We Have a Limited Operating History and an Evolving Technology and Service
Offering, Which Makes it Difficult to Evaluate Our Future Prospects

Our success is based on integrating and developing a viable technology and
services offering and securing new customers. Our business model is not fully
developed, not proven and depends upon our ability, among other things, to:



| |  |  | develop and market technology and services solutions that achieve broad market acceptance by our customers;                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | acquire and deploy a sufficient number of customers to achieve profitability;                                                    
|
| |  |  | extend our technology to support a large range of customers with a variety of needs;                                             
|
| |  |  | acquire or license third party technologies that we require to deliver our technology and services;                              
|
| |  |  | overcome publicity related to our public announcements of
restructurings, litigation and the shutdown of our former marketplaces;
|
| |  |  | overcome customer bias toward choosing larger, well capitalized
vendors to provide their enterprises software solutions; and     
|
| |  |  | acquire customers operating in industries where we have limited
experience and provide them quality technology and services.     

We may not successfully address these risks. If we do successfully address
these risks, additional risks related to factors that are outside our control
may prevent us from realizing sufficient revenues or profit margins to reach or
sustain profitability. For example, collaborative business process solutions
may experience problems with users as a result of security and privacy concerns
or general reticence about technology.

We Are Dependent on a Small Number of Customers in a Limited Number of
Industries

To date, we have derived a significant portion of our revenues from a
small number of customers in two industries. Many of our customers do not have
contracts that extend beyond one year. Critical to the success of the Companys
business plan will be the acquisition of new customers in other industries,
increasing the number of users in our current customers and renewing current
contracts. There can be no assurance that we will be successful in developing
profitable relationships with new customers in new industries or that we will
retain existing customers.

Our Business Involves a Lengthy and Unpredictable Sales Cycle

The sales cycle for the target customers for the software and services we
provide tends to be lengthy and our sales cycle may be somewhat longer than
those of our more established competitors. The unpredictability of the length
of our sales cycle could make it difficult to forecast revenue and plan
expenditures. Additionally, any delays in deployment of our software related to
our inexperience with a type of business or the size or complexity of the
account would delay our ability to recognize revenue from that account. Such
delays could adversely affect our financial results.

Legislative Actions, Higher Insurance Costs and Potential New Accounting
Pronouncements May Cause our General and Administrative Expenses to Increase
and Impact our Future Financial Position and Results of Operations

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as
well as proposed changes to listing standards by Nasdaq and proposed accounting
changes by the Securities and Exchange Commission, we may be required to hire
additional personnel and will utilize additional outside legal, accounting and
advisory services, all of which would cause our general and administrative
costs to increase beyond what we currently have planned. Insurers may also
increase premiums as a result of the high claims rates incurred in past years,
and so our premiums for our various insurance policies, including our
directors and officers insurance policies, may increase. Proposed changes to
accounting rules, including proposals to account for employee stock options as
a compensation expense, could, if mandated, materially increase the expenses we
report under generally accepted accounting principles and adversely affect our
operating results.

Security Risks and Concerns May Decrease the Demand for Our Services, and
Security Breaches May Disrupt Our Services or Make Them Inaccessible to Our
Customers.

Our services include the storage and transmission of business-critical,
proprietary information. If the security measures we or our third party data
centers have implemented are breached, our customers could lose this
information and we could be exposed to litigation and possible liability.
Anyone who circumvents these security measures could misappropriate
business-critical proprietary

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information or cause interruptions in our services or operations. In
addition, computer hackers could introduce computer viruses into our systems
or those of our customers, which could disrupt our services or make them
inaccessible to customers. We may be required to expend significant capital and
other resources to protect against the threat of security breaches or to
alleviate problems caused by breaches. Our security measures and those that our
third-party data centers provide may be inadequate to prevent security
breaches, and our business and reputation will suffer if these breaches occur.

Adopting a Business Model That Includes the Sale of Perpetual Licenses to our
Software Products May Not Result in Continued Immediate Recognition of License
Revenue

We expect to sell a greater proportion of perpetual software licenses and
fewer subscriptions to term licenses in coming quarters. When certain criteria
are met, including the establishment of vendor specific objective evidence
(VSOE) for the prices of the elements sold in an arrangement that includes
perpetual licenses, the sale of a perpetual software licenses can result in the
recognition of the revenue for the perpetual license in the period in which it
is delivered. If NexPrise is able to meet these criteria during 2003, revenue
for arrangements that include a perpetual license will be recognized sooner
than under a subscription method of accounting and, therefore, revenue growth
in the period in which the licenses are sold will be greater than it would have
been under the subscription method. There can be no assurance that NexPrise
will be able to maintain VSOE or meet all the other criteria required to
transition to a perpetual license model. If the criteria are not met the
revenue for the perpetual license portion of the arrangement will likely be
recognized over the term of the maintenance period and will not be recognized
upon delivery of the perpetual license. If that is the case, revenue growth
will not accelerate due to the inclusion of perpetual licenses in our sales
mix.

We May Not Be Able to Sustain VSOE and May Therefore be Forced to Restate
Quarterly Revenue and Operating Results

We established VSOE for maintenance in the second quarter of 2003 and
began recognizing perpetual license revenue upon delivery of the license. If
we are unable to continuously meet the criteria required to maintain VSOE
during the rest of 2003 we may be required to restate perpetual license revenue
in prior quarters as if VSOE had never been established. This restating of
perpetual license revenue from up front recognition to ratable recognition over
the maintenance period would have a material negative impact on our revenue and
operating profit and could expose the Company to stockholder litigation.

Our Products May Contain Defects That Could Harm Our Reputation, Be Costly to
Correct, Delay Revenue and Expose Us to Litigation

Despite testing by us, our partners and our customers, errors may be found
in our products after commencement of commercial delivery. Errors have arisen
in our software products from time to time, and they could arise again in the
future. If errors are discovered, we may not be able to successfully correct
them in a timely manner or at all. Errors and failures in our products could
result in loss of or delay in market acceptance of our products and damage to
our reputation and our ability to convince commercial users of the benefits of
our products. In addition, we may need to make significant expenditures of
capital resources in order to eliminate errors and failures. Since our products
are used by customers for mission-critical applications, errors, defects or
other performance problems could also result in financial or other damages to
our customers, which could assert warranty and other claims for substantial
damages against us. Although our license agreements with our customers
typically contain provisions designed to limit our exposure to potential
product liability claims, it is possible that such provisions may not be
effective or enforceable under the laws of certain jurisdictions. In addition,
our insurance policies may not adequately limit our exposure with respect to
such claims. A product liability claim, even if unsuccessful, would be costly
and time-consuming to defend and could harm our business.

We Anticipate Our Operating Results Will Fluctuate Significantly from
Quarter-to-Quarter

Important factors that could cause our quarterly results to fluctuate materially include:



| |  |  | the timing of obtaining new customers (length of sales cycle);                                                                                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of deploying services for new customers;                                                                                                     
|
| |  |  | the proportion of perpetual licenses sold in place of subscriptions;                                                                                    
|
| |  |  | the timing and magnitude of operating expenses and capital expenditures;                                                                                
|
| |  |  | costs related to the various third-party technologies we incorporate into our products;                                                                 
|
| |  |  | utilization of third party data center services and technology infrastructure;                                                                          
|
| |  |  | changes in our pricing policies or those of our competitors; and                                                                                        
|
| |  |  | the amount of credits that we may be required to issue to our current
customers if we fail to deliver our services pursuant to contractual
arrangements.

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Due to these and other factors, quarter-to-quarter comparisons of our
operating results may not be meaningful. You should not rely on our results for
any one quarter as an indication of our future performance. In future quarters,
our operating results may fall below the expectations of public market analysts
or investors. If this occurs, the market price of our common stock would likely
decline.

Our current and future levels of operating expenses and capital
expenditures are based largely on our operating plans and estimates of future
billings and revenues. These expenditure levels are, to a large extent, fixed
in the short term. We may not be able to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenue relative to planned expenditures could negatively impact our
business and results of operations.

Our Operating Results Are Highly Dependent on License and Service Revenues from
Our Software Suite and Our Business Could Be Materially Harmed by Factors That
Adversely Affect the Pricing and Demand for This Software Suite

Substantially all of our revenues to date have been derived from the sale
of licenses and services associated with the ipTeam solution. Our future
operating results will depend on continued demand for ipTeam and the recently
introduced nProcessPlatform. ipTeam was commercially launched in 1998. If our
competitors release new products that are superior to ipTeam or nProcess
Platform in performance or price, or if we fail to enhance ipTeam and nProcess
Platform in a timely manner, demand for our products may decline, and we may
have to reduce the pricing of our products. A decline in demand or pricing as a
result of these or other factors would significantly reduce the revenues we can
expect in the future.

In the past, many software companies have experienced delays in the
commencement of commercial release of their products. To date, such delays have
not had a material impact on NexPrises revenues. In the future, we may fail to
introduce or deliver new products on a timely basis. If new releases or
products are delayed or do not achieve market acceptance, we could experience
customer dissatisfaction or a delay or loss of revenues. In addition, customers
may delay purchases of our products in anticipation of future releases. If
customers defer material orders in anticipation of new releases or new product
introductions, our revenues may decline.

Moreover, as we release enhanced versions of our products, we may not be
successful in upgrading our customers who purchased previous versions of the
product to the current version. We also may not be successful in selling add-on
modules for our products to existing customers. Any failure to continue to
upgrade existing customers products or sell new modules, if and when they are
introduced, could negatively impact customer satisfaction and our revenues.

As with most software companies, developing and selling a product that
does not require significant customization in product features or sales process
for any particular customer or set of customers is critical to our success. If
we are unable to resist customer requests to individualize our product or
unable to develop a repeatable sales process our revenues will suffer and our
costs will increase.

The Company Has a History of Losses, No Significant Revenues and Expects to
Continue to Incur Significant Operating Losses and Negative Cash Flow; We May
Never Achieve or Maintain Profitability

We have incurred substantial net losses in the past and we expect to incur
net losses in future periods. We incurred a net loss of approximately $1.6
million during the three months ended June 30, 2003. As of June 30, 2003 we
had an accumulated deficit of approximately $629 million. We will need to
generate significant increases in revenues to achieve and maintain
profitability, and we may not be able to do so. If our revenues grow more
slowly than we anticipate or if our operating expenses cannot be reduced in the
event of lower than expected revenues, we may find it necessary to obtain
additional equity or debt financing or, in the alternative, significantly
curtail our operations. Such financing may not be available on acceptable
terms or at all. Even if we achieve profitability in the future on a quarterly
or annual basis, we may not be able to sustain or increase profitability.
Failure to achieve profitability or achieve and sustain the level of
profitability expected by investors and securities analysts may adversely
affect the market price of our common stock.

We Operate in a Highly Competitive Market and Our Inability to Compete
Successfully Against New Entrants and Established Companies Could Adversely
Affect Our Market Share

Our target market is rapidly evolving and is highly competitive. It may be
characterized by an increasing number of market entrants, as many companies may
find a technological path around existing barriers to entry.

We already have competition from a diverse group of companies, including
companies such as MatrixOne and PTC. In addition, providers of various software
products such as Oracle, IBM, PeopleSoft and SAP may expand their product
offerings to be competitive with us in the future.

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Our current and potential competitors may develop superior platforms that
achieve greater market acceptance than our solution. Many of our existing and
potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. Such competitors can undertake
more extensive marketing campaigns for their brands, products and services,
adopt more aggressive pricing policies and make more attractive offers to
customers, potential employees, distribution partners, commerce companies and
third-party suppliers.

In addition, substantially all of our prospective customers have
established and long-standing relationships with some of our current or
potential competitors. Accordingly, we cannot be certain that we will be able
to expand NexPrises customer and user base, or retain its current customers.
We may not be able to compete successfully against our current or future
competitors, which could have a material adverse effect on our business,
results of operations and financial condition.

We Are Dependent Upon Outsourcing Providers for Provision of the Hosted
Environment for our Customers; Connection and Performance Issues Have Occurred
and May Recur

We rely on third-party providers for our data center services, principal
Internet connections and data hosting. This hosted environment is critical to
the provision of our software to many of our customers and if the environment
does not work well, is cut-off or fails, our customers would be unable to use
our solution. We have experienced and may continue to experience interruptions
and delays in service and availability for such services. We have signed an
agreement with a new vendor to provide the hosted environment, but there can be
no assurance that the new provider will provide service to the full
satisfaction of our customers. Furthermore, we rely on these third party
providers to respond promptly to requests we make for changes to our hardware,
networking and telecommunications configuration in order to deliver our
products and services to our customers. Any failures, security breaches,
interruptions, or delays experienced or caused by these third party providers
could negatively impact our relationship with users and adversely affect our
brand and our business and could expose us to liabilities to third parties.

Our operations could be significantly hindered by the occurrence of a
natural disaster or other catastrophic event at our company or any third party
provider. Our and their operations are susceptible to outages due to fire,
floods, power loss, telecommunications failures, break-ins and similar events.
In addition, the majority of our and their network infrastructure is located in
California, an area susceptible to earthquakes. In the recent past, the western
United States (and California, in particular) has experienced repeated episodes
of diminished electrical power supply. As a result of these episodes, certain
of our and their operations or facilities may be subject to rolling blackouts
or other unscheduled interruptions of electrical power. The prospect of such
unscheduled interruptions may continue for the foreseeable future and we are
unable to predict their occurrence, duration or cessation. We do not have, and
our third party providers may not have, multiple site capacity for all of our
services in the event of any such occurrence. Despite implementation of network
security measures, the servers are vulnerable to computer viruses, physical and
electronic break-ins, and similar disruptions from unauthorized tampering with
our computer systems. In addition, systems are vulnerable to coordinated
attempts to overload them with data, which could result in denial or reduction
of service to some or all of our users for a period of time. Furthermore, the
failure by the third party providers to provide our required data
communications capacity could result in interruptions in our service.
Interruptions in our service will reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system
is unreliable or insecure. We have experienced system failures from time to
time. If we experience frequent or persistent system failures, our reputation
and brand could be permanently harmed. We do not carry sufficient business
interruption insurance to compensate us for losses that may occur as a result
of any of these events. Any such event could have a material adverse effect on
our business, operating results, and financial condition.

Our Financial Performance and Workforce Reductions May Adversely Affect the
Morale and Performance of Our Personnel and Our Ability to Hire New Personnel

In connection with the evolution of our business model and in order to
reduce our cash expenses, we have enacted a number of changes in personnel.
Over the past two years, this includes changes to virtually all executive
management, resignation of most of the original board of directors, significant
workforce reductions and transfers of several employees. The significant
changes in personnel may adversely affect morale and the Companys ability to
attract and retain key personnel. In addition, recent trading levels of our
common stock have decreased the value of the stock options granted to employees
pursuant to our stock option plan. As a result of these factors, our remaining
personnel may seek employment with larger, more established companies or
companies they perceive to have better prospects.

If We Fail to Comply with Nasdaq Rules, Our Common Stock May Be Delisted from
Nasdaq, Which Could Eliminate the Trading Market for Our Common Stock

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If we fail to meet the criteria for continued listing on Nasdaq, our
common stock may be delisted from Nasdaq. The Nasdaq National and SmallCap
Markets have a number of criteria companies are required to meet in order to
stay listed on Nasdaq. Those criteria include maintaining a minimum bid price
of at least $1 per share and maintaining stockholders equity of at least $2.5
million for the Nasdaq SmallCap Market. If NexPrise is unable to maintain the
$1 per share minimum bid price or if ongoing reported losses drive
stockholders equity below the $2.5 million threshold, the Company may be
delisted from Nasdaq. If the stock is delisted, it would significantly
decrease the liquidity of an investment in NexPrise common stock. In addition,
following delisting, the stock could be deemed to be penny stock. If our common
stock is considered penny stock, it would be subject to rules that impose
additional sales practices on broker-dealers who sell our securities. For
example, broker-dealers would have to make a special suitability determination
for the purchaser and have received the purchasers written consent to the
transaction prior to sale. Also, a disclosure schedule must be prepared prior
to any transaction involving a penny stock and disclosure is required about
sales commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Monthly statements
are also required to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stock.
Because of these additional obligations, some brokers may be unwilling to
effect transactions in penny stocks. This could have an adverse effect on the
liquidity of our common stock and the ability of investors to sell the common
stock.

Our Business Will Suffer If We Do Not Enhance Our Product or Introduce New
Features to Meet Changing Customer Requirements

The market for software and services is characterized by rapid
technological change, frequent new hardware, software and networking product
introductions and Internet-related technology enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. If we
do not develop technology that can respond to these changes we will find it
very difficult to attract new customers. In particular, we are designing our
technology to support a variety of hardware, software and networking products
that we believe to be proven and among the most widely used. We can make no
assurances, however, that future customers will continue to use these products.
Even if they do, as new versions of these products are released, we will need
to adapt our technology to keep pace with changes made to hardware and software
configurations and network infrastructures.

If we do not develop, license or acquire new technology, or deliver
enhancements to existing products on a timely and cost-effective basis, we may
be unable to meet the growing demands of potential customers. In addition, as
we introduce new services or technologies into existing customer architectures,
we may experience performance problems associated with incompatibility among
different versions of hardware, software and networking products. To the extent
that such problems occur, we may face adverse publicity, delay in market
acceptance of our services or customer claims against us, any of which could
harm our business.

We Are Dependent on Intellectual Property and on Products Licensed or Purchased
from Third Parties and are Exposed to Legal Liability for Infringement

Our success and ability to compete depends on our ability to develop and
maintain the proprietary aspects of our technology. We rely on a combination
of copyright, trademark and trade secret laws and contractual restrictions to
establish and protect the proprietary aspects of our technology. We seek to
protect the source code for our software, documentation and other written
materials under trade secret copyright laws. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information to execute confidentiality
agreements with us and by restricting access to our source code.

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, and to determine the validity and scope of the proprietary rights of
others. Any resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business
operating results.

Our business has involved the licensing of our technology to our
customers. Pursuant to our existing licenses, we have made certain
representations and warranties and agreed to indemnify our licensees against
claims of infringement by third parties. Thus, we may be exposed to a
significant risk of liability for intellectual property infringement claims by
others. Our success and ability to compete also depend on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability
to license the infringed technology, our business and operating results would
be significantly harmed.

As part of our normal operations, we purchase or license software products
from third party commercial vendors. These products may not continue to be
available on commercially reasonable terms, or at all. The loss of these
products could result in delays in the sale of our services until equivalent
technology, if available, is identified, procured and integrated, and these
delays could result in lost revenues. Some of the key components of our
services are available only from sole or limited sources. Further, to the
extent that the vendors from whom we purchase these products increase their
prices, our gross margins could be negatively affected.

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Non-Compliance with Government Regulations May Subject Us to Liability

In addition to regulations applicable to businesses generally, in
connection with our former business of servicing business-to-business
marketplaces, we were subject to direct regulation by governmental agencies
which includes numerous laws and regulations generally applicable to the
chemical, pharmaceutical, controlled substances, human and biological reagents,
medical and invitro devices, nuclear chemical businesses and environmental

spills, as well as U.S. import and export controls and import controls of other
countries. While the shutdown of Chemdex, Promedix and SpecialtyMD may limit
future regulatory and product liability risks, until all statutes of limitation
have expired, certain legal risks will remain.

We relied on our suppliers to comply with applicable local, state and
federal laws regarding the labeling and the dissemination of information on any
products sold that may be hazardous or present a health threat to the user. If
these suppliers have failed, or we have failed to maintain the requisite
records irrespective of the actions of the suppliers, or if either of us have
failed to adequately comply with labeling and information dispensing
requirements of local, state or federal laws, then we may be held legally
responsible, since we held title to these products, and could be subject to
governmental penalties or fines, as well as private lawsuits to enforce these
laws. We have also relied upon our suppliers to obtain appropriate approvals
for products regulated by the Food and Drug Administration (FDA) and to
comply with the requirements relating to those approvals and products. The
failure of suppliers to obtain or comply with those approvals, or the failure
of the product advertising or labeling to be consistent with the FDA approval
for the products, or other failures by the products themselves, or our failure
to keep regulatory records required by the FDA, such as complaint files, could
result in costly product recalls, significant fines and judgments, civil and
criminal liabilities and negative publicity. In addition, we may discover that
we inadvertently sold other regulated products without a requisite license or
permit or failed to fully comply with other local, state or federal laws
governing these sales.

Except as described in the next sentence, we are unaware of any current
investigations, inquiries, citations, fines or allegations of violations or
noncompliance relating to regulatory requirements pending by government
agencies or by third parties against us. In February, 2001 we received a
subpoena from the U.S. Department of Justice, Drug Enforcement Administration,
for certain billing, invoice, and shipping records concerning sales to an
unaffiliated purchaser. It is also possible that there may be investigations or
allegations that we are not aware of or future investigations or allegations.
The risk that any noncompliance may be discovered in the future is currently
unknown. Although any potential impact on us for noncompliance cannot currently
be established, it could result in significant civil or criminal penalties,
including monetary fines and injunctions, for noncompliance and negative
publicity, and seriously harm our business, revenues, results of operations and
financial condition.

Government Contracts and Compliance With Government Regulations May Subject Us
to Increased Administrative Burdens and Risks That May Increase the Cost of
Doing Business

As a result of increased contracting with Federal, state and local
agencies and their primary contractors, we may become subject to additional
laws and regulations not currently applicable to us thereby increasing our
administrative burdens. Furthermore, we must comply with any new regulations
in both Europe and the United States, as well as any other regulations adopted
by other countries where we may do business. Compliance with any newly adopted
laws may prove difficult and may harm our business, operating results and
financial condition.

Government entities may also terminate their contracts with us earlier
than we expect which could result in revenue shortfalls. Government entities
may also investigate and audit our contracts and, if any improprieties are
found, we may be required to refund revenues we have received, to forego
anticipated revenues and may be subject to penalties. In addition, if we fail
to establish and maintain important relationships with government entities and
agencies, our ability to successfully bid for future contracts may be adversely
affected.

We Face Risks Associated With Stockholder and Bondholder Litigation

Several class action lawsuits have been filed and served upon us alleging
that we and certain individuals made false and misleading statements concerning
our business model and earnings for fiscal 2000 and concerning our initial
public offering. Although we believe that we have meritorious defenses to the
actions and intend to defend the suits vigorously, we cannot predict with
certainty the outcome of these lawsuits. Our defense against such lawsuits will
be costly and will require a significant commitment of time and resources by
our senior management.

General Economic and Political Conditions May Impact Our Results

Our revenue growth and future profitability depend on the overall demand
for software and related services. This demand can be adversely affected by
unfavorable economic conditions, as customers reduce or defer spending on
information technology improvements. We may be especially prone to this as a
result of the relatively small installed base and operating history of our

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products. A softening demand for software caused by a prolonged slowdown
of the economy would result in decreased revenue or lower revenue growth rates
and would adversely affect our operating results.

Recent political events, including the U.S. military action in the Middle
East, have put further pressure on economic conditions. The potential turmoil
that may result from such events contribute to the uncertainty of the economic
climate, further reducing predictability and our ability to develop and
implement long-term strategic plans. The impact of these or future similar
events may have a material adverse impact on our operating results and
financial position

Our Common Stock Price is Especially Volatile Which Could Result in Substantial
Losses to Investors

The stock market and specifically the stock prices of technology related
companies have been very volatile. This broad market volatility and industry
volatility may reduce the price of our common stock, because our business is
Internet-based without regard to our operating performance. On a post reverse
split basis, our common stock reached a high of $3,652.50 and traded as low as
$8.85 during 2000, and had a high of $64.65 and low of $1.80 during 2001. Our
stock reached a high of $7.25 and a low of $1.34 during fiscal 2002. On June
30, 2003 the last reported sales price on The Nasdaq SmallCap Market was $3.15.




Item 3.Qualitative and Quantitative Disclosure about Market Risk

The following discussion about the Companys market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. We are exposed to
market risk related primarily to changes in interest rates. However, we do not
hold derivative financial instruments for speculative or trading purposes.

Interest Rate Sensitivity

We are also exposed to interest rate risk related to our investment
portfolios. We have performed a sensitivity analysis as of June 30, 2003, using
a modeling technique that measures the change in the fair values arising from a
hypothetical 10% adverse movement in the levels of interest rates across the
entire yield curve with all other variables constant. The discount rates used
were based on the market interest rates in effect at June 30, 2003. The
sensitivity analysis at June 30, 2003 indicated that a potential loss in the
fair values of our interest rate sensitive investment instruments was not
material.

Our convertible and promissory notes are not exposed to interest rate risk
as our interest rate is fixed at 6%.

Foreign Currency Risk

Our sales to-date have primarily been made to U.S. customers and, as a
result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. If our
sales outside of the U.S. increase and are made in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets.




Item 4.Controls and Procedures

(a)  Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act
of 1934, as amended (the Exchange Act), within 90 days prior to the filing
date of this report. Based on their evaluation, our principal executive officer
and principal accounting officer concluded that our disclosure controls and
procedures are effective in ensuring that we are able to gather, analyze and
disclose on a timely basis all information that is required to be disclosed in
our Exchange Act reports.

(b)  There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings

Starting in March 2001, several lawsuits were filed in United States
District Court for the Northern District of California against the Company and
certain of its officers and directors on behalf of putative classes of persons
who purchased the Companys securities
during time periods from December 1999 through December 6, 2000. One of
the lawsuits also names as a defendant the lead underwriter for the Companys
offering of convertible notes. The lawsuits generally allege that the Company
and certain individuals violated the federal securities laws by making false
and misleading statements during 2000, including in the Companys registration
statement for its convertible notes offering. These lawsuits have been
consolidated as In re Ventro Corp. Sec. Litigation, Master File No. Civ.
01-1287 SBA, and a consolidated complaint was filed. On July 30, 2002, the
Company and other defendants named in the action filed motions to dismiss. On
June 30, 2003, the Court granted in part and denied in part the motions to
dismiss. The plaintiffs filed an amended complaint May 15, 2003. On July 14,
2003 the Company and the individual defendants filed a motion to dismiss
certain allegations of the amended complaint. No discovery has taken place,
and the Court has not set a trial date. The Company believes that the claims
are without merit and intends to defend the case vigorously.

In August 2001, Chadwell v. Byers, Case No. CV800814, a putative
shareholder derivative suit was filed in California Superior Court, Santa Clara
County against certain of the Companys present and former officers and
directors, alleging breaches of fiduciary duty and insider trading. The
Company is named solely as a nominal defendant against whom no recovery is
sought. After a demurrer was sustained with leave to amend, the parties
stipulated to a stay of proceedings pending a determination of the sufficiency
of the complaint in the In re Ventro Corp. Sec. Litigationfederal consolidated
action.

In March 2001, Kassin v. Ventro Corp. et al., Index No. 01-CV-3450 (SAS),
a stockholder class action complaint, was filed in the United States District
Court for the Southern District of New York against the Company, several of its
officers and directors, and the underwriters of its initial public offering.
The class action has been consolidated for pre-trial purposes with more than
one thousand other actions, filed against more than 300 other issuers of
securities, affiliated individuals and dozens of underwriters of the securities
offerings in In Re Initial Public Offering Securities Litigation, 21 MC 92
(SAS). The plaintiffs allege that the prospectus for the initial public
offering of the Companys common stock, incorporated in the Registration
Statement on Form S-1 filed with the Securities and Exchange Commission, was
materially false and misleading because it failed to disclose, among other
things, that the underwriters had made secret arrangements for aftermarket
purchases of the securities and made arrangements for excessive and improper
underwriters compensation in the form of increased brokerage commissions.
Plaintiffs are claiming damages of an unspecified amount based on the
subsequent decline in the market price of the Companys shares below their
original offering price.

In recent months, counsel for the plaintiffs, liaison counsel for the
issuer defendants and counsel for insurers of the issuer defendants have taken
part in continuing discussions mediated by a former federal district court
judge to explore a possible settlement of the claims against all of the issuer
defendants in the IPO Allocation Litigation, including the Company. In June
2003, a memorandum of understanding was entered into by and among the
plaintiffs, liaison counsel for the issuer defendants and counsel for the
insurers which would result in dismissal of the action against the issuers,
including the Company, on terms that would not require any current payment by
the Company and are believed by the Companys board of directors to carry only
a remote risk that any future payment by the Company would be required. In
addition, the plaintiffs would release the Company and its officers and
directors from the claims that have been asserted against them in the IPO
Allocation Litigation as a part of the proposed settlement. On June 30, 2003,
the Companys board of directors approved the memorandum of understanding and
authorized the Company to enter into the proposed settlement. The memorandum
of understanding and proposed settlement are expected to be submitted to the
Court for its required approval shortly. The IPO Allocation Litigation in
general, and the litigation against the Company in particular, are in an early
phase, and no date has yet been set by the court for completion of pre-trial
discovery or trial.

The Company is a party to various claims in the ordinary course of
business. Although the results of litigation and claims cannot be predicted
with certainty, the Company believes the final outcome of such matters will not
have a material adverse effect on the Companys financial position, results of
operations or cash flows.




Item 2.Changes in Securities and Use of Proceeds

None




Item 3.Defaults upon Senior Securities

None

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Item 4.Submission of Matters to a Vote of Securities Holders

The Company held its annual meeting of stockholders in Palo Alto, California on
April 17, 2003. Of the 3,225,900 shares outstanding as of March 10, 2003, the
record date, 2,236,735 shares were present or represented by proxy at the
meeting. At the meeting the following actions were voted upon:

1) To elect the following five (5) directors to serve until the next
Annual Meeting of Shareholders and until their successors are duly elected and
qualified:

|                   |  |     |           |                    |  |  |        | 
|------------------ |  | --- | --------- | ------------------ |  |  | ------ | 
|                   |  | For |           | Authority Withheld
|                   |  |     |           |                   
|Ted Drysdale       |  |     | 2,232,797 |                    |  |  | 3,938  | 
|David P. Perry     |  |     | 2,225,912 |                    |  |  | 10,823 | 
|Thomas Insley      |  |     | 2,224,007 |                    |  |  | 12,728 | 
|Donald Westerheide |  |     | 2,224,976 |                    |  |  | 12,759 | 
|Daniel Jess        |  |     | 2,224,007 |                    |  |  | 12,728 | 

2) To approve the appointment of Ernst & Young LLP as the independent
auditors of NexPrise for fiscal year 2003:

|          |  |         |        |         |  |  |       | 
|--------- |  | ------- | ------ | ------- |  |  | ----- | 
|For       |  | Against |        | Abstain
|          |  |         |        |        
|2,224,673 |  |         | 10,721 |         |  |  | 1,341 | 




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits. The following is a list of exhibits filed as part of this
Report on Form 10-Q. Where indicated by footnote, exhibits that were previously
filed are incorporated by reference.

|        |  |                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                        
|Number  |  | Description                                                                                                            
|        |  |                                                                                                                        
|31      |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                                                        
|32      |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)  Reports on Form 8-K:



| |  |  | A Report on Form 8-K was furnished on April 24, 2003 (Item 12).
The report contained information announcing Nexprise, Inc. earnings
release issued on April 24, 2003.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 04, 2003.

| |  |                |                      |                                        
| |  | -------------- | -------------------- | ---------------------------------------
| |  | NEXPRISE, INC.
| |  |                |                      |                                        
| |  | By:            | /s/ JEROME E. NATOLI
| |  |               
| |  |                |                      | Jerome E. NatoliChief Financial Officer

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EXHIBIT INDEX

|        |  |                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                        
|Number  |  | Description                                                                                                            
|        |  |                                                                                                                        
|31      |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                                                        
|32      |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

30