INTERNET CAPITAL GROUP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2003

Commission File Number 0-26929

INTERNET CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		23-2996071 (I.R.S. Employer Identification Number)

600 Building, 435 Devon Park Drive, Wayne, PA (Address of principal executive offices)		19087 (Zip Code)

(610) 989-0111

(Registrant’s telephone number, including area code)

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 and 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. x Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) o Yes x No

Number of shares of Common Stock outstanding as of May 12, 2003: 286,920,469 shares.

INTERNET CAPITAL GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX


Item		Page No.

PART—FINANCIAL INFORMATION
Item 1—	Financial Statements:
	Consolidated Balance Sheets—March 31, 2003 (unaudited) and December 31, 2002	4
	Consolidated Statements of Operations (unaudited)—Three Months Ended March 31, 2003 and 2002	5
	Condensed Consolidated Statements of Cash Flows (unaudited)—Three Months Ended March 31, 2003 and 2002	6
	Notes to Consolidated Financial Statements	7
Item 2—	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3—	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4—	Controls and Procedures	36
PART II—OTHER INFORMATION
Item 1—	Legal Proceedings	37
Item 2—	Changes in Securities and Use of Proceeds	37
Item 3—	Defaults Upon Senior Securities	37
Item 4—	Submission of Matters to a Vote of Security Holders	38
Item 5—	Other Information	38
Item 6—	Exhibits and Reports on Form 8-K	38
Signatures		39
Certifications		40
Exhibit Index		42

Although we refer in this Report to the companies in which we have acquired a convertible debt or an equity ownership interest as our “partner companies” and that we indicate that we have a “partnership” with these companies, we do not act as an agent or legal representative for any of our partner companies, and we do not have the power or authority to legally bind any of our partner companies, and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.

This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended. See the subsection of Part I, Item 2 entitled “Risk Factors” for more information.

INTERNET CAPITAL GROUP, INC.
PARTNER COMPANIES AS OF MARCH 31, 2003

Agribuys, Inc. (“Agribuys”)

Anthem/CIC Ventures Fund LP (“Anthem”)

Arbinet - thexchange Inc. (“Arbinet”)

Blackboard, Inc. (“Blackboard”)

Captive Capital Corporation (f/k/a eMarketCapital, Inc.) (“Captive Capital”)

Citadon, Inc. (“Citadon”)

ClearCommerce Corporation (“ClearCommerce”)

CommerceQuest, Inc. (“CommerceQuest”)

ComputerJobs.com, Inc. (“ComputerJobs.com”)

Co-nect Inc. (f/k/a Simplexis.com) (“Co-nect”)

CreditTrade Inc. (“CreditTrade”)

eCredit.com, Inc. (“eCredit”)

eMerge Interactive, Inc. (“eMerge Interactive”) (Nasdaq:EMRG)

Emptoris, Inc. (“Emptoris”)

Entegrity Solutions Corporation (“Entegrity Solutions”)

Freeborders, Inc. (“Freeborders”)

FuelSpot.com, Inc. (“FuelSpot”)

GoIndustry AG (“GoIndustry”)

ICG Commerce Holdings, Inc. (“ICG Commerce”)

inreon Limited (“inreon”)

Investor Force Holdings, Inc. (“Investor Force”)

iSky, Inc. (“iSky”)

Jamcracker, Inc. (“Jamcracker”)

LinkShare Corporation (“LinkShare”)

Marketron International, Inc. (f/k/a BuyMedia, Inc.) (“Marketron”)

Mobility Technologies, Inc. (f/k/a traffic.com Inc.) (“Mobility Technologies”)

OneCoast Network Holdings, Inc. (f/k/a USgift Corporation) (“OneCoast”)

OnMedica Group Limited (“OnMedica”)

Onvia.com, Inc. (“Onvia.com”) (Nasdaq:ONVI)

Persona, Inc. (“Persona”)

StarCite, Inc. (“StarCite”)

Surgency, Inc. (f/k/a Benchmarking) (“Surgency”)

Syncra Systems, Inc. (“Syncra Systems”)

Tibersoft Corporation (“Tibersoft”)

Universal Access Global Holdings Inc. (“Universal Access”) (Nasdaq:UAXS)

Verticalnet, Inc. (“Verticalnet”) (Nasdaq:VERT)

INTERNET CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS


			As of March 31,			As of December 31,
			2003			2002

			(Unaudited)
			(in thousands, except per share data)
Assets
Current Assets
	Cash and cash equivalents		$	100,016		$	118,657
	Restricted cash			6,000			10,876
	Short-term investments			2,315			7,311
	Accounts receivable, net of allowance ($3,459 — 2003; $4,255 — 2002)			30,756			32,859
	Prepaid expenses and other current assets			6,851			6,528

		Total current assets		145,938			176,231
Assets of discontinued operations				4,105			5,746
Fixed assets, net				8,189			10,292
Ownership interests in Partner Companies				68,791			71,732
Available-for-sale securities				9,597			10,228
Goodwill				60,584			60,584
Other				26,643			31,433

		Total Assets	$	323,847		$	366,246

Liabilities and Stockholders’ Deficit
Current Liabilities
	Current maturities of other long-term debt		$	5,290		$	11,728
	Accounts payable			18,136			13,042
	Accrued expenses			26,543			33,812
	Accrued compensation and benefits			7,924			11,554
	Accrued restructuring			11,598			13,464
	Deferred revenue			21,326			19,063

		Total current liabilities		90,817			102,663
Liabilities of discontinued operations				4,105			5,296
Other long-term debt				12,616			7,919
Other liabilities				9,595			11,794
Minority interest				4,545			7,106
Convertible subordinated notes				271,114			283,114

		Total Liabilities		392,792			417,892
Commitments and contingencies
Stockholders’ Deficit
	Preferred stock, $.01 par value; 10,000 shares authorized; none issued			—			—
	Common stock, $.001 par value; 2,000,000 shares authorized; 286,920 (2003) and 286,720 (2002) issued and outstanding			287			287
	Additional paid-in capital			3,085,303			3,085,232
	Accumulated deficit			(3,152,138	)		(3,134,036	)
	Unamortized deferred compensation			(1,937	)		(2,968	)
	Notes receivable—stockholders			(460	)		(460	)
	Accumulated other comprehensive loss			—			299

		Total stockholders’ deficit		(68,945	)		(51,646	)

		Total Liabilities and Stockholders’ Deficit	$	323,847		$	366,246

See notes to consolidated financial statements.

INTERNET CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


		Three Months Ended March 31,

		2003			2002

		(in thousands, except per
		share data)
Revenue		$	24,939		$	24,819
Operating expenses
	Cost of revenue		15,428			18,341
	Selling, general and administrative		18,849			24,738
	Research and development		5,461			6,488
	Amortization of intangibles		2,174			3,100
	Impairment related and other		(814	)		1,490

	Total operating expenses		41,098			54,157

			(16,159	)		(29,338	)
Other income (loss), net			5,774			(5,895	)
Interest income			442			1,398
Interest expense			(4,668	)		(7,557	)

Loss before minority interest and equity loss			(14,611	)		(41,392	)
Minority interest			1,434			5,717
Equity loss			(4,925	)		(20,607	)

Loss from continuing operations			(18,102	)		(56,282	)
Loss on discontinued operations			—			(5,366	)

Net loss		$	(18,102	)	$	(61,648	)

Basic and diluted loss per share:
Loss from continuing operations		$	(0.07	)	$	(0.20	)
Loss on discontinued operations			—			(0.02	)

		$	(0.07	)	$	(0.22	)

Shares used in computation of basic and diluted loss per share			269,580			279,262

See notes to consolidated financial statements.

INTERNET CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


		Three Months Ended March 31,

		2003			2002

		(in thousands)
Net cash used in operating activities		$	(10,172	)	$	(13,253	)

Investing Activities
	Capital expenditures		(89	)		(50	)
	Proceeds from sales of available-for-sale securities		—			287
	Proceeds from sales of Partner Company ownership interests		—			4,800
	Advances to and acquisitions of ownership interests in Partner Companies		(7,318	)		(10,776	)
	Proceeds from short-term investments		4,990			—
	Reduction in cash due to deconsolidation of a subsidiary		—			(5,876	)

Net cash used in investing activities			(2,417	)		(11,615	)

Financing Activities
	Long-term debt and capital lease obligations, net		(150	)		77
	Line of credit borrowings		312			—
	Line of credit repayments		(143	)		(350	)
	Repurchase of convertible notes		(5,529	)		—
	Issuance of stock by subsidiary		—			381

Net cash (used in) provided by financing activities			(5,510	)		108

Net decrease in cash and cash equivalents			(18,099	)		(24,760	)

Effect of exchange rates on cash			(542	)		—
Cash and cash equivalents at the beginning of period			118,657			238,135

Cash and cash equivalents at the end of period		$	100,016		$	213,375

See notes to consolidated financial statements.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company for the three months ended March 31, 2003 and 2002, included herein, have been prepared by the Company pursuant to accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of the Company’s operations and its cash flows for the three months ended March 31, 2003 and 2002 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or for any other interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The information included in this report on Form 10-Q (“Report”) should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s financial statements and notes thereto included in the Company’s 2002 Annual Report on Form 10-K/A.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The consolidated financial statements also include the following majority owned subsidiaries for the periods indicated, each of which was consolidated since the date the Company acquired majority control (collectively, the “Consolidated Subsidiaries”):

Three Months Ended March 31, 2003


Captive Capital		Freeborders
CommerceQuest		ICG Commerce
eCredit		OneCoast

Three Months Ended March 31, 2002


Captive Capital		ICG Commerce
CommerceQuest		OneCoast
eCredit

Subsequent to March 31, 2003, the Company’s ownership interest in eCredit was reduced to below 50%. Accordingly, beginning in April 2003, eCredit will no longer be consolidated; however, it will be accounted for under the equity method of accounting.

Concentration of Customer Base and Credit Risk

Approximately 13% of the Company’s revenue for the three months ended March 31, 2003 relates to one customer. Accounts receivable from this customer as of March 31, 2003 was not significant. No customers represented more than 10% of the Company’s revenues for the three months ended March 31, 2002.

Stock Based Compensation

As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation,” the Company measures compensation cost in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense is recorded for stock options issued to employees that are granted at fair market value until they are exercised. Stock options issued to non-employees are recorded at fair value at the date of grant. Fair value is determined using the Black-Scholes model and the expense is amortized over the vesting period.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

1. Significant Accounting Policies — (Continued)

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,” which provides optional transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the statement mandates certain new disclosures that are incremental to those required by SFAS No. 123. The Company will continue to account for stock-based compensation in accordance with APB No. 25. As such, the Company does not expect this standard to have a material impact on its consolidated financial position or results of operations. The Company adopted the disclosure-only provisions of SFAS No. 148 as of December 31, 2002.

The following table illustrates the effect on the Company’s net loss and net loss per share as if the fair value based method had been applied to all outstanding and unvested awards for each period (unaudited).


	Three Months Ended March 31,

	2003			2002

	(in thousands)
Net loss, as reported	$	(18,102	)	$	(61,648	)
Add stock-based employee compensation expense included in reported net loss		1,311			3,802
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards		(7,212	)		(9,320	)

Proforma net loss	$	(24,003	)	$	(67,166	)

Net loss per share, as reported	$	(0.07	)	$	(0.22	)
Pro forma net loss per share	$	(0.09	)	$	(0.24	)

The per share weighted-average fair value of options issued by the Company during the three months ended March 31, 2003 and 2002 was $0.42 and $0.80, respectively.

The following assumptions were used to determine the fair value of stock options granted to employees by the Company for the three month periods ended March 31, 2003 and 2002:


Volatility		96-156.5	%
Average expected option life	5 years
Risk-free interest rate		2.87-6.74	%
Dividend yield		0.0	%

The Company also includes its share of its Partner Companies SFAS No. 148 pro forma expense in the Company’s SFAS No. 148 pro forma expense. The methods used by the Partner Companies included the minimum value method for private Partner Companies and the Black-Scholes method for public Partner Companies.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation. The impact of these changes is not material and did not affect net loss.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2. Ownership Interests in Partner Companies

The following summarizes the Company’s goodwill and other intangibles and ownership interests in Partner Companies by method of accounting.


	As of March 31,		As of December 31,
	2003		2002

	(Unaudited)
	(in thousands)
Goodwill – Consolidated	$	60,584	$	60,584
Other intangibles – Consolidated		17,207		20,143

	$	77,791	$	80,727

Ownership interests in Partner Companies – Equity Method	$	53,758	$	58,067
Ownership interests in Partner Companies - Cost Method		15,033		13,665

	$	68,791	$	71,732

Equity Method Companies

The following unaudited summarized financial information for Partner Companies accounted for under the equity method of accounting at March 31, 2003 and 2002 has been compiled from the financial statements of the respective Partner Companies.

Balance Sheets


	As of March 31,		As of December 31,
	2003		2002

Current assets	$	160,865	$	203,954
Non-current assets		122,170		152,912

Total assets	$	283,035	$	356,866


Current liabilities	$	101,130	$	136,732
Non-current liabilities		50,042		76,759
Stockholders’ equity		131,863		143,375

Total liabilities and Stockholder’ equity	$	283,035	$	356,866

Results of Operations


	Three Months Ended March 31,

	2003			2002

	(in thousands)
Revenue	$	72,365		$	100,699
Net loss	$	(20,224	)	$	(84,170	)

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually for impairment in accordance with this statement. Accordingly, the Company has ceased amortization of all goodwill and indefinite-lived intangible assets as of January 1, 2002. During the first quarter of 2002, the Company completed the transitional impairment test of other intangible assets, which indicated that the Company’s other intangible assets were not impaired. As of March 31, 2003, goodwill was allocated to the Company’s segments (see Note 11 — Segment Information) as follows: Core - $59.5 million; Emerging - $1.1 million. Amortizable intangible assets as of March 31, 2003 and December 31, 2002 of $16.4 million and $19.4 million, respectively, are included in Other Assets on the Company’s Consolidated Balance Sheets. Unamortizable intangible assets of $0.8 million are also included in Other Assets on the Company’s Consolidated Balance Sheets. Other intangible assets that meet the new criteria continue to be amortized as shown in the table below over their useful lives.


		As of March 31, 2003

		(in thousands)
	Useful	Gross Carrying		Accumulated			Net Carrying
Amortizable Intangible Assets	Life	Amount		Amortization			Amount

Customer Base	3-5 years	$	15,540	$	(6,553	)	$	8,987
Technology	3-5 years		25,647		(18,173	)		7,474

		$	41,187	$	(24,726	)	$	16,461


		As of December 31, 2002

		(in thousands)

	Useful	Gross Carrying		Accumulated			Net Carrying
Amortizable Intangible Assets	Life	Amount		Amortization			Amount

Customer Base	3-5 years	$	15,540	$	(5,686	)	$	9,854
Technology	3-5 years		25,479		(15,936	)		9,543

		$	41,019	$	(21,622	)	$	19,397

Amortization expense for intangible assets during the three months ended March 31, 2003 and 2002 was $2.2 million and $3.1 million, respectively. Estimated amortization expense for the remainder of 2003 and the five succeeding fiscal years ended is as follows (in thousands):


December 31, 2003 (remainder)	$	8,439
December 31, 2004		4,719
December 31, 2005		3,177
December 31, 2006		126
December 31, 2007 and thereafter		—

	$	16,461

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. Derivative Financial Instruments

In September 2001, the Company entered into a variable share forward contract to hedge 1.8 million shares of its holdings of i2 Technologies, Inc. (“i2 Technologies”) common stock. In addition, as of March 31, 2003, the Company held approximately 518,000 shares of i2 Technologies common stock that have not been hedged. At March 31, 2003, the Company’s holdings of i2 Technologies and the related forward contract were valued at $9.6 million. The Company designated the forward contract as a cash flow hedge and recorded the forward contract at its estimated fair value, with unrealized gains and losses resulting from changes in fair value recorded as a component of “Accumulated other comprehensive loss” on the Consolidated Balance Sheets and changes due to the ineffectiveness of this instrument in “Other income (loss), net” on the Consolidated Statements of Operations. Unrealized gains and losses as a result of this instrument are recognized in the Consolidated Statements of Operations when the underlying hedged item is extinguished or otherwise terminated.

Subsequent to March 31, 2003, the i2 Technologies forward contract was terminated and the Company received $9.6 million in cash.

The fair value of warrants held in Partner Companies, which are derivative instruments, are recorded on the Consolidated Balance Sheets at issuance in “Ownership interests in Partner Companies” and are valued using the Black-Scholes method. Changes in the fair value of the warrants are recorded to “Other income (loss), net”. The estimated fair value of warrants held in Partner Companies was approximately $0.8 million at March 31, 2003 and December 31, 2002.

5. Income Taxes

The Company’s deferred tax asset before valuation allowance of $645 million at March 31, 2003 consists primarily of $350 million related to the carrying value of its Partner Companies, capital loss carryforwards of $136 million and net operating loss carryforwards of approximately $127 million.

A valuation allowance has been provided for the Company’s net deferred tax asset at March 31, 2003, as the Company believes, after evaluating all positive and negative evidence, historical and prospective, that it is more likely than not that these benefits will not be realized.

6. Comprehensive Loss

Comprehensive loss is the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s source of comprehensive loss is net unrealized appreciation (depreciation) related to its available-for-sale securities. The following summarizes the components of comprehensive loss:


		Three Months Ended March 31,

		2003			2002

		(Unaudited)
		(in thousands)
Net loss		$	(18,102	)	$	(61,648	)
Other comprehensive income (loss):
	Unrealized depreciation		( 631	)		(2,771	)
	Reclassification adjustments		332			1,052

Comprehensive loss		$	(18,401	)	$	(63,367	)

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7. Net Loss per Share

The calculations of net loss per share were:


	Three Months Ended March 31,

	2003			2002

	(Unaudited)
	(in thousands, except per share data)
Basic and Diluted
Net loss from continuing operations	$	(18,102	)	$	(56,282	)
Loss on discontinued operations		—			(5,366	)

Net loss	$	(18,102	)	$	(61,648	)

Average common shares outstanding		269,580			279,262

Loss from continuing operations	$	(0.07	)	$	(0.20	)
Loss on discontinued operations		—			(0.02	)

Net loss per share	$	(0.07	)	$	(0.22	)

If a consolidated or equity method Partner Company has dilutive options or securities outstanding, diluted net income (loss) per share is computed first by deducting from income (loss) from continuing operations the income attributable to the potential exercise of the dilutive options or securities of the Partner Company. For the three months ended March 31, 2003 and 2002, the impact of our Partner Companies’ dilutive securities are not included as the impact would be anti-dilutive.

The following options, restricted stock grants and warrants were not included in the computation of diluted EPS as their effect would have been anti-dilutive: outstanding options to purchase 18,541,875 and 18,570,872 shares of common stock at average prices of $2.95 and $11.29, respectively, as of March 31, 2003 and 2002; 1,994,970 and 7,737,808 shares of unvested restricted stock outstanding as of March 31, 2003 and 2002; respectively; warrants to purchase 1,470,676 shares of common stock at $6.00 which were outstanding as of March 31, 2002 and convertible subordinated notes convertible into 2,127,385 and 3,500,164 shares of common stock outstanding as of March 31, 2003 and 2002, respectively.

8. Debt

Convertible Subordinated Notes

In December 1999, the Company issued $566.3 million of convertible subordinated notes. The notes bear interest at an annual rate of 5.5% and mature in December 2004. The notes are convertible at the option of the holder, at any time on or before maturity into shares of the Company’s common stock at a conversion price of $127.44 per share, which is equal to a conversion rate of 7.8468 shares per $1,000 principal of notes. Additionally, the notes may be redeemed by the Company if the Company’s closing stock price exceeds 150% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days. The conversion rate is subject to adjustment.

As of March 31, 2003, the remaining principal balance of the convertible subordinated notes was $271.1 million and the fair value was approximately $134.2 million. As of December 31, 2002, the remaining principal balance was $283.1 million.

In January 2003, the Company purchased and extinguished $12.0 million face value of convertible subordinated notes for $5.5 million in cash. The purchase resulted in a gain of $6.1 million, net of expenses, that was included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. Debt – (Continued)

In 2002 and 2001, the Company purchased and extinguished $163.0 million and $120.2 million face value of convertible subordinated notes for $48.8 million and $35.5 million in cash, respectively.

The Company recorded interest expense of $3.8 million and $6.1 million during the three months ended March 31, 2003 and 2002, respectively, with interest payments due semiannually through December 21, 2004. Issuance costs of $18.3 million were recorded in other assets and are being amortized as interest expense over the terms of the notes using the effective interest method. In connection with the Company’s early extinguishment of debt in 2003, approximately $0.2 million of these issuance costs was immediately expensed and included in the computation of the gain. As of March 31, 2003, unamortized issuance costs are approximately $2.7 million.

Loan and Credit Agreements

On September 30, 2002, the Company entered into a loan agreement with Comerica Bank to provide for the issuance of letters of credit (the “Loan Agreement”). The Loan Agreement provides for issuances of letters of credit up to $20 million subject to a cash-secured borrowing base as defined by the Loan Agreement. Issuance fees of 0.50% per annum of the face amount of each letter of credit will be paid to Comerica Bank subsequent to issuance. The Loan Agreement also is subject to a 0.25% per annum unused commitment fee payable to the bank quarterly. As of March 31, 2003, $0.9 million in letters of credit were outstanding under the loan agreement, and amounts secured under the Loan Agreement are included in “Restricted Cash” on the Company’s Consolidated Balance Sheets.

Other Long-Term Debt

The Company’s other long-term debt of $12.6 million (net of current maturities of $5.3 million) relates to its consolidated Partner Companies and primarily consists of secured notes due to stockholders and outside lenders of CommerceQuest, Freeborders, OneCoast, as well as certain capital lease commitments. $3.3 million of this debt is secured by cash collateral, which is included in “Restricted Cash” on the Company’s Consolidated Balance Sheets.

9. Discontinued Operations

In 2002, two Partner Companies of the Company sold substantially all of their assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” these Partner Companies have been treated as discontinued operations. Accordingly, the operating results of these two discontinued operations have been presented separately from continuing operations in the line item “Loss on discontinued operations” in our Consolidated Statements of Operations. These two former consolidated subsidiaries, Delphion, Inc. (“Delphion”) and Logistics.com, Inc. (“Logistics.com”) had revenue of $3.4 million for the three months ended March 31, 2002. The assets and liabilities of Delphion should be settled by the end of the third quarter of 2003.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. Restructuring

During 2003, 2002 and 2001, the Company and certain of its consolidated Partner Companies implemented restructuring plans designed to reduce cost structures by closing and consolidating offices, disposing of fixed assets, and reducing their workforces. In the three months ended March 31, 2003, the Company and its Consolidated Partner Companies recorded restructuring charges totaling $0.5 million offset by a credit of $1.3 million for a restructuring item that was settled for less than the amount that was originally anticipated and accrued. These charges are included in “Impairment related and other” in the Consolidated Statements of Operations.

Restructuring activity is summarized as follows:


									Non-cash
									Items
	Accrual at		Restructuring			Cash			Expensed			Accrual at
	December 31, 2002		Charges			Payments			Immediately			March 31, 2003

	(in thousands)
Restructuring – 2003
Office closure costs	$	1,395	$	31		$	(31	)	$	(245	)	$	1,150
Employee severance and related benefits		1,186		506			(528	)		—			1,164

	$	2,581		537			(559	)		(245	)		2,314
Restructuring – 2002
Office closure costs		10,474		(1,351	)		—			—			9,123
Employee severance and related benefits		260		—			(248	)		—			12

		10,734		(1,351	)		(248	)		—			9,135
Restructuring – 2001
Lease termination costs		149		—			—			—			149

	$	13,464	$	(814	)	$	(807	)	$	(245	)	$	11,598

11. Segment Information

The Company’s reportable segments using the “management approach” under SFAS No. 131, “Disclosure About Segments of a Business Enterprise and Related Information,” consist of two operating segments, the core (“Core”) partner companies operating segment and the emerging (“Emerging”) partner companies operating segment. Each segment includes the results of the Company’s Consolidated Partner Companies and records the Company’s share of earnings and losses of Partner Companies accounted for under the equity method of accounting and captures our basis in the assets of all of our partner companies.

The Core operating segment includes those partner companies in which the Company’s management takes a very active role in providing strategic direction and management assistance. The Emerging operating segment includes investments in companies that are, in general, managed to provide the greatest near term stockholder value.

The following summarizes the unaudited selected information related to the Company’s segments. All significant intersegment activity has been eliminated. Assets are owned or allocated assets used by each operating segment.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Segment Information (Continued)


Three Months Ended March 31, 2003

										Reconciling Items

										Discontinued
							Total			Operations and								Consolidated
	Core			Emerging			Segments			Dispositions		Corporate			Other			Results

	(in thousands)
Selected data:
Revenues	$	24,737		$	202		$	24,939		$	—	$	—		$	—		$	24,939
Net loss	$	(14,760	)	$	(1,209	)	$	(15,969	)	$	—	$	(8,981	)	$	6,848	*	$	(18,102	)
Assets	$	205,869		$	16,498		$	222,367		$	4,105	$	97,375		$	—		$	323,847
Capital expenditures	$	(89	)	$	—		$	(89	)	$	—	$	—		$	—		$	(89	)


Three Months Ended March 31, 2002

										Reconciling Items

										Discontinued
							Total			Operations and									Consolidated
	Core			Emerging			Segments			Dispositions			Corporate			Other			Results

	(in thousands)
Selected data:
Revenues	$	24,757		$	76		$	24,833		$	—		$	—		$	(14	)	$	24,819
Net loss	$	(28,316	)	$	(10,633	)	$	(38,949	)	$	(8,858	)	$	(13,833	)	$	(8	)*	$	(61,648	)
Assets	$	226,777		$	54,154		$	280,391		$	38,738		$	256,952		$	—		$	576,621
Capital expenditures	$	(71	)	$	—		$	(71	)	$	—		$	21		$	—		$	(50	)

* Other reconciling items to net loss are as follows:


	Three Months ended March 31,

	2003		2002

Minority interest	$	1,434	$	5,717
Other income (loss)		5,414		(5,725	)

	$	6,848	$	(8	)

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

12. Parent Company Financial Information

Parent Company financial information is provided to present the financial position and results of operations of the Company as if the Partner Companies accounted for under the consolidation method of accounting were accounted for under the equity method of accounting for all applicable periods presented. The Company’s share of the consolidated Partner Companies’ losses is included in “Equity loss” in the Parent Company Statements of Operations for all periods presented based on the Company’s ownership percentage in each period. The carrying value of the consolidated companies as of March 31, 2003 and December 31, 2002 is included in “Ownership interests in Partner Companies” in the Parent Company Balance Sheets.

Parent Company Balance Sheets


			As of March 31,			As of December 31,
			2003			2002

			(Unaudited)
			(in thousands)
Assets
	Cash and cash equivalents		$	68,553		$	81,875
	Restricted cash			4,180			9,180
	Short-term investments			1,996			6,986
	Other current assets			2,346			2,927

		Current assets		77,075			100,968
	Ownership interests in Partner Companies			132,034			140,621
	Available-for-sale securities			9,597			10,228
	Other			7,219			8,180

		Total assets	$	225,925		$	259,997

Liabilities and stockholders’ deficit
	Current liabilities		$	23,756		$	28,529
	Convertible subordinated notes			271,114			283,114
	Stockholders’ deficit			(68,945	)		(51,646	)

		Total liabilities and stockholders’ deficit	$	225,925		$	259,997

Parent Company Statements of Operations


			Three Months Ended March 31,

			2003			2002

			(Unaudited)
			(in thousands)
Revenue			$	—		$	—
Operating expenses
	General and administrative			5,032			8,226

		Total operating expenses		5,032			8,226

				(5,032	)		(8,226	)
Other income (loss), net				5,414			(5,725	)
Interest expense, net				(3,949	)		(5,607	)

Loss before equity loss				(3,567	)		(19,558	)
Equity loss				(14,535	)		(42,090	)

Net loss			$	(18,102	)	$	(61,648	)

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

12. Parent Company Financial Information (Continued)

Parent Company Statements of Cash Flows


		Three Months Ended March 31,

		2003			2002

		(Unaudited)
		(in thousands)
Net cash used in operating activities		$	(1,015	)	$	(1,380	)

Investing Activities
	Capital expenditures, net		—			21
	Proceeds from sales of available-for-sale securities		—			287
	Proceeds from sales of Partner Company ownership interests		—			4,800
	Advances to and acquisitions of ownership interests in Partner Companies		(11,768	)		(24,726	)
	Proceeds from short-term investments		4,990			—

Net cash used in investing activities			(6,778	)		(19,618	)

Financing Activities
	Repurchase of convertible notes		(5,529	)		—

Net cash used in financing activities			(5,529	)		—

Net decrease in cash and cash equivalents			(13,322	)		(20,998	)

Cash and cash equivalents at the beginning of period			81,875			215,581

Cash and cash equivalents at the end of period		$	68,553		$	194,583

Other Income (Loss), net

Other income (loss), net consists of the effect of transactions and other events incidental to the Company’s ownership interests in its Partner Companies and its operations in general.


	Three Months Ended March 31,

	2003			2002

	(Unaudited)
	(in thousands)
Gain on debt extinguishment (Note 8)	$	6,127		$	—
Realized and unrealized losses on available-for-sale securities		(332	)		(1,052	)
Sales of Ownership interests in Partner Companies		—			(3,793	)
Other		(381	)		(880	)

	$	5,414		$	(5,725	)

During the three months ended March 31, 2003 and 2002, the Company recorded losses of $0.3 and $1.3 million to reflect the other-than-temporary decline in market value of i2 Technologies and divine, Inc. During the three months ended March 31, 2002, the Company sold shares of other available-for-sale securities resulting in a gain of $0.2 million.

During the three months ended March 31, 2002, the Company sold its ownership interests in various Partner Companies in exchange for cash. Sales of Partner Company interests resulted in a loss of $3.8 million for the three months ended March 31, 2002.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements 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 elsewhere in this Report and the risks discussed in our other SEC filings. The following discussion should be read in conjunction with our audited Consolidated Financial Statements and related Notes thereto included elsewhere in this Report.

Although we refer in this Report to companies in which we have acquired a convertible debt or an equity ownership interest as our “partner companies” and indicate that we have a “partnership” with these companies”, we do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies, and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.

Because we own significant interests in information technology companies, many of which generate net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While many of our partner companies have consistently reported losses, we have recorded net income in certain periods and experienced significant volatility from period to period due to one-time or infrequently occurring transactions and other events incidental to our ownership interests in partner companies. These transactions and events are described in more detail in Note 8, Note 9, and Note 12 of our Consolidated Financial Statements and include dispositions of, and changes to, our partner company ownership interests, dispositions of our holdings of available-for-sale securities and debt extinguishments.

Critical Accounting Policies

Our discussion and analysis of our 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 us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our investments in our partner companies, marketable securities, income taxes, commitments and contingencies. We base our 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. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgment.

Valuation of Goodwill, Intangible Assets and Ownership Interests in Partner Companies

We perform on-going business reviews and, based on quantitative and qualitative measures, assess the need to record impairment losses on goodwill, intangible assets and our ownership interests in our partner companies when impairment indicators are present. Where impairment indicators are present, we determine the amount of the impairment charge as the excess of the carrying value over the fair value. We determine fair value based on a combination of the discounted cash flow methodology, which is based upon converting expected future cash flows to present value, and the market approach, which includes analysis of market price multiples of companies engaged in lines of business similar to the company being evaluated. The market price multiples are selected and applied to the company based on relative performance, future prospects and risk profile of the company in comparison to the guideline companies. Significant assumptions relating to future operating results must be made when estimating the future cash flows associated with these companies. Significant assumptions relating to achievement of business plan objectives and milestones must be made when evaluating whether impairment indicators are present. Should unforeseen events occur or should operating trends change significantly, additional impairment losses could occur.

Revenue

We may assume all or a part of a customer’s procurement function as part of sourcing arrangements. Typically, in these engagements, we are paid a fee based on a percentage of the amount spent by our customer’s purchasing department in the specified areas we manage, a fixed fee agreed upon in advance, and in many cases we have the opportunity to earn additional fees based on the level of savings achieved for customers. We recognize fee income as earned and any additional fees as we become entitled to them. In these arrangements, we do not assume inventory, warranty or credit risk for the goods or services a customer purchases, but we do negotiate the arrangements between a customer and supplier.

We recognize license revenue when a signed contract or purchase order exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method” prescribed by Statements of Position No. 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.”

We assess whether the fee is fixed or determinable and collection is probable at that time of the transaction. In determining whether the fee is fixed or determinable, we compare the payment terms of the transaction to our normal payment terms. If a significant portion of a fee is due after our normal payment terms, we account for the fee as not being fixed or determinable and recognize revenue as the fees become due. We assess whether collection is probable based on a number of factors, including the customer’s past transaction history and credit-worthiness. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. For such arrangements with multiple obligations, we allocate revenue to each component of the arrangement based on the fair value of the undelivered elements. Fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts. Maintenance revenue is deferred and recognized ratably over the term of the maintenance and support period. Fair value of services, such as consulting or training, is based upon separate sales of these services. Consulting and training services are generally billed based on hourly rates and revenues are generally recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of our products and generally do not include significant customization to or development of the underlying software code.

Deferred Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets is charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

Commitments and Contingencies

From time to time, we are a defendant or plaintiff in various legal actions that arise in the normal course of business. We are also a guarantor of various third-party obligations and commitments. We are required to assess 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 reserves required for these contingencies, if any, which would be charged to earnings, is made after careful analysis of each individual matter. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.

Basis of Presentation

Effect of Various Accounting Methods on our Results of Operations

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

Consolidation. Partner companies in which we directly or indirectly own more than 50% of the outstanding voting securities are generally accounted for under the consolidation method of accounting. Under this method, a partner company’s accounts are reflected within our Consolidated Statements of Operations. Participation of other partner company stockholders in the earnings or losses of a consolidated partner company is reflected in the caption “Minority interest” in our Consolidated Statements of Operations. Minority interest adjusts our consolidated net results of operations to reflect only our share of the earnings or losses of the consolidated partner company.

Equity Method. Partner companies whose results we do not consolidate, but over whom we exercise significant influence, are generally accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a partner company depends on an evaluation of several factors including, among others, representation on the partner company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the partner company, including voting rights associated with our holdings in common, preferred and other convertible securities of the partner company. Under the equity method of accounting, a partner company’s accounts are not reflected within our Consolidated Statements of Operations; however, our share of the earnings or losses of the partner company is reflected in the caption “Equity loss” in our Consolidated Statements of Operations.

Cost Method. Partner companies not accounted for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of the earnings or losses of these companies is not included in our Consolidated Statements of Operations.

Reportable Segments

Our reportable segments using the “management approach” under SFAS No. 131, “Disclosure About Segments of a Business Enterprise and Related Information,” consist of two operating segments, the Core partner companies operating segment and the Emerging partner companies operating segment. Each segment includes the results of our consolidated partner companies, our share of earnings and losses of partner companies accounted for under the equity method of accounting and captures our basis in the assets of all of our partner companies. Our operations, as well as our partner companies’ operations, were principally in the United States of America during all periods presented.

As of March 31, 2003, we owned interests in 36 partner companies which are categorized below based on segment and method of accounting.


CORE PARTNER COMPANIES (%Voting Interest)

Consolidated	Equity	Cost

CommerceQuest (80%)	CreditTrade (30%)	Blackboard (15%)
eCredit (99.9%)	eMerge Interactive (33%)
Freeborders (55%)	GoIndustry (31%)
ICG Commerce (75%)	Investor Force (38%)
OneCoast (97%)	iSky (25%)
	LinkShare (40%)
	Marketron (40%)
	StarCite (22%)
	Syncra Systems (29%)
	Universal Access (22%)
	Verticalnet (22%)


EMERGING PARTNER COMPANIES (%Voting Interest)

Consolidated	Equity	Cost

Captive Capital (54%)	Agribuys (31%)	Anthem (9%)
	ComputerJobs.com (46%)	Arbinet (3%)
	Co-nect (36%)	Citadon (2%)
	OnMedica (33%)	ClearCommerce (11%)
	Onvia.com (22%)	Emptoris (12%)
	Surgency (22%)	Entegrity Solutions (2%)
		FuelSpot (9%)
		inreon (17%)
		Jamcracker (3%)
		Mobility Technologies (3%)
		Persona (11%)
		Tibersoft (5%)

The following summarizes the unaudited selected financial information related to our segments. Each segment includes the results of our consolidated partner companies and records our share of the earnings and losses of partner companies accounted for under the equity method of accounting. The partner companies included within the segments are consistently the same 36 partner companies for 2003 and 2002. The method of accounting for any particular partner company may change based on our ownership interest.

The Core operating segment includes those partner companies in which our management takes a very active role in providing strategic direction and management assistance. The Emerging operating segment includes investments in companies that are, in general, managed to provide the greatest near-term stockholder value. Discontinued operations and dispositions are those partner companies that have been sold or ceased operations and are no longer included in a segment for all periods presented. Corporate expenses represent our General and Administrative expenses of supporting the partner companies. The measure of segment net loss reviewed by us does not include items such as impairment related charges, income taxes, extraordinary items and accounting changes, which are reflected in other reconciling items in the information which follows.


Three Months Ended March 31, 2003

										Reconciling Items

	Core			Emerging			Total Segments			Discontinued Operations and Dispositions		Corporate			Other		Consolidated Results

	(in thousands)
Selected Data:
Revenues	$	24,737		$	202		$	24,939		$	—	$	—		$	—	$	24,939
Net loss	$	(14,760	)	$	(1,209	)	$	(15,969	)	$	—	$	(8,981	)	$	6,848	$	(18,102	)


Three Months Ended March 31, 2002

										Reconciling Items

	Core			Emerging			Total Segments			Discontinued Operations and Dispositions			Corporate			Other			Consolidated Results

	(in thousands)
Selected Data:
Revenues	$	24,757		$	76		$	24,833		$	—		$	—		$	(14	)	$	24,819
Net loss	$	(28,316	)	$	(10,633	)	$	(38,949	)	$	(8,858	)	$	(13,833	)	$	(8	)	$	(61,648	)

Results of Operations – Core Companies

The following presentation of our Results of Operations – Core Companies includes the results of our consolidated Core partner companies and our share of the results of our equity method Core partner companies.

Core Segment Results


	Three Months Ended March 31,

	2003			2002

	(in thousands)
Selected data:
Revenue	$	24,737		$	24,757
Cost of revenue	$	(15,339	)	$	(18,241	)
Selling, general and administrative	$	(13,461	)	$	(16,197	)
Research and development	$	(5,461	)	$	(6,488	)
Amortization of other intangibles	$	(2,174	)	$	(3,100	)
Equity loss	$	(3,959	)	$	(6,831	)
Net loss	$	(14,760	)	$	(28,316	)

Revenue

Revenue from Core companies was $24.7 million for the three months ended March 31, 2003 versus $24.8 million for the three months ended March 31, 2002. Included in Core revenue for 2003 was $1.8 million due to the inclusion of an additional consolidated partner company which was not included during the 2002 period. Increases in the customer base and increased activity of existing customers at ICG Commerce were more than offset by lower software and services revenue at CommerceQuest and eCredit and lower revenue at OneCoast principally as a result of the sale of an agency.

Operating Expenses

Operating expenses, including cost of revenue, selling, general and administrative and research and development for Core companies were $34.3 million and $40.9 million for the three months ended March 31, 2003 and 2002, respectively. These operating expenses have decreased by $9.3 million as ICG Commerce, CommerceQuest, OneCoast and eCredit implemented cost reduction programs. These decreases were partially offset by an increase of $2.7 million due to the inclusion of an additional consolidated partner company in 2003.

Amortization of other intangibles

Amortization of other intangibles related to Core companies was $2.2 million and $3.1 million for the three months ended March 31, 2003 and 2002, respectively. The decrease is principally the result of a lower net intangibles balance at March 31, 2003 versus 2002.

Equity Loss

A significant portion of our net results from our Core companies is derived from those partner companies in which we hold a substantial minority ownership interest. Our share of income or losses of these companies, amortization of intangibles related to our carrying value of these companies and any impairment losses related to these companies is recorded in our Consolidated Statements of Operations under “Equity loss.”

Our share of income and net losses of Core companies decreased to $4.0 million for the three months ended March 31, 2003 versus $6.8 million for the same period of 2002. As a result of our share of Verticalnet’s, eMerge Interactive’s and Universal Access’ reduced 2003 losses versus 2002, our equity loss decreased by $1.6 million.

The residual decrease of $1.2 million is due to decreased losses at the majority of our Core equity method companies in 2003 versus 2002 as they increased revenues and reduced operating expenses.

Our investment in certain Core equity method partner companies may be reduced to zero. As a result we may not record our share of these companies losses until such time as our share of income equals the unrecorded losses or the partner companies equity transactions result in an adjustment of our investment.

There were no impairment losses related to Core equity method partner companies for the three months ended March 31, 2003 and 2002.

Results of Operations – Emerging Companies

The following presentation of our Results of Operations – Emerging Companies includes the results of our consolidated Emerging partner companies and our share of the results of our equity method Core partner companies.

Emerging Segment Results


	Three Months Ended March 31,

	2003			2002

	(in thousands)
Selected data:
Revenue	$	202		$	76
Cost of revenue	$	(89	)	$	(100	)
Selling, general and administrative	$	(356	)	$	(328	)
Equity loss	$	(966	)	$	(10,284	)
Net loss	$	(1,209	)	$	(10,633	)

Our share of income and net losses of equity method Emerging companies was $1.0 million for 2003 versus $10.3 million for 2002. The decrease is primarily the result of our basis in these companies being reduced to zero, principally at Onvia.com, and reduced losses at these companies.

Discontinued Operations and Dispositions

During 2002, two consolidated subsidiaries sold substantially all of their assets. In accordance with SFAS No. 144, these transactions were treated as discontinued operations. Accordingly, the revenue and operating results for 2002 have been presented, net, in one line item “Loss on discontinued operations” in our Consolidated Statements of Operations. These two consolidated subsidiaries, Delphion and Logistics.com had revenue of $3.4 million for the three months ended March 31, 2002. Our share of these companies’ losses totaled $5.4 million for the three months ended March 31, 2002. The assets and liabilities of Delphion should be settled by the end of the third quarter of 2003.

The caption “Dispositions” for segment reporting purposes includes the impact on our consolidated results of the partner companies that we have disposed our ownership interest in or have ceased operations during the three months ended March 31, 2002.

Our share of the income and losses of those equity method companies that we disposed of was losses of $3.5 million for the three months ended March 31, 2002.

Corporate


	Three Months Ended March 31,

	2003			2002

	(in thousands)
General and administrative	$	(5,032	)	$	(8,226	)
Interest income (expense), net		(3,949	)		(5,607	)

Total corporate operating expenses	$	(8,981	)	$	(13,833	)

General and Administrative

Our general and administrative costs consist primarily of employee compensation, facilities, outside services such as legal, accounting and consulting, travel-related costs and stock-based compensation. The decrease is the result of the restructuring of our operations, principally the reduction in the number of employees. Included in these expenses is stock-based compensation of $1.1 and $2.7 million for the three months ended March 31, 2003 and 2002, respectively, consisting primarily of amortization expense related to options granted below fair value in 1999 and grants of restricted stock to employee’s during 2001. Stock-based compensation for 2003 decreased as the result of more restricted stock grants vesting in 2002.

Interest Income/Expense

The decrease in interest expense, net of $1.7 million is primarily attributable to the reduction in the amount of convertible notes outstanding and cash at March 31, 2003 versus March 31, 2002.

Other


	Three Months Ended March 31,

	2003		2002

	(in thousands)
Other income (loss) (Note 12)	$	5,414	$	(5,725	)
Minority interest		1,434		5,717

	$	6,848	$	(8	)

Liquidity and Capital Resources

As of March 31, 2003, we had $70.5 million in cash, cash equivalents and short-term investments, $9.6 million in available-for-sale securities, principally consisting of shares in i2 Technologies which were converted into cash in April 2003 and $4.2 million in restricted cash for total liquidity of $84.3 million. In addition, our consolidated partner companies had cash, cash equivalents, restricted cash and short-term investments of $33.6 million. Consolidated working capital decreased to $55.1 million at March 31, 2003 compared to $73.6 million at December 31, 2002, primarily as a result of acquisition of ownership interests, our repurchase of debt and net cash outflows from operations during the period ended March 31, 2003.

Net cash used in operating activities was approximately $10.2 million for the quarter ended March 31, 2003 compared to $13.3 million during the same prior year period. The decrease is primarily the result of the decreased losses at our consolidated partner companies.

Net cash used in investing activities during the quarter ended March 31, 2003 was $2.4 million, versus $11.6 million during the comparable 2002 period. The decrease is primarily due to fewer acquisitions of ownership interests and the effect of the reduction in cash due to a deconsolidation of a subsidiary in the 2002 period.

Net cash used in financing activities during the quarter ended March 31, 2003 was $5.5 million, versus net cash provided by financing activities of $0.1 million during the comparable 2002 period. This change is primarily attributable to the repurchase of convertible notes during the three months ended March 31, 2003.

Existing cash, cash equivalents and short-term investments, available-for-sale securities, proceeds from the issuance of debt and equity securities of our consolidated partner companies to third parties, proceeds from the potential sales of all or a portion

of our minority interests in certain partner companies, and other internal sources of cash flow are expected to be sufficient to fund our cash requirements through March 31, 2004, including commitments to existing partner companies, debt obligations and repurchases and general operations requirements. At March 31, 2003, we had $14.0 million of funding and guarantee commitments relating to partner companies. If a certain consolidated partner company achieves a fair market value in excess of $1.0 billion, we will be obligated to pay, in cash or stock at our option, 4% of the partner company’s fair market value in excess of $1.0 billion, up to $70 million. This contingent obligation will expire on the earlier to occur of May 31, 2005 or an unaffiliated company sale, if the valuation milestone is not achieved. Currently, the fair market value of this partner company is well below $1.0 billion.

We will continue to evaluate acquisition opportunities and may acquire additional equity or debt interests in new and existing partner companies during the next twelve months; however, such acquisitions are largely discretionary. If we elect to make additional acquisitions, it may become necessary for us to raise additional funds. We may not be able to raise additional capital and failure to do so could have a material adverse effect on our business. If additional funds are raised through the issuance of equity securities, our existing stockholders may experience significant dilution.

We are a party to a loan agreement which provides for issuances of letters of credit up to $20 million subject to a cash secured borrowing base. As of March 31, 2003, $0.9 million in letters of credit were outstanding under the agreement.

We and our consolidated subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. We do not expect the ultimate liability with respect to these actions will materially affect our financial position or cash flows.

Commitments

Our long-term commitments have not materially changed from those disclosed in our filing on Form 10-K/A for the year ended December 31, 2002 other than the aforementioned reduced funding commitments and debt repurchase.

Risk Factors

Forward-looking statements made with respect to our financial condition and results of operations and business in this Report and those made from time to time by us through our senior management are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and projections about future events but are subject to known and unknown risks, uncertainties and assumptions about us and our partner companies that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements.

Factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those anticipated in forward-looking statements include, but are not limited to, factors discussed elsewhere in this Report and include among other things:

• our ability and our partner companies’ ability to access the capital markets;

• our ability to effectively manage existing capital resources;

• our ability to retain key personnel;

• our ability to maximize value in connection with divestitures;

• development of the e-commerce and information technology markets;

• our outstanding indebtedness; and

• our partner companies’ ability to compete successfully against competitors.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue” or the negative of such terms or other similar expressions. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might not occur.

Risks Particular to Internet Capital Group

Our ability to grow our business and the businesses of our partner companies may be adversely affected if economic conditions in the United States are not favorable.

The United States economy has been weakened by, among other things, a recession, the terrorist attacks of September 11, 2001 and the response of the United States to such attacks and hostilities in the Middle East involving the United States Armed Forces. These matters, and subsequent future terrorist attacks or hostilities or economic deterioration, could continue to result in further weakness in the United States economy, which could negatively affect our business.

Our stock price has been volatile in the past and may continue to be volatile in the future.

Our stock price has historically been very volatile. Stock prices of technology companies have generally been volatile as well. This volatility may continue in the future.

The following factors, among others, will add to our common stock price’s volatility:

• actual or anticipated variations in our quarterly results and those of our partner companies;

• changes in the market valuations of our partner companies and other technology and internet companies;

• conditions or trends in the software industry in general and the e-commerce sector in particular;

• negative public perception of the prospects of internet companies;

• changes in our financial estimates and those of our partner companies by securities analysts;

• new products or services offered by us, our partner companies and their competitors;

• announcements by our partner companies and their competitors of technological innovations;

• announcements by us or our partner companies or our competitors of significant acquisitions, strategic partnerships or joint ventures;

• our capital commitments;

• additional sales of our securities;

• additions to or departures of our key personnel or key personnel of our partner companies; and

• general economic conditions such as a recession or interest rate or currency rate fluctuations and the reluctance of enterprises to increase spending on new technologies.

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

If our common stock ceases to be listed for trading on the Nasdaq SmallCap Market, the price and liquidity of our common stock may be adversely affected.

Companies listed on the Nasdaq SmallCap Market are required to maintain a minimum bid price of $1.00 per share. When we transferred from the Nasdaq National Market to the Nasdaq SmallCap Market, our securities were trading below $1.00. As a result of our transfer to the SmallCap market, we were granted an initial grace period lasting until October 22, 2002 to regain compliance with the $1.00 per share minimum bid price requirement. On October 23, 2002 we received a letter from Nasdaq informing us that, although we did not regain compliance during the initial grace period, we qualified for and would be provided with a second grace period, lasting 180 calendar days, to regain compliance. On April 21, 2003, we received a letter from Nasdaq informing us that although we did not regain compliance during the second grace period, we qualified for and have been provided with with a third grace period lasting 90 calendar days to regain compliance. Accordingly, while we are not now in compliance with the SmallCap Market’s $1.00 per share minimum bid price requirement, we currently have until July 21, 2003 to regain compliance.

In order to regain compliance with the SmallCap Market’s minimum bid price requirement, the bid price of our common stock must close at $1.00 per share or more for a minimum of ten consecutive trading days before the end of the relevant grace period. There can be no assurance that we will achieve compliance with the $1.00 per share minimum bid price before the last applicable grace period is exhausted, or that we will continue to satisfy all of the other listing requirements of the Nasdaq SmallCap Market. In the event that we do not qualify for listing on the Nasdaq SmallCap Market, sales of our common stock would likely be conducted only in the over-the-counter market. This could have a negative impact on the price and liquidity of our common stock, as investors could find it

more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock.

We may not be able to pay our long-term debt when it matures.

In December 1999, the Company issued convertible subordinated notes that bear interest at an annual rate of 5.5% and mature in December 2004. As of March 31, 2003, $271.1 million in face value of these notes remained outstanding. We may be unable to repay or refinance this long-term debt when it matures. If we successfully refinance this debt, then we may issue securities that will be senior to our common stock and may issue equity securities that would dilute the interests of the holders of our common stock. If we are unable to pay or refinance these obligations when due, we would probably be rendered insolvent and could be forced into bankruptcy. In a bankruptcy proceeding, it is likely that the holders of our common stock would lose most or all of their investment.

Our outstanding indebtedness could negatively impact our future prospects.

As of March 31, 2003, we had $271.1 million in outstanding convertible subordinated notes and $17.9 million in other long-term debt (including the current portion thereof). This indebtedness may:

• make it more difficult to obtain additional financing;

• limit our ability to deploy existing capital resources; and

• constrain our ability to react quickly in an unfavorable economic climate.

If we are unable to satisfy our debt service requirements, substantial liquidity problems could result, which would negatively impact our future prospects.

Our business depends upon the performance of our partner companies, which is uncertain.

Economic, governmental, industry and internal company factors outside our control affect each of our partner companies. If our partner companies do not succeed, the value of our assets and the price of our common stock will decline. The material risks relating to our partner companies include:

• fluctuations in the market price of the common stock of Verticalnet, eMerge Interactive, Onvia.com and Universal Access, our publicly traded partner companies, and other future publicly traded partner companies, which are likely to affect the price of our common stock;

• many of our partner companies are in the early stages of their development with limited operating history, little revenue and substantial losses;

• lack of the widespread commercial use of the internet, decreased spending on information technology software and services and elongated sales cycles which may prevent our partner companies from succeeding;

• intensifying competition for the products and services our partner companies offer, which could lead to the failure of some of our partner companies; and

• the inability of our partner companies to secure additional financing, which may force some of our partner companies to cease or scale back operations.

Of our $323.8 million in total assets as of March 31, 2003, $68.8 million, or 21.2%, consisted of ownership interests in and advances to our partner companies accounted for under the equity and cost methods. The carrying value of our partner company ownership interests includes our original acquisition cost, the effect of accounting for certain of our partner companies under the equity method of accounting, the effect of adjustments to our carrying value resulting from certain issuances of equity securities by our partner companies, and the effect of impairment charges recorded for the decrease in value of certain partner companies. The carrying value of our partner companies will be impaired and decrease if one or more of our partner companies do not succeed. The carrying value of our partner companies is not marked to market; therefore, a decline in the market value of one of our publicly traded partner companies may impact our financial position by not more than the carrying value of the partner company. However, this decline would likely affect the price of our common stock. For example, our stakes in our publicly traded partner companies had a combined market value of $13.6 million in the aggregate as of March 31, 2003. A decline in the market value of our publicly traded partner companies will likely cause a decline in the price of our common stock.

Other material risks relating to our partner companies are more fully described below under “Risks Particular to Our Partner Companies.”

Because we have limited resources to dedicate to our partner companies, some of the partner companies may not be able to raise sufficient capital to sustain their operations.

Our allocation of resources to our partner companies is mostly discretionary. Because our resources and our ability to raise capital are limited, we cannot commit to provide our partner companies with sufficient capital resources to allow them to reach a cash flow positive position. If our partner companies are not able to raise capital from other outside sources, then they may need to cease operations.

If public and private capital markets are not favorable for the technology sector we may not be able to execute on our strategy.

Our strategy includes creating value for our stockholders by building leading technology e-commerce companies. Our success depends on the acceptance by the public and private capital markets of technology companies in general, including initial public offerings of those companies. The technology market has experienced significant volatility recently and the market for initial public offerings of technology companies has been extremely weak since 2000. If these conditions continue, we may not be able to create stockholder value by taking our partner companies public. In addition, reduced market interest in technology e-commerce companies may reduce the market value of our publicly traded partner companies.

Fluctuations in our quarterly results may adversely affect our stock price.

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

• the operating results of our partner companies;

• significant fluctuations in the financial results of technology companies generally;

• changes in equity losses or income;

• the acquisition or divestiture of interests in partner companies;

• the repurchase of any of our outstanding indebtedness

• changes in our methods of accounting for our partner company interests, which may result from changes in our ownership percentages of our partner companies;

• sales of equity securities by our partner companies, which could cause us to recognize gains or losses under applicable accounting rules;

• the pace of development or a decline in growth of the technology market;

• competition for the goods and services offered by our partner companies; and

• our ability to effectively manage our growth and the growth of our partner companies.

We believe that period-to-period comparisons of our operating results are not meaningful. If our operating results in one or more quarters do not meet securities analysts’ or investors’ expectations, the price of our common stock could decrease.

The loss of any of our or our partner companies’ executive officers or other key personnel or our or our partner companies’ inability to attract additional key personnel could disrupt our business and operations.

We believe that our success will depend on continued employment by us and our partner companies of executive officers and key personnel, as well as on our and our partner companies’ ability to attract additional qualified personnel. If one or more members of our executive officers or key personnel, or our partner companies’ executive officers or key personnel were unable or unwilling to continue in their present positions, or if we or our partner companies were unable to hire qualified personnel, our business and operations could be disrupted and our operating results and financial condition could be seriously harmed.

The success of some of our partner companies also depends on their having highly trained technical and marketing personnel. A shortage in the number of trained technical and marketing personnel could limit the ability of our partner companies to increase sales of their existing products and services and launch new product offerings.

We have had a history of losses and expect continued losses in the foreseeable future.

We have had significant operating losses and, excluding the effect of any future non-operating gains, we expect to continue incurring significant operating losses in the future. As a result, we may not have sufficient resources to expand our operations in the future. We can give no assurances as to when or whether we will achieve profitability, and if we ever have profits, we may not be able to sustain them.

We may have difficulty assisting our partner companies in managing their operations.

Our partner companies are facing different challenges. Some are growing rapidly. Some face elongated sales cycles where our prospective customers maintain tight controls over technology spending. These situations are likely to place significant strain on their resources and on the resources we allocate to assist our partner companies. In addition, our management may be unable to convince our partner companies in adopting ideas for effectively and successfully managing such situations.

Our accounting estimates with respect to the ultimate recoverability of our basis in our partner companies could change materially in the near term.

We operate in an industry that is rapidly evolving and extremely competitive. Many internet-based businesses, including some with business models similar to ours, have experienced difficulty in raising additional capital necessary to fund operating losses and continue investments that their management teams believe are necessary to sustain operations. Valuations of public companies operating in the technology sector have declined significantly since early 2000. In the first quarter of 2000 we announced several significant acquisitions that were financed principally with shares of our stock and based on the price of our stock at that time, were valued in excess of $1 billion. Based on our periodic review of our partner company holdings, including those valued during 2001, impairment charges of $1.3 billion were recorded to write off certain partner company holdings. It is reasonably possible that our accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis including goodwill in other partner companies could change in the near term and that the effect of such changes on the financial statements could be material. At year end, the recorded amount of carrying basis including goodwill is not impaired, although we cannot assure that our future results will confirm this assessment, that a significant write-down or write-off of partner company carrying basis including goodwill will not be required in the future, or that a significant loss will not be recorded in the future upon the sale of a partner company.

We may compete with one of our stockholders and some of our partner companies, and our partner companies may compete with each other, which could deter companies from partnering with us and may limit future business opportunities.

We may compete with one of our stockholders and some of our partner companies for internet-related opportunities. As of March 31, 2003, Safeguard Scientifics, Inc. owns 12.9% of our outstanding common stock and may compete with us to acquire interests in technology e-commerce companies. The Chairman of Safeguard Scientifics’ Board of Directors and Safeguard Scientifics’ former Chairman and CEO are currently members of our Board of Directors. This may give Safeguard Scientifics access to our business plan and knowledge about potential transactions. In addition, we may compete with our partner companies to acquire interests in technology e-commerce companies and our partner companies may compete with each other for technology e-commerce opportunities. This competition, and the complications posed by the Safeguard Scientifics affiliated directors, may deter companies from partnering with us and may limit our business opportunities.

Our partner companies could make business decisions that are not in our best interests or that we do not agree with, which could impair the value of our partner company interests.

Although we generally seek a significant equity interest and participation in the management of our Core partner companies, we may not be able to control significant business decisions of our Core partner companies. In addition, although we currently own a controlling interest in several of our Core partner companies, we may not maintain this controlling interest. Equity interests in partner companies in which we lack control or share control involves additional risks that could cause the performance of our interest and our operating results to suffer, including the management of a partner company having economic or business interests or objectives that are different from ours

and partner companies not taking our advice with respect to the financial or operating difficulties that they may encounter.

Our inability to prevent dilution of our ownership interests in our partner companies or our inability to otherwise have a controlling influence over the management and operations of our partner companies could have an adverse impact on our status under the Investment Company Act. Our ability to adequately control our partner companies could also prevent us from assisting them, or could prevent us from liquidating our interest in them at a time or at a price that is favorable to us. Additionally, our partner companies may not collaborate with each other or act in ways that are consistent with our business strategy. These factors could hamper our ability to maximize returns on our interests and cause us to recognize losses on our interests in partner companies.

Our operations and growth could be impaired by limitations on our and our partner companies’ ability to raise money.

We have been dependent on the capital markets for access to funds for acquisitions, operations and other purposes. While we attempt to operate our business in such a manner so as to be independent from the capital markets, there is no assurance that we will be successful in doing so. Our partner companies are also dependent on the capital markets to raise capital for their own purposes. During the past three years, the market for internet-related and software companies and initial public offerings weakened dramatically. If this weakness continues for an extended period of time, our ability and the ability of our partner companies to grow and access the capital markets, if necessary, will be impaired, which would require us to take other actions, such as borrowing money on terms that may be unfavorable to us, or divesting of interests in our partner companies to raise capital.

Our stakes in some partner companies have been and are likely to be diluted, which could materially reduce the value of our stake in such partner companies.

Since we allocate our financial resources to those partner companies that we believe have the most potential, our ownership interests in other partner companies have been and are likely to continue to be diluted due to our decision not to participate in financings. This dilution results in a reduction in the value of our stakes in such partner companies.

In the future, we may need to raise additional capital to fund our operations and this capital may not be available on acceptable terms, if at all.

We may need to raise additional funds in the future and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all.

Even if a number of our partner companies achieve profitability, we may not be able to extract cash from such companies, which could have a negative impact on our operations.

One of our goals is to help our partner companies achieve profitability. Even if a number of our partner companies do meet such goal, we may not be able to access cash generated by such partner companies to fund our own operations, which could have a negative impact on our operations.

When we divest partner company interests, we may be unable to obtain maximum value for such interests.

We focus our capital and human resources on those partner companies that we believe present the greatest long-term stockholder value. We may divest our interests in those partner companies that do not fit this criterion or in other partner companies that we believe are no longer core to our strategy. We divest of our interests in other partner companies to generate cash or for strategic reasons. When we divest all or part of an interest in a partner company interest, we may not receive maximum value for our position. For partner companies with publicly-traded stock, we may be unable to sell our interest at then-quoted market prices. Furthermore, for those partner companies that do not have publicly-traded stock, the realizable value of our interests may ultimately prove to be lower than the carrying value currently reflected in our consolidated financial statements. We continually evaluate the carrying value of our ownership interests in and advances to each of our partner companies for possible impairment based on achievement of business plan objectives and milestones, the value of each ownership interest in the partner company relative to carrying value, the financial condition and prospects of the partner company and other relevant factors. If we are

unable to raise capital from other sources we may be forced to sell our stakes in partner companies at unfavorable prices in order to sustain our operations. Additionally, we may be unable to find buyers for certain of our assets, which could adversely affect our business.

We may have difficulty selling our stakes in our publicly-traded partner companies.

Because we hold significant stakes of restricted securities in thinly-traded public companies, we may have difficulty selling our interest in such companies and, if we are able to sell our shares, such sales may be subject to volume limitations and may be at prices that are below the then-quoted bid prices.

The Companies that we have identified as Core partner companies may not succeed.

We cannot ensure that the companies we have identified as Core partner companies are those that actually have the greatest value proposition or are those to which we will continue to allocate capital. Although we have identified certain of our partner companies as Core partner companies, this categorization does not necessarily imply that every one of our Core partner companies is a de facto success at this time or will become successful in the future. There is no guarantee that a Core partner company will remain categorized as Core or that it will be able to successfully continue operations.

Due to our decision to allocate the majority of our resources to partner companies we believe present the greatest long-term stockholder value, our ability to provide support to our other partner companies will be limited.

We allocate our resources to focus on those partner companies that we believe present the greatest stockholder value. We cannot ensure that the companies we identified in this process are those that actually have the greatest value proposition. As a result of our reallocation of resources, we will not allocate capital to all of our existing partner companies. Our decision to not provide additional capital support to some of our partner companies could have a material adverse impact on the operations of such partner companies.

We may have to buy, sell or retain assets when we would otherwise choose not to in order to avoid registration under the Investment Company Act of 1940, which would impact our investment strategy.

We believe that we are actively engaged in the business of technology through our network of majority-owned subsidiaries and companies that we are considered to “control.” Under the Investment Company Act, a company is considered to control another company if it owns more than 25% of that company’s voting securities and is the largest stockholder of such company. A company may be required to register as an investment company if more than 45% of its total assets consist of, and more than 45% of its income/loss and revenue attributable to it over the last four quarters is derived from, ownership interests in companies it does not control. Because many of our partner companies are not majority-owned subsidiaries, and because we own 25% or less of the voting securities of a number of our partner companies, changes in the value of our interests in our partner companies and the income/loss and revenue attributable to our partner companies could subject us to regulation under the Investment Company Act unless we take precautionary steps. For example, in order to avoid having excessive income from “non-controlled” interests, we may not sell minority interests we would otherwise want to sell or we may have to generate non-investment income by selling interests in partner companies that we are considered to control. We may also need to ensure that we retain more than 25% ownership interests in our partner companies after any equity offerings. In addition, we may have to acquire additional income or loss generating majority-owned or controlled interests that we might not otherwise have acquired or may not be able to acquire “non-controlling” interests in companies that we would otherwise want to acquire. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively managing, operating and promoting collaboration among our network of partner companies. On August 23, 1999, the SEC granted our request for an exemption under Section 3(b)(2) of the Investment Company Act declaring us to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. This exemptive order reduces the risk that we may have to take action to avoid registration as an investment company, but it does not eliminate the risk.

We have implemented certain anti-takeover provisions that could make it more difficult for a third party to acquire us.

Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Our certificate of incorporation provides that our board of directors may issue preferred stock without stockholder approval and also provides for a staggered board of directors. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders. Additionally, we have a Rights Agreement which has the effect of discouraging any person or group from beneficially owning more that 15% of our outstanding common stock unless our board has amended the plan or redeemed the rights. The combination of these provisions may inhibit a non- negotiated merger or other business combination.

In August 2003, members of management may sell shares of the Company’s common stock in connection with the vesting of restricted stock grants, which could have a negative effect on the price of the Company’s stock.

Members of our management have been granted shares of restricted stock of which approximately 1.2 million will vest in August 2003. We believe that individuals are likely to sell shares of the Company’s common stock to cover tax liabilities associated with the vesting and they may sell additional vested shares. Such sales could have a negative effect on the stock price.

Risks Particular to Our Partner Companies

Many of our partner companies have a limited operating history and may never be profitable.

Many of our partner companies are early-stage companies with limited operating histories, have significant historical losses and may never be profitable. Many of these companies have incurred substantial costs to develop and market their products and expand operations, have incurred net losses and cannot fund their cash needs from operations. Operating expenses of these companies could increase in the foreseeable future as they continue to develop products, increase sales and marketing efforts and expand operations.

Fluctuation in the price of the common stock of our publicly-traded partner companies may affect the price of our common stock.

Verticalnet, eMerge Interactive, Onvia.com and Universal Access are our publicly-traded partner companies. The price of their common stock has been highly volatile. As of March 31, 2003, the market value of our publicly-traded partner companies was $13.6 million. Fluctuations in the price of Verticalnet’s, eMerge Interactive’s, Onvia.com’s and Universal Access’ and other future publicly-traded partner companies’ common stock are likely to affect the price of our common stock. Our assets as reflected in our balance sheet dated March 31, 2003, were $323.8 million, of which $9.4 million related to Verticalnet, eMerge Interactive, Onvia.com and Universal Access. However, we believe that comparisons of the value of our holdings in partner companies to the value of our total assets are not meaningful because not all of our partner company ownership interests are marked to market in our balance sheet.

Verticalnet’s results of operations, and accordingly the price of its common stock, may be adversely affected by the risk factors disclosed in its SEC filings, including the following factors:

• potential inability to sustain operations due to cash constraints and exploration of alternatives that include a sale of all or part of its business or a reorganization or liquidation of Verticalnet;

• inability to retain key management and experienced software personnel;

• inability to generate significant revenues from enterprise, software licensing and professional services;

• inability to reduce expenses or generate an operating profit;

• inability to establish brand awareness;

• inability to acquire additional funding;

• inability to maintain listing on the Nasdaq SmallCap Market; and

• lengthy sales and implementation cycles for products.

eMerge Interactive’s results of operations, and accordingly the price of its common stock, may be adversely affected by the risk factors disclosed in its SEC filings, including the following factors:

• lack of commercial acceptance of eMerge Interactive’s products and services;

• inability to respond to competitive developments;

• failure to achieve brand recognition;

• failure to introduce new products and services; and

• failure to upgrade and enhance its technologies to accommodate expanded product and service offerings and increased customer traffic.

Onvia.com’s results of operations, and accordingly the price of its common stock, may be adversely affected by the risk factors disclosed in its SEC filings, including the following factors:

• potential loss of rights to distribute governmental content;

• potential reduction in governmental spending resulting in a reduction of Onvia.com’s bid flow;

• inability to eliminate monthly lease payments on idle office space;

• inability to increase subscribership to its premium, higher priced services;

• many competitors of Onvia.com have larger customer bases and greater brand recognition;

• government agencies’ unwillingness to purchase their business services and products online;

• a significant number of small businesses, government agencies and their vendors’ unwillingness to use its emarketplace to buy and sell services and products;

• failure of small business customers to provide data about themselves;

• inability to enhance the features and services of its exchange to achieve acceptance and scalability;

• negative impact on stock price and future operations resulting from a declared cash distribution; and

• inability to manage a change in strategy.

Universal Access’ results of operations, and accordingly the price of its common stock, may be adversely affected by the risk factors disclosed in its SEC filings, including the following factors:

• restrictions on future operating activities and ability to pursue business opportunities in connection with the incurrence of indebtedness

• significant dilution of stockholders’ equity interest in connection with proposed stock sale to CityNet Telecommunications, Inc.

• failure of its services to be sufficiently rapid, reliable and cost-effective;

• unwillingness of clients to outsource the obtaining of circuits;

• inability to expand its Universal Transport Exchange (UTX) facilities;

• failure to successfully operate a network operations center;

• inability to implement and maintain its Universal Information Exchange (UIX) databases;

• failure of the market for UTX services to grow;

• inability to maintain listing on the Nasdaq SmallCap Market;

• inability of clients’ to pay their obligations;

• inability to obtain additional financing;

• inability to reduce costs and increase revenues, difficulties or delays in delivering circuits;

• inability to successfully aggregate circuits; and

• dependence on several large clients.

The success of our partner companies depends on the development of the e-commerce market, which is uncertain.

Some of our partner companies rely on e-commerce markets for the success of their businesses. The development of the e-commerce market is in its early stages. If widespread commercial use of the internet does not develop, or if the internet does not develop as an effective medium for providing products and services, our partner companies may not succeed.

Our long-term success depends on widespread market acceptance of e-commerce.

A number of factors could prevent widespread market acceptance of e-commerce, including the following:

• the unwillingness of businesses to shift from traditional processes to e-commerce processes;

• the network necessary for enabling substantial growth in usage of e-commerce may not be adequately developed;

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

• insufficient availability of telecommunication services or changes in telecommunication services which could result in slower response times for the users of e-commerce; and

• concern and adverse publicity about the security of e-commerce transactions.

Our partner companies may fail if their competitors provide superior technology offerings or continue to have greater resources than our partner companies have.

Competition for technology products and services is intense. As the market for technology grows, we expect that competition will intensify. Barriers to entry are minimal and competitors can offer products and services at a relatively low cost. Our partner companies compete for a share of a customer’s:

• purchasing budget for information technology and services, materials and supplies with other online providers and traditional distribution channels; and

• dollars spent on consulting services with many established information systems and management consulting firms.

In addition, some of our partner companies compete to attract and retain a critical mass of buyers and sellers. Many companies offer competitive solutions that compete with one or more of our partner companies. We expect that additional companies will offer competing solutions on a stand-alone or combined basis in the future. Furthermore, our partner companies’ competitors may develop products or services that are superior to, or have greater market acceptance than, the solutions offered by our partner companies. If our partner companies are unable to compete successfully against their competitors, our partner companies may fail.

Many of our partner companies’ competitors have greater brand recognition and greater financial, marketing and other resources than our partner companies. This may place our partner companies at a disadvantage in responding to their competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives.

In the future, our partner companies may need to raise additional capital to fund their operations and this capital may not be available on acceptable terms, if at all.

Our partner companies may need to raise additional funds in the future and we cannot be certain that they will be able to obtain additional financing on favorable terms, if at all.

Our partner companies may fail to retain significant customers.

If our partner companies are not able to retain significant customers, such partner companies’ results of operations and financial position could be adversely effected.

The inability of our partner companies’ customers to pay their obligations to them in a timely manner or at all could have an adverse effect on our partner companies.

Some of the customers of our partner companies may have inadequate financial resources to meet all their obligations. If a significant number of customers are unable to pay amounts owed to a partner company, such partner company’s results of operations and financial condition could be adversely affected.

Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.

Our partner companies are inventing new solutions for doing business. In support of this innovation, they will develop proprietary techniques, trademarks, processes and software. Although we believe reasonable efforts will be taken to protect the rights to this intellectual property, the complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of these young companies and the demands of quick

delivery of products and services to market, create risk that their efforts will prove inadequate. Further, the nature of internet business demands that considerable detail about their innovative processes and techniques be exposed to competitors, because it must be presented on the websites in order to attract clients. Some of our partner companies also license content from third parties, and it is possible that they could become subject to infringement actions based upon the content licensed from those third parties. Our partner companies generally obtain representations as to the origin and ownership of such licensed content; however, this may not adequately protect them. Any claims against our partner companies’ proprietary rights, with or without merit, could subject our partner companies to costly litigation and the diversion of their technical and management personnel. If our partner companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase and their profits, if any, will decrease.

Government regulation of the internet and e-commerce may harm our partner companies’ businesses

Government regulation of the internet and e-commerce is evolving and unfavorable changes could harm our partner companies’ business. Our partner companies are subject to general business regulations and laws specifically governing the internet and e-commerce. Such existing and future laws and regulations may impede the growth of the internet or other online services. These regulations and laws may cover taxation, user privacy, pricing content, copyrights, distribution, electronic contracts, consumer protection, the provision of online payment services, broadband residential internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and e-commerce. Unfavorable resolution of these issues may harm our partner companies’ business.

Our partner companies that publish or distribute content over the internet may be subject to legal liability.

Some of our partner companies may be subject to legal claims relating to the content on their websites, or the downloading and distribution of this content. Claims could involve matters such as defamation, invasion of privacy and copyright infringement. Providers of internet products and services have been sued in the past, sometimes successfully, based on the content of material. In addition, some of the content provided by our partner companies on their websites is drawn from data compiled by other parties, including governmental and commercial sources. The data may have errors. If any of our partner companies’ website content is improperly used or if any of our partner companies supply incorrect information, it could result in unexpected liability. Any of our partner companies that incur this type of unexpected liability may not have insurance to cover the claim or its insurance may not provide sufficient coverage. If our partner companies incur substantial cost because of this type of unexpected liability, the expenses incurred by our partner companies will increase and their profits, if any, will decrease.

Our partner companies’ computer and communications systems may fail, which may discourage parties from using our partner companies’ systems.

Some of our partner companies’ businesses depend on the efficient and uninterrupted operation of their computer and communications hardware systems. Any system interruptions that cause our partner companies’ websites to be unavailable to web browsers may reduce the attractiveness of our partner companies’ websites to third parties. If third parties are unwilling to use our partner companies’ websites, our business, financial condition and operating results could be adversely affected. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events.

Our partner companies’ businesses may be disrupted if they are unable to upgrade their systems to meet increased demand.

Capacity limits on some of our partner companies’ technology, transaction processing systems and network hardware and software may be difficult to project and they may not be able to expand and upgrade their systems to meet increased use. As traffic on our partner companies’ websites continues to increase, they must expand and upgrade their technology, transaction processing systems and network hardware and software. Our partner companies may be unable to accurately project the rate of increase in use of their websites. In addition, our partner companies may not be able to expand and upgrade their systems and network hardware and software capabilities to accommodate increased use of their websites. If our partner companies are unable to appropriately upgrade their systems and network hardware and software, the operations and processes of our partner companies may be disrupted.

Our partner companies may be unable to acquire or maintain easily identifiable website addresses or prevent third parties from acquiring website addresses similar to theirs.

Some of our partner companies hold various website addresses relating to their brands. These partner companies may not be able to prevent third parties from acquiring website addresses that are similar to their addresses, which could adversely affect the use by businesses of our partner companies’ websites. In these instances, our partner companies may not grow as we expect. The acquisition and maintenance of website addresses generally is regulated by governmental agencies and their designees. The regulation of website addresses in the United States and in foreign countries is subject to change. As a result, our partner companies may not be able to acquire or maintain relevant website addresses in all countries where they conduct business. Furthermore, the relationship between regulations governing such addresses and laws protecting trademarks is unclear.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to equity price risks on the marketable portion of our equity securities. Our public holdings at March 31, 2003 include equity positions in companies in the technology industry sector, including: eMerge Interactive; Universal Access; Onvia.com; and Verticalnet, many of which have experienced significant historical volatility in their stock prices. A 20% adverse change in equity prices, based on a sensitivity analysis of our public holdings as of March 31, 2003, would result in an approximate $2.7 million decrease in the fair value of our public holdings.

The carrying values of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximate fair value because of the short maturity of these instruments. At March 31, 2003, the fair value of convertible subordinated notes is $134.2 million versus a carrying value of $271.1 million. The carrying value of other long-term debt approximates its fair value, as estimated by using discounted future cash flows based on our current incremental borrowing rates for similar types of borrowing arrangements.

We have historically had very low exposure to changes in foreign currency exchange rates, and as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days of the filing of this Report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures provide reasonable assurance that information required to be included in the Company’s periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.

There were no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our most recent evaluation.

PART II- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In May and June 2001, certain of the Company’s present directors, along with the Company, certain of its former directors, certain of its present and former officers and its underwriters, were named as defendants in nine class action complaints filed in the United States District Court for the Southern District of New York. The plaintiffs and the alleged classes they seek to represent include present and former stockholders of the Company. The complaints generally allege violations of Sections 11 and 12 of the Securities Act of 1933 and Rule 10b-5 promulgated under the Securities Exchange Act of 1934, based on, among other things, the dissemination of statements allegedly containing material misstatements and/or omissions concerning the commissions received by the underwriters of the initial public offering and follow-on public offering of the Company as well as failure to disclose the existence of purported agreements by the underwriters with some of the purchasers in these offerings to buy additional shares of the Company’s stock subsequently in the open market at pre-determined prices above the initial offering prices. The plaintiffs seek for themselves and the alleged class members an award of damages and litigation costs and expenses. The claims in these cases have been consolidated for pre-trial purposes (together with other issuers and underwriters) before one judge in the Southern District of New York federal court. In April 2002, a consolidated, amended complaint was filed against these defendants which generally alleges the same violations and also refers to alleged misstatements or omissions that relate to the recommendations regarding the Company’s stock by analysts employed by the underwriters. In June and July 2002, defendants, including the Company defendants, filed motions to dismiss plaintiffs’ complaints on numerous grounds. The Company’s motion was denied in its entirety in a lengthy opinion by the Court dated February 19, 2003. The Company will hereafter be required to answer the complaint and participate in the discovery process. There have been no other material developments in these cases to date.

On August 6, 2002, EOP-One Market, L.L.C. filed a lawsuit against the Company and ten John Doe defendants in the Superior Court of California, City and County of San Francisco. The action asserts a claim for breach of contract and alleges a failure to pay rent on property at One Market Street, San Francisco, since October 1, 2001, under a lease extending to December 31, 2010. The lawsuit seeks damages, interest, attorneys’ fees and costs. The Company has asserted a cross-complaint against EOP-One Market, L.L.C. and 20 John Doe cross-defendants asserting claims for breach of contract, return of security deposit and unfair business act or practices. The cross-complaint alleges, among other things, that the cross-defendants breached an agreement under which the Company would return a portion of the leased space to EOP-One Market, L.L.C. in exchange for a cash payment to the Company. The cross-complaint seeks compensatory damages, interest, restitution of the security deposit and an injunction against further withholding of the security deposit amount, attorneys’ fees and costs.

On December 20, 2002, the Company was named as a defendant in an action filed in the United States District Court for the District of Maine. The plaintiffs include former stockholders of Animated Images, Inc (“Animated Images”), one of the Company’s former partner companies. In addition to the Company, the defendants include Freeborders, a current partner company, and four individual defendants, including former officers of the Company and former Animated Images directors. The complaint generally alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Section 5(a) of the Securities Act of 1933, fraud, breach of contract, breach of fiduciary duty and civil conspiracy, among other claims, in connection with the merger of Animated Images into Freeborders. In support of these claims, the plaintiffs allege, among other things, that the defendants misrepresented the value of the stock of Freeborders, resulting in plaintiffs’ having received less consideration in the merger than that to which they believe they were entitled. On April 18, 2003 the Company filed a motion to dismiss substantially all plaintiffs’ complaints. Plaintiffs have yet to respond to this motion and the Court has not yet ruled on this motion.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits


Number		Document

10.1		Severance and Change of Control Agreement by and between ICG Commerce, Inc. and Edward H. West dated as of January 1, 2003.

10.2		Letter Agreement between Internet Capital Group and Edward H. West dated February 25, 2003 relating to termination of employment.

11.1		Statement Regarding Computation of Per Share Earnings (included herein at Note 7 “Net Loss Per Share” to the Consolidated Financial Statements on page 12)

(b) Reports on Form 8-K

On March 31, 2003, the Company filed a Current Report on Form 8-K dated March 31, 2003 in connection with the certifications of our Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 which accompanied our Form 10-K for the year ended December 31, 2002, in accordance with Regulation FD.

SIGNATURES

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


	INTERNET CAPITAL GROUP, INC.

Date: May 15, 2003	By:	/s/ Anthony P. Dolanski

	Name: Anthony P. Dolanski
	Title: Chief Financial Officer
	(Principal Financial and Principal Accounting Officer)
	(Duly Authorized Officer)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Walter W. Buckley, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Internet Capital Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date:

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize, and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 15, 2003		/s/ Walter W. Buckley, III

		Walter W. Buckley, III
		Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Anthony P. Dolanski, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Internet Capital Group, Inc.;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:

	a.		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date with 90 days prior to the filing date of this quarterly report (the “Evaluation Date’); and

	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize, and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 15, 2003		/s/ Anthony P. Dolanski

		Anthony P. Dolanski
		Chief Financial Officer

EXHIBIT INDEX


Number		Document

10.1		Severance and Change in Control Agreement by and between ICG Commerce, Inc. and Edward H. West dated as of January 1, 2003.

10.2		Letter Agreement between Internet Capital Group and Edward H. West dated February 25, 2003 relating to termination of employment

11.1		Statement Regarding Computation of Per Share Earnings (included herein at Note 7 “Net Loss Per Share” to the Consolidated Financial Statements on page 12)

1.		Significant Accounting Policies

Basis of Presentation

	•		our ability and our partner companies’ ability to access the capital markets;

	•		our ability to effectively manage existing capital resources;

	•		our ability to retain key personnel;

	•		our ability to maximize value in connection with divestitures;

	•		development of the e-commerce and information technology markets;

	•		our outstanding indebtedness; and

	•		our partner companies’ ability to compete successfully against competitors.

	•		actual or anticipated variations in our quarterly results and those of our partner companies;

	•		changes in the market valuations of our partner companies and other technology and internet companies;

	•		conditions or trends in the software industry in general and the e-commerce sector in particular;

	•		negative public perception of the prospects of internet companies;

	•		changes in our financial estimates and those of our partner companies by securities analysts;

	•		new products or services offered by us, our partner companies and their competitors;

	•		announcements by our partner companies and their competitors of technological innovations;

	•		announcements by us or our partner companies or our competitors of significant acquisitions, strategic partnerships or joint ventures;

	•		our capital commitments;

	•		additional sales of our securities;

	•		additions to or departures of our key personnel or key personnel of our partner companies; and

	•		general economic conditions such as a recession or interest rate or currency rate fluctuations and the reluctance of enterprises to increase spending on new technologies.

	•		make it more difficult to obtain additional financing;

	•		limit our ability to deploy existing capital resources; and

	•		constrain our ability to react quickly in an unfavorable economic climate.

	•		fluctuations in the market price of the common stock of Verticalnet, eMerge Interactive, Onvia.com and Universal Access, our publicly traded partner companies, and other future publicly traded partner companies, which are likely to affect the price of our common stock;

	•		many of our partner companies are in the early stages of their development with limited operating history, little revenue and substantial losses;

	•		lack of the widespread commercial use of the internet, decreased spending on information technology software and services and elongated sales cycles which may prevent our partner companies from succeeding;

	•		intensifying competition for the products and services our partner companies offer, which could lead to the failure of some of our partner companies; and

	•		the inability of our partner companies to secure additional financing, which may force some of our partner companies to cease or scale back operations.

	•		the operating results of our partner companies;

	•		significant fluctuations in the financial results of technology companies generally;

	•		changes in equity losses or income;

	•		the acquisition or divestiture of interests in partner companies;

	•		the repurchase of any of our outstanding indebtedness

	•		changes in our methods of accounting for our partner company interests, which may result from changes in our ownership percentages of our partner companies;

	•		sales of equity securities by our partner companies, which could cause us to recognize gains or losses under applicable accounting rules;

	•		the pace of development or a decline in growth of the technology market;

	•		competition for the goods and services offered by our partner companies; and

	•		our ability to effectively manage our growth and the growth of our partner companies.

	•		potential inability to sustain operations due to cash constraints and exploration of alternatives that include a sale of all or part of its business or a reorganization or liquidation of Verticalnet;

	•		inability to retain key management and experienced software personnel;

	•		inability to generate significant revenues from enterprise, software licensing and professional services;

	•		inability to reduce expenses or generate an operating profit;

	•		inability to establish brand awareness;

	•		inability to acquire additional funding;

	•		inability to maintain listing on the Nasdaq SmallCap Market; and

	•		lengthy sales and implementation cycles for products.

	•		lack of commercial acceptance of eMerge Interactive’s products and services;

	•		inability to respond to competitive developments;

	•		failure to achieve brand recognition;

	•		failure to introduce new products and services; and

	•		failure to upgrade and enhance its technologies to accommodate expanded product and service offerings and increased customer traffic.

	•		potential loss of rights to distribute governmental content;

	•		potential reduction in governmental spending resulting in a reduction of Onvia.com’s bid flow;

	•		inability to eliminate monthly lease payments on idle office space;

	•		inability to increase subscribership to its premium, higher priced services;

	•		many competitors of Onvia.com have larger customer bases and greater brand recognition;

	•		government agencies’ unwillingness to purchase their business services and products online;

	•		a significant number of small businesses, government agencies and their vendors’ unwillingness to use its emarketplace to buy and sell services and products;

	•		failure of small business customers to provide data about themselves;

	•		inability to enhance the features and services of its exchange to achieve acceptance and scalability;

	•		negative impact on stock price and future operations resulting from a declared cash distribution; and

	•		inability to manage a change in strategy.

	•		restrictions on future operating activities and ability to pursue business opportunities in connection with the incurrence of indebtedness

	•		significant dilution of stockholders’ equity interest in connection with proposed stock sale to CityNet Telecommunications, Inc.

	•		failure of its services to be sufficiently rapid, reliable and cost-effective;

	•		unwillingness of clients to outsource the obtaining of circuits;

	•		inability to expand its Universal Transport Exchange (UTX) facilities;

	•		failure to successfully operate a network operations center;

	•		inability to implement and maintain its Universal Information Exchange (UIX) databases;

	•		failure of the market for UTX services to grow;

	•		inability to maintain listing on the Nasdaq SmallCap Market;

	•		inability of clients’ to pay their obligations;

	•		inability to obtain additional financing;

	•		inability to reduce costs and increase revenues, difficulties or delays in delivering circuits;

	•		inability to successfully aggregate circuits; and

	•		dependence on several large clients.

	•		the unwillingness of businesses to shift from traditional processes to e-commerce processes;

	•		the network necessary for enabling substantial growth in usage of e-commerce may not be adequately developed;

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

	•		insufficient availability of telecommunication services or changes in telecommunication services which could result in slower response times for the users of e-commerce; and

	•		concern and adverse publicity about the security of e-commerce transactions.

	•		purchasing budget for information technology and services, materials and supplies with other online providers and traditional distribution channels; and

	•		dollars spent on consulting services with many established information systems and management consulting firms.