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 September 30, 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) 690 Lee Road, Suite 310, Wayne, PA (Address of principal executive offices)		23-2996071 (I.R.S. Employer Identification Number) 19087 (Zip Code)

(610) 727-6900
(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) x Yes o No

Number of shares of Common Stock outstanding as of November 14, 2003: 392,860,781 shares.

INTERNET CAPITAL GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX


ITEM		PAGE NO.

PART I — FINANCIAL INFORMATION
Item 1 —	Financial Statements:
	Consolidated Balance Sheets--September 30, 2003 (unaudited) and December 31, 2002		4
	Consolidated Statements of Operations (unaudited) — Three Months and Nine Months Ended September 30, 2003 and 2002		5
	Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30, 2003 and 2002		6
	Notes to Consolidated Financial Statements		7
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3 —	Quantitative and Qualitative Disclosures About Market Risk		37
Item 4 —	Controls and Procedures		38
PART II — OTHER INFORMATION
Item 1 —	Legal Proceedings		39
Item 2 —	Changes in Securities and Use of Proceeds		39
Item 3 —	Defaults Upon Senior Securities		40
Item 4 —	Submission of Matters to a Vote of Security Holders		40
Item 5 —	Other Information		40
Item 6 —	Exhibits and Reports on Form 8-K		40
Signatures			41
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 SEPTEMBER 30, 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”)
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”)
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”)
Onvia.com, Inc. (“Onvia.com”) (Nasdaq:ONVI)
StarCite, Inc. (“StarCite”)
Syncra Systems, Inc. (“Syncra Systems”)
Tibersoft Corporation (“Tibersoft”)
Universal Access Global Holdings Inc. (“Universal Access”) (Nasdaq:UAXS)
Verticalnet, Inc. (“Verticalnet”) (Nasdaq:VERT)

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS


				September 30,			December 31,
				2003			2002

				(unaudited)
				(in thousands, except per share data)
Assets
Current Assets
	Cash and cash equivalents			$	79,993		$	118,657
	Restricted cash				5,100			10,876
	Short term investments				419			7,311
	Accounts receivable, net of allowance ($2,353-2003(unaudited); $4,255-2002)				26,357			32,859
	Prepaid expenses and other current assets				7,816			6,528

			Total current assets		119,685			176,231
Assets of discontinued operations					4,105			5,746
Fixed assets, net					4,194			10,292
Available for sale securities					7,164			10,228
Ownership interests in Partner Companies					55,335			71,732
Goodwill, net					56,469			60,584
Other					19,867			31,433

		Total Assets		$	266,819		$	366,246

Liabilities and Stockholders’ Deficit
Current Liabilities
	Current maturities of other long-term debt			$	8,739		$	11,728
	Accounts payable				15,537			13,042
	Accrued expenses				23,772			33,812
	Accrued compensation and benefits				7,931			11,554
	Accrued restructuring				2,446			13,464
	Deferred revenue				14,550			19,063

			Total current liabilities		72,975			102,663
Liabilities of discontinued operations					4,105			5,296
Other long - term debt					496			7,919
Other liabilities					9,014			11,794
Minority interest					4,793			7,106
Convertible subordinated notes (Note 8)					223,189			283,114

			Total Liabilities		314,572			417,892

Stockholders’ Deficit
	Preferred stock, $.01 par value; 10,000 shares authorized; none issued or outstanding				—			—
	Common stock, $.001 par value; 2,000,000 shares authorized, 348,303 (2003) and 286,720 (2002) issued and outstanding				348			287
	Additional paid-in capital				3,165,629			3,085,232
	Accumulated deficit				(3,213,499	)		(3,134,036	)
	Unamortized deferred compensation				(929	)		(2,968	)
	Notes receivable-stockholders				(460	)		(460	)
	Accumulated other comprehensive income				1,158			299

			Total stockholders’ deficit		(47,753	)		(51,646	)

			Total Liabilities and Stockholders’ Deficit	$	266,819		$	366,246

See notes to consolidated financial statements.

INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


		Three Months Ended September 30,						Nine Months Ended September 30,

		2003			2002			2003			2002

		(in thousands, except per share data)
Revenue		$	22,239		$	27,338		$	71,180		$	77,742
Operating expenses
	Cost of revenue		12,774			16,557			42,891			52,165
	Selling, general and administrative		12,625			18,706			46,869			66,312
	Research and development		2,536			5,548			11,830			18,967
	Amortization of intangibles		1,584			2,883			5,760			9,114
	Impairment related and other		(7,030	)		2,056			(4,851	)		10,820

	Total operating expenses		22,489			45,750			102,499			157,378

			(250	)		(18,412	)		(31,319	)		(79,636	)
Other income (loss), net			(28,612	)		44,297			(25,251	)		96,632
Interest income			257			1,177			1,071			3,537
Interest expense			(4,348	)		(5,425	)		(13,638	)		(19,237	)

Income (loss) before minority interest and equity loss			(32,953	)		21,637			(69,137	)		1,296
Minority interest			(33	)		3,182			2,445			14,459
Equity loss			(2,704	)		(7,158	)		(12,771	)		(62,431	)

Income (loss) from continuing operations			(35,690	)		17,661			(79,463	)		(46,676	)
Loss on discontinued operations			—			(4,832	)		—			(15,282	)

Net income (loss)		$	(35,690	)	$	12,829		$	(79,463	)	$	(61,958	)

Basic and diluted income (loss) per share:
Income (loss) from continuing operations		$	(0.12	)	$	0.06		$	(0.29	)	$	(0.17	)
Loss on discontinued operations			—			(0.01	)		—			(0.05	)

		$	(0.12	)	$	0.05		$	(0.29	)	$	(0.22	)

Shares used in computation of basic and diluted income (loss) per share			288,027			283,031			276,154			281,284

See notes to consolidated financial statements.

INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


			Nine Months Ended September 30,

			2003			2002

			(in thousands)
Net cash used in operating activities			$	(37,467	)	$	(67,570	)

Investing Activities
	Capital expenditures, net			(560	)		(607	)
	Proceeds from sales of available-for-sale securities			9,935			287
	Proceeds from sales of Partner Company ownership interests			3,151			18,312
	Advances to and acquisitions of ownership interests in Partner Companies			(9,697	)		(23,597	)
	Proceeds from short-term investments			6,986			4,948
	Other acquisitions, net of cash acquired			(1,595	)		—
	Reduction in cash due to deconsolidation of a subsidiary			(1,759	)		(5,876	)

Net cash (used in) provided by investing activities				6,461			(6,533	)

Financing Activities
		Repurchase of convertible notes		(5,529	)		(48,952	)
		Long-term debt and capital lease obligations, net		(2,745	)		(8,180	)
		Line of credit borrowing		978			1,001
		Line of credit repayments		(458	)		(612	)
		Exercises of stock options		275			—
		Proceeds of issuance of common stock by a subsidiary		—			631
		Repayment of loans by employees		477			—

Net cash used in financing activities				(7,002	)		(56,112	)

Net decrease in cash and cash equivalents				(38,008	)		(130,215	)
Effect of exchange rates on cash				(656	)		(1,104	)
Cash and cash equivalents at the beginning of period				118,657			238,135

Cash and cash equivalents at the end of period			$	79,993		$	106,816

Supplemental non-cash — See Note 8

See notes to consolidated financial statements.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Summary of Significant Accounting Policies

Description of the Company

The Company is an information technology company actively engaged in delivering software solutions and services, which are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. The Company operates through a network of partner companies which deliver those solutions to customers. To help drive partner company progress, the Company provides operational assistance, capital support, industry expertise, access to operational best practices, and a strategic network of business relationships. The Company was formed in March 1996 and is headquartered in Wayne, Pennsylvania.

Although the Company refers to companies in which it has acquired a convertible debt or an equity ownership interest as its “Partner Companies” and indicates that it has a “partnership” with these companies, it does not act as an agent or legal representative for any of its Partner Companies, it does not have the power or authority to legally bind any of its Partner Companies and it does not have the types of liabilities in relation to its Partner Companies that a general partner of a partnership would have.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 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 Securities and Exchange Commission (“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 for the three and nine months ended September 30, 2003 and 2002 and its cash flows for the nine months ended September 30, 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 Form 10-Q 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 SEPTEMBER 30, 2003
CommerceQuest
ICG Commerce
OneCoast

THREE MONTHS ENDED SEPTEMBER 30, 2002
CommerceQuest
eCredit
Captive Capital
ICG Commerce
OneCoast

NINE MONTHS ENDED SEPTEMBER 30, 2003
CommerceQuest
eCredit
Captive Capital
Freeborders
ICG Commerce
OneCoast

NINE MONTHS ENDED SEPTEMBER 30, 2002
CommerceQuest
eCredit
Captive Capital
ICG Commerce
OneCoast

Effective during the three months ended June 30, 2003, Freeborders and eCredit are accounted for under the equity method of accounting and Captive Capital is accounted for under the cost method of accounting.

Principles of Accounting for Ownership Interests in Partner Companies

The various interests that the Company acquires in its Partner Companies are accounted for under three methods: consolidation, equity and cost. The applicable accounting method is generally determined based on the Company’s voting interest in a Partner Company.

Consolidation. Partner Companies in which the Company directly or indirectly owns more than 50% of the outstanding voting securities or those the Company has effective control over are generally accounted for under the consolidation method of accounting. Under this method, a Partner Company’s balance sheet and results of operations are reflected within the Company’s Consolidated Financial Statements. All significant intercompany accounts and transactions have been eliminated. Participation of other Partner Company stockholders in the net assets and in the earnings or losses of a consolidated Partner Company is reflected in the caption “Minority interest” in the Company’s Consolidated Balance Sheet and Statements of Operations. Minority interest adjusts the Company’s consolidated results of operations to reflect only the Company’s share of the earnings or losses of the consolidated Partner Company. The results of operations and cash flows of a consolidated Partner Company are included through the latest interim period in which the Company owned a greater than 50% direct or indirect voting interest for the entire interim period or otherwise exercised control over the Partner Company. Upon dilution of control below 50%, the accounting method is adjusted to the equity or cost method of accounting, as appropriate, for subsequent periods.

Equity Method. Partner Companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises 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 the Company’s holdings in common, preferred and other convertible instruments in the Partner Company. Under the equity method of accounting, a Partner Company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses of the Partner Company is reflected in the caption “Equity loss” in the Consolidated Statements of Operations. The carrying value of equity method Partner Companies is reflected in “Ownership interests in Partner Companies” in the Company’s Consolidated Balance Sheets.

When the Company’s investment in an equity method Partner Company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the Partner Company or has committed additional funding. When the Partner Company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

Cost Method. Partner Companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such companies is not included in the Balance Sheet or Consolidated Statements of Operations. However, cost method Partner Company impairment charges are recognized in the Consolidated Statement of Operations. If circumstances suggest that the value of the Partner Company has subsequently recovered, such recovery is not recorded.

When a cost method Partner Company qualifies for use of the equity method, the Company’s investment is adjusted retroactively for its share of the past results of its operations. Therefore, prior losses could significantly decrease the Company’s basis at that time.

The Company records its ownership interest in debt securities of Partner Companies accounted for under the cost method at cost because it has the ability and intent to hold these securities until maturity. The Company records its ownership interest in equity securities of Partner Companies accounted for under the cost method at cost, unless these securities have readily determinable fair values based on quoted market prices, in which case these interests are valued at fair value and classified as available-for-sale securities or some other classification in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. In addition to the Company’s investments in voting and non-voting equity and debt securities, it also periodically makes advances to its Partner Companies in the form of promissory notes which are accounted for in accordance with SFAS No. 114, “Accounting By Creditors for Impairment of a Loan”.

Liquidity

The Company believes existing cash, cash equivalents and short-term investments, proceeds from the issuance of debt and equity securities of our Consolidated Partner Companies to third parties and proceeds from the potential sales of all or a portion of our interests in certain Partner Companies are expected to be sufficient to fund our cash requirements through September 2004, including commitments to existing partner companies, debt obligations and general operations requirements. However, as of November 14, 2003, the Company has outstanding $193.8 million in face value of convertible notes which are

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

1. The Company and Summary of Significant Accounting Policies (Continued)

due December 21, 2004 (see Note 8). The Company currently does not have sufficient cash, cash equivalents, restricted cash, short-term investments and available-for-sale securities to satisfy these convertible notes at maturity.

From 2001 through November 14, 2003, the Company has repurchased and extinguished $372.5 million of the original $566.3 million face value of December 2004 convertible notes for $89.8 million in cash and 103.1 million shares of the Company’s common stock in a series of separate transactions. The Company is attempting to satisfy or refinance the remaining $193.8 million in convertible notes. This may require us to raise additional debt and/or equity financing which may not be available at all, or may only be available on terms unfavorable to the Company. If we are successful in satisfying or refinancing the debt, the Company’s financial resources may be reduced and the interests of the holders of our common stock may be significantly diluted. Additionally, the terms of a refinancing may require that the Company reorganize pursuant to a pre-packaged or pre-arranged bankruptcy. The Company can provide no assurance that it will be successful in satisfying or refinancing the convertible notes. If the Company is not successful in satisfying or refinancing these obligations, the Company may default on its obligations which could render the Company insolvent and the Company could file for or be forced into bankruptcy.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities, an Interpretation of APB Opinion No. 51,” (FIN 46) which requires all variable interest entities (“VIEs”) to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In addition, the interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. In September 2003, the FASB voted for a limited deferral for companies for the implementation of FIN 46 if the Company met the following criteria: (1) the interest was acquired before February 1, 2003; (2) the assets of the VIE or potential VIE are predominantly non-financial; (3) the VIE or potential VIE was not specifically created by the public entity to undertake a single specified purpose; and (4) the determination of whether the entity is a VIE or the holder of the variable interest is a primary beneficiary has not been completed as of the issuance of the financial statements beginning after September 15, 2003. The Company’s Partner Companies that could be deemed VIEs meet all of the criteria and accordingly, the Company expects to implement the provisions of FIN 46 during the fourth quarter of 2003. The Company’s management is currently assessing the impact of FIN 46. The consolidation requirements of this interpretation are effective for all periods beginning after June 15, 2003. It is possible that under the consolidation provisions, the Company may be required to consolidate previously unconsolidated Partner Companies.

In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All provisions of this Statement were to be applied prospectively. The provisions of SFAS No. 149 did not impact the Company’s financial condition, results of operations, or disclosures.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first annual period beginning after June 15, 2003. The Company’s management is evaluating the impact SFAS No. 150 will have on the Company’s financial condition, results of operations, or disclosures.

Concentration of Customer Base and Credit Risk

Approximately 12% and 11% of the Company’s revenue for the three and nine months ended September 30, 2003, respectively, relates to one customer of one of the Company’s consolidated Partner Companies. Accounts receivable from this customer as of September 30, 2003 and December 31, 2002 were not significant. During the three months ended June 30, 2003, this customer notified such consolidated Partner Company that it is exercising its right to terminate its arrangement to purchase services from it effective January 1, 2004. Approximately 13% and 10% of the Company’s revenue for the three and nine months ended September 30, 2002, respectively, related to this customer.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

1. The Company and Summary of Significant Accounting Policies (Continued)

Accounts Receivable

The Company provides services in which the Company manages the transaction between its customer and a third party supplier. In these transactions, the Company is responsible for paying the supplier for the full cost of the goods or services and the customer is responsible for paying the Company an amount, which is generally the Company’s cost plus a transaction fee, for the goods or services. The Company is responsible for paying the supplier independent of when and if the Company receives payment from its customer. The Company receives payment directly from its customer. The Company records the gross amount of the associated receivables and payables on the accompanying consolidated balance sheets. However, the Company records the net amount of the transaction fee on the accompanying statements of operations. As of September 30, 2003 and December 31, 2002, accounts receivable included approximately $17.2 million and $18.3 million, respectively, related to such transactions.

Stock Based Compensation

As permitted by SFAS No. 123, “Accounting for Stock Based Compensation,” the Company measures compensation cost in accordance with Accounting Principles Board 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. Stock options issued to non-employees are recorded at fair value at the date of grant. Fair value is determined using the Black-Scholes option-pricing model and the expense is amortized over the vesting period.

In December 2002, the 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 income (loss) and net income (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						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

				(in thousands)
Net income (loss) as reported	$	(35,690	)	$	12,829		$	(79,463	)	$	(61,958	)
Add stock-based employee compensation expense included in reported net income (loss)		363			2,038			2,467			8,368
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards		(6,978	)		(9,320	)		(21,373	)		(27,960	)

Proforma net income (loss)	$	(42,305	)	$	5,547		$	(98,369	)	$	(81,550	)

Basic and diluted net income (loss) per share, as reported	$	(0.12	)	$	0.05		$	(0.29	)	$	(0.22	)
Pro forma basic and diluted net income (loss) per share	$	(0.15	)	$	0.02		$	(0.36	)	$	(0.29	)

The per share weighted-average fair value of options issued by the Company during the nine months ended September 30, 2003 was $0.79 and $0.23 and $0.40 for the three and nine months ended September 30, 2002, respectively. There were no options issued for the three months ended September 30, 2003.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

1. The Company and Summary of Significant Accounting Policies (Continued)

The following assumptions were used to determine the fair value of stock options granted to employees by the Company for the three and nine month periods ended September 30, 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. 123 pro forma expense in the Company’s SFAS No. 123 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

In addition to the reclassification required for SFAS No. 145 (see Note 8), certain prior period amounts have been reclassified to conform with the current period presentation. The impact of these changes is not material and did not affect net loss.

2. Partner Company Ownership Interests And Impairments

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


	As of September 30,		As of December 31,
	2003		2002

	(unaudited)
	(in thousands)
Goodwill	$	56,469	$	60,584
Other intangibles		14,269		20,143

	$	70,738	$	80,727

Ownership interests in Partner Companies - Equity Method	$	43,270	$	58,067
Ownership interests in Partner Companies - Cost Method		12,065		13,665

	$	55,335	$	71,732

Goodwill decreased from December 31, 2002 to September 30, 2003 as a result of eCredit, Freeborders and Captive Capital being deconsolidated due to ownership decreases.

Impairments related to Equity Method Companies

During the nine months ended September 30, 2003 and 2002, the Company recorded impairment charges of $1.4 million and $9.5 million, respectively, related to equity method Partner Companies. There were no equity method impairment charges during the three months ended September 30, 2003 or 2002. Impairment charges related to equity method Partner Companies have been included in the Consolidated Statements of Operations as “Equity loss”.

The following unaudited summarized financial information for Partner Companies accounted for under the equity method of accounting at September 30, 2003 and 2002 and December 31, 2002 has been compiled from the financial statements of the respective Partner Companies.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. Partner Company Ownership Interests And Impairments (Continued)

Balance Sheet


		As of September 30,		As of December 31,
		2003		2002

		(in thousands)
Cash and cash equivalents		$	79,297	$	118,998
Other current assets			46,470		81,374
Non-current assets			107,045		141,694

	Total assets	$	232,812	$	342,066

Current liabilities		$	65,063	$	134,727
Non-current liabilities			31,760		76,759
Stockholders’ equity			135,989		130,580

	Total liabilities and stockholders’ equity	$	232,812	$	342,066

Results of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

				(in thousands)
Revenue	$	52,885		$	94,699		$	199,691		$	290,042
Net loss	$	(17,620	)	$	(68,878	)	$	(55,526	)	$	(289,315	)

During the three months ended September 30, 2003, two of the Company’s public Partner Companies accounted for under the equity method of accounting were reclassified to the cost method of accounting as the Company’s ownership level decreased as well as its ability to exercise significant influence on these entities. Accordingly, effective during the three months ended September 30, 2003 these two Partner Companies were accounted for as available-for-sale securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

Impairment of Cost Method Companies

During the three months ended September 30, 2003 and 2002, the Company recorded no impairment charges related to cost method Partner Companies. During the nine months ended September 30, 2003, the Company recorded $3.4 million in impairment charges related to cost method Partner Companies for which it has been determined that the Company will not be able to recover its full investment. The Company recorded $9.9 million in impairment charges during the nine months ended September 30, 2002. Impairment charges related to cost method Partner Companies have been included in the Consolidated Statements of Operations as a component of “Other income (loss), net”.

3. Goodwill And Other Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 does not allow 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 goodwill and other intangible assets, which indicated that the Company’s goodwill and other intangible assets were not impaired. As of September 30, 2003, the Company’s goodwill of $56.5 million was allocated to the Core segment (see Note 11). The Company plans to complete its annual impairment test in the fourth quarter. Accordingly, there may be impairment charges recorded related to the Company’s goodwill. Amortizable intangible assets as of September 30, 2003 and December 31, 2002 of $13.4 million and $19.4 million, respectively, are included in Other Assets in the Company’s Consolidated Balance Sheets. Unamortizable intangible assets of $0.8 million as of September 30, 2003 and December 31, 2002, are included in Other Assets in 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.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Goodwill And Other Intangible Assets (Continued)


		As of September 30, 2003

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

Customer Base	3-5 years	$	14,850	$	(7,256	)	$	7,594
Technology	2-5 years		20,346		(14,544	)		5,802

		$	35,196	$	(21,800	)	$	13,396


		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

The gross carrying amount of intangibles decreased from December 31, 2002 to September 30, 2003 as a result of eCredit, Freeborders and Captive Capital being deconsolidated due to ownership changes.

Amortization expense for intangible assets during the three and nine months ended September 30, 2003 was $1.6 million and $5.8 million, respectively, and $2.9 million and $9.1 million for the three and nine months ended September 30, 2002, 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)	$	1,314
December 31, 2004		5,678
December 31, 2005		4,147
December 31, 2006		844
December 31, 2007		718
Thereafter		695

	$	13,396

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 common stock. On April 7, 2003, the forward contract was terminated and the Company received cash of $9.6 million.

The fair value of warrants issued to the Company by Partner Companies, which are derivative instruments, are recorded in the Consolidated Balance Sheets at issuance in “Ownership interests in Partner Companies” and are valued using the Black-Scholes option-pricing model. 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 $0.9 million at September 30, 2003 and $0.7 million at December 31, 2002.

5. Income Taxes

The Company’s deferred tax asset before valuation allowance of $652 million at September 30, 2003 consists primarily of $305 million related to the carrying value of its Partner Companies, capital loss carryforwards of $194 million and net operating loss carryforwards of approximately $148 million.

A valuation allowance has been provided for the Company’s net deferred tax asset at September 30, 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.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Comprehensive Income (Loss)

Comprehensive income (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 income (loss), the Company’s primary source of comprehensive income (loss) is net unrealized appreciation (depreciation) related to its available-for-sale securities. The following summarizes the components of comprehensive income (loss):


		Three Months Ended						Nine Months ended
		September 30,						September 30,

		2003			2002			2003			2002

					(unaudited)
					(in thousands)
Net income (loss)		$	(35,690	)	$	12,829		$	(79,463	)	$	(61,958	)
Other comprehensive income (loss):
	Unrealized appreciation/(depreciation), net of tax		1,109			(551	)		527			(7,174	)
	Reclassification adjustments, net of tax		—			6,600			332			7,665

Comprehensive income (loss)		$	(34,581	)	$	18,878		$	(78,604	)	$	(61,467	)

7. Net Income (Loss) Per Share

The calculations of net income (loss) per share were:


	Three Months Ended						Nine Months ended
	September 30,						September 30,

	2003			2002			2003			2002

				(unaudited)
	(in thousands, except per share data)
Basic and Diluted:
Income (loss) from continuing operations	$	(35,690	)	$	17,661		$	(79,463	)	$	(46,676	)
Loss on discontinued operations		—			(4,832	)		—			(15,282	)

Net income (loss)	$	(35,690	)	$	12,829		$	(79,463	)	$	(61,958	)

Weighted average common shares outstanding		288,027			283,031			276,154			281,284

Income (loss) from continuing operations	$	(0.12	)	$	0.06		$	(0.29	)	$	(0.17	)
Loss on discontinued operations		—			(0.01	)		—			(0.05	)

Net income (loss) per share	$	(0.12	)	$	0.05		$	(0.29	)	$	(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 and nine months ended September 30, 2003 and 2002, the impact of a Partner Company’s dilutive securities has not been included as the impact would be anti-dilutive.

The following options and restricted stock grants were not included in the computation of diluted EPS as their effect would have been anti-dilutive: options to purchase 16,265,774 and 17,924,630 shares of common stock at average prices of $3.18 and $4.56, respectively, outstanding as of September 30, 2003 and 2002; 4,379,833 shares of unvested restricted stock outstanding as of September 30, 2002; and convertible subordinated notes convertible into 1,751,326 and 2,221,547 shares of common stock outstanding as of September 30, 2003 and 2002 respectively; 14,873,132 shares of underlying notes receivable — stockholders at average prices of $2.18 outstanding at September 30, 2003.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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.

During the three months ended September 30, 2003, the Company exchanged approximately $47.9 million face value of its convertible subordinated notes for approximately 58.7 million shares of its common stock. In accordance with SFAS No. 84 “Induced Conversions of Convertible Debt”, the Company recorded $30.1 million in expense equal to the fair value of the 58.7 million shares issued of $30.8 million in excess of the fair value of the 0.4 million shares issuable pursuant to the original conversion terms of $0.2 million, less $0.5 million of accrued interest. Additionally, the Company incurred $0.3 million, net, of other costs associated with these transactions. The total $30.4 million loss is included in “Other income (loss)” net in the Company’s Consolidated Statements of Operations. Accordingly, additional paid-in capital increased by the $47.9 million of face value of convertible notes exchanged and the $30.6 million of fair value of the 58.7 million shares issued in excess of the 0.4 million shares issuable pursuant to the original terms.

From October 1, 2003 through November 14, 2003, the Company exchanged approximately $29.4 million face value of its convertible subordinated notes for approximately 44.4 million shares of its common stock. These exchanges will result in a expense in the fourth quarter in accordance with SFAS No. 84. As of November 14, 2003, the remaining principal balance was $193.8 million.

In June 2002, the Company purchased and extinguished $92.6 million face value of convertible subordinated notes for $27.8 million in cash. The purchase resulted in a gain of $63 million net of expenses, that was included in “Other income (loss) net” in the Company’s Consolidated Statements of Operations.

During the three months ended September 30, 2002, the Company purchased and extinguished $70.4 million face value of convertible subordinated notes for $21.0 million in cash. The purchase resulted in a gain in the amount of $48 million, net of expenses, that was included in “Other income (loss) net” in the Company’s Consolidated Statement of Operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections”. This Statement rescinded FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This standard requires that the extinguishment of debt be treated as an ordinary item instead of an extraordinary item. Accordingly, SFAS No. 145 requires reclassification of previously recorded debt extinguishments from extraordinary to ordinary. The Company adopted SFAS No. 145 effective April 1, 2002.

The Company recorded interest expense of $3.6 million and $4.2 million and $11.1 million and $16.4 million during the three and nine months ended September 30, 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 mehod. In connection with the Company’s debt transactions in 2003, approximately $0.5 million of these costs were immediately expensed and included in the computation of the expense. As of September 30, 2003, the remaining balance of the issuance costs is approximately $1.6 million and is included in “Other Assets” in the Company’s Consolidated Balance Sheets.

As of September 30, 2003, the remaining principal balance of the convertible subordinated notes was $223.2 million and the fair value was approximately $140.1 million. Fair value of the Company’s convertible subordinated notes is determined by obtaining thinly traded market quotes from public sources.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Debt (Continued)

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 provided for issuances of letters of credit up to $20 million subject to a cash-secured borrowing base as defined by the Loan Agreement. The Loan Agreement was extended to October 19, 2004 and the maximum amount of letters of credit authorized to be issued was reduced to $10 million. 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 September 30, 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 $0.5 million (net of current maturities of $8.7 million) relates to its consolidated Partner Companies and primarily consists of secured notes due to stockholders and outside lenders of CommerceQuest and 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, Delphion, Inc. (“Delphion”) and Logistics.com, Inc. (“Logistics), 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. Revenues and operating results for the three and nine months ended September 30, 2002 is presented, net, in one line item “Loss on discontinued operations” in our Consolidated Statements of Operations. Delphion and Logistics had aggregate revenues of $4.3 million and $12.1 million for the three and nine months ended September 30, 2002, respectively. The Company’s share of the net losses of Delphion and Logistics.com totaled $4.8 million and $15.3 million for the three and nine months ended September 30, 2002, respectively.

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

10. Restructuring

From 2000 through 2003, the Company and its consolidated Partner Companies have implemented restructuring plans designed to reduce cost structures by closing and consolidating offices, disposing of fixed assets, and reducing their workforces. During the three months ended September 30, 2003, the Company settled a lease liability for $550,000 in cash and the issuance of 1,500,000 shares of the Company’s Common Stock valued at $0.6 million, resulting in a credit of $7.0 million as this liability was settled for less than originally estimated. Additionally, a credit of $1.3 million was recorded during the three months ended March 31, 2003 for a similar restructuring item settled for less than estimated. These charges and credits are included in “Impairment related and other” in the Company’s Consolidated Statements of Operations.

Restructuring Activity is Summarized as Follows:


	Accrual at								Non-cash Items			Accrual at
	December 31,		Restructuring						Expensed			September 30,
	2002		Charges/Credits			Cash Payments			Immediately/Other			2003

						(unaudited)
						(in thousands)
Restructuring - 2003
Office closure costs	$	—	$	(336	)	$	(150	)	$	517		$	31
Employee severance and related benefits		—		2,762			(1,768	)		(623	)		371

		—		2,426			(1,918	)		(106	)		402

Restructuring – 2002
Office closure costs		1,395		—			(100	)		(454	)		841
Employee severance and related benefits		1,186		200			(1,209	)		18			195

		2,581		200			(1,309	)		(436	)		1,036

Restructuring – 2001
Office closure costs		10,623		(8,421	)		(589	)		(645	)		968
Employee severance and related benefits		260		—			(220	)		—			40

		10,883		(8,421	)		(809	)		(645	)		1,008

	$	13,464	$	(5,795	)	$	(4,036	)	$	(1,187	)	$	2,446

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

Segment Information
(in thousands)


										Reconciling Items

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

Three Months Ended September 30, 2003
Revenues	$	22,239		$	—		$	22,239		$	—		$	—		$	—		$	22,239
Net loss	$	(5,937	)	$	(47	)	$	(5,984	)	$	—		$	(380	)	$	(29,326	)*	$	(35,690	)
Assets	$	178,495		$	10,786		$	189,281		$	4,105		$	73,433		$	—		$	266,819
Capital Expenditures	$	(198	)	$	—		$	(198	)	$	—		$	(22	)	$	—		$	(220	)
Three Months Ended September 30, 2002
Revenues	$	27,205		$	133		$	27,338		$	—		$	—		$	—		$	27,338
Net income	$	(15,946	)	$	(4,826	)	$	(20,772	)	$	(5,082	)	$	(9,428	)	$	48,111	*	$	12,829
Assets	$	221,958		$	37,266		$	259,224		$	20,494		$	126,470		$	—		$	406,188
Capital Expenditures	$	(313	)	$	—		$	(313	)	$	—		$	—		$	—		$	(313	)
Nine Months Ended September 30, 2003
Revenues	$	70,978		$	202		$	71,180		$	—		$	—		$	—		$	71,180
Net loss	$	(31,835	)	$	(1,319	)	$	(33,154	)	$	(404	)	$	(19,629	)	$	(26,276	)*	$	(79,463	)
Assets	$	178,495		$	10,786		$	189,281		$	4,105		$	73,433		$	—		$	266,819
Capital Expenditures	$	(538	)	$	—		$	(538	)	$	—		$	(22	)	$	—		$	(560	)
Nine Months Ended September 30, 2002
Revenues	$	77,407		$	349		$	77,756		$	—		$	—		$	(14	)	$	77,742
Net loss	$	(87,984	)	$	(17,700	)	$	(105,684	)	$	(21,105	)	$	(37,570	)	$	102,401	*	$	(61,958	)
Assets	$	221,958		$	37,266		$	259,224		$	20,494		$	126,470		$	—		$	406,188
Capital Expenditures	$	(607	)	$	—		$	(607	)	$	—		$	—		$	—		$	(607	)

* Other reconciling items to net loss are as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,

	2003			2002		2003			2002

Impairment (Note 2)	$	-—		$	-—	$	(5,813	)	$	(19,403	)
Minority interest		(33	)		3,182		2,445			14,459
Other income (loss) (Note 12)		(29,293	)		44,929		(22,908	)		107,345

	$	(29,326	)	$	48,111	$	(26,276	)	$	102,401

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 September 30, 2003 and December 31, 2002 is included in “Ownership interests in Partner Companies” in the Parent Company Balance Sheets. This Parent Company financial information includes the “Parent”, Internet Capital Group, Inc., and its wholly-owned subsidiaries, ICG Holdings, Inc., 1999 Internet Capital Group (Europe) L.P., and Internet Capital Group Operations, Inc.. The Company’s cash and cash equivalents, restricted cash, short-term investments, ownership interests in Partner Companies and available-for-sale securities are held by ICG Holdings, Inc. and 1999 Internet Capital Group (Europe) L.P.

Parent Company Balance Sheets


			As of September 30,			As of December 31,
			2003			2002

			(unaudited)
			(in thousands)
ASSETS
	Cash and cash equivalents		$	52,290		$	81,875
	Restricted cash			4,180			9,180
	Short-term investments			—			6,986
	Other current assets			3,956			2,927

	Current assets		$	60,426		$	100,968
	Ownership interests in Partner Companies			115,959			140,621
	Available-for-sale securities			7,164			10,228
	Other			4,951			8,180

		Total assets	$	188,500		$	259,997

LIABILITIES AND STOCKHOLDERS’ DEFICIT
	Current liabilities		$	13,064		$	28,529
	Convertible subordinated notes			223,189			283,114
	Stockholders’ deficit			(47,753	)		(51,646	)

		Total liabilities and stockholders’ deficit	$	188,500		$	259,997

Parent Company Statements of Operations


			Three Months Ended September 30,						Nine Months Ended September 30,

			2003			2002			2003			2002

			(unaudited)
			(in thousands)
Revenue			$	—		$	—		$	—		$	—
Operating expenses
	General and administrative			3,628			5,741			12,997			20,777
	Impairment related and other			(7,070	)		—			(4,150	)		1,499

		Total operating expenses		(3,442	)		5,741			8,847			22,276

				3,442			(5,741	)		(8,847	)		(22,276	)
Other income (loss), net				(29,293	)		44,906			(26,396	)		97,388
Interest expense, net				(3,822	)		(3,687	)		(11,726	)		(15,294	)

Income (loss) before equity loss				(29,673	)		35,478			(46,969	)		59,818
Equity loss				(6,017	)		(22,649	)		(32,494	)		(121,776	)

Net income (loss)			$	(35,690	)	$	12,829		$	(79,463	)	$	(61,958	)

INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. Parent Company Financial Information (Continued)

Parent Company Statements of Cash Flows


		Nine Months Ended September 30,

		2003			2002

		(unaudited)
Cash used in operating activities		$	(19,219	)	$	(26,031	)

Investing Activities
	Capital expenditures, net		(22	)		33
	Proceeds from disposals of fixed assets		—			287
	Proceeds from sales of available-for-sale securities		9,935			—
	Proceeds from sales of Partner Company ownership interests		2,459			18,312
	Advances to and acquisitions of ownership interests in Partner Companies		(24,947	)		(69,546	)
	Proceeds from short-term investments		6,986			4,948

Cash used in investing activities			(5,589	)		(45,966	)
Financing Activities
	Repurchase of convertible notes		(5,529	)		(48,952	)
	Repayment of loans from employees		477			—
	Exercises of stock options		275			—

Cash used in financing activities			(4,777	)		(48,952	)

Net Decrease in Cash and Cash Equivalents			(29,585	)		(120,949	)
Cash and cash equivalents at beginning at period			81,875			215,581

Cash and cash equivalents at end of period		$	52,290		$	94,632

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						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

	(unaudited)
	(in thousands)
Gain (Loss) on Debt Extinquishment (Note 8)	$	(30,313	)	$	48,196		$	(24,186	)	$	111,423
Partner Company Impairment Charges (Note 2)		—			—			(3,488	)		(9,911	)
Loss on SFAS No. 133 Securities		—			—			(332	)		(681	)
Sales/Dispositions of Ownership interests in Partner Companies		855			2,519			1,048			4,308
Realized gains (losses) on available-for-sale securities		—			(6,600	)		340			(7,665	)
Other		165			791			222			(86	)

	$	(29,293	)	$	44,906		$	(26,396	)	$	97,388

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 and e-commerce 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 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 of America. 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, revenues, income taxes and 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 important to the presentation of our financial statements and require the most difficult, subjective and complex judgments.

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

We perform on-going business reviews and perform annual goodwill impairment tests in accordance with SFAS No. 142 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.

Effect of Various Accounting Methods on our Results of Operations

The various interests that we acquire in our partner companies are accounted for under one of three accounting methods: consolidation, equity method or 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 statement 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. 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. 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 September 30, 2003, we owned interests in 31 partner companies that are categorized below based on segment and method of accounting.


CORE PARTNER COMPANIES (%Voting Interest)

Consolidated	Equity	Cost

CommerceQuest (80%)	CreditTrade (30%)	Blackboard (15%)
ICG Commerce (75%)	eCredit (42%)	StarCite (17%)
OneCoast (97%)	eMerge Interactive (18%)	Universal Access (9%)
	Freeborders (48%)	Verticalnet (17%)
	GoIndustry (31%)
	Investor Force (38%)
	iSky (25%)
	LinkShare (40%)
	Marketron (40%)
	Syncra Systems (31%)


EMERGING PARTNER COMPANIES (%Voting Interest)

Consolidated	Equity	Cost

	Agribuys (27%)	Anthem (9%)
	ComputerJobs.com (46%)	Arbinet (2%)
	Co-nect (36%)	Captive Capital (5%)
	Onvia.com (22%)	ClearCommerce (11%)
		Emptoris (9%)
		Entegrity Solutions (2%)
		FuelSpot (9%)
		Jamcracker (2%)
		Mobility Technologies (3%)
		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 31 partner companies for 2003 and 2002. The method of accounting for any particular partner company may change based on our ownership interest.

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 that follows.

Segment Information

(in thousands)


										Reconciling Items

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

Three Months Ended September 30, 2003
Revenues	$	22,239		$	—		$	22,239		$	—		$	—		$	—		$	22,239
Net loss	$	(5,937	)	$	(47	)	$	(5,984	)	$	—		$	(380	)	$	(29,326	)	$	(35,690	)
Three Months Ended September 30, 2002
Revenues	$	27,205		$	133		$	27,338		$	—		$	—		$	—		$	27,338
Net income	$	(15,946	)	$	(4,826	)	$	(20,772	)	$	(5,082	)	$	(9,428	)	$	48,111		$	12,829
Nine Months Ended September 30, 2003
Revenues	$	70,978		$	202		$	71,180		$	—		$	—		$	—		$	71,180
Net loss	$	(31,835	)	$	(1,319	)	$	(33,154	)	$	(404	)	$	(19,629	)	$	(26,276	)	$	(79,463	)
Nine Months Ended September 30, 2002
Revenues	$	77,407		$	349		$	77,756		$	—		$	—		$	(14	)	$	77,742
Net loss	$	(87,984	)	$	(17,700	)	$	(105,684	)	$	(21,105	)	$	(37,570	)	$	102,401		$	(61,958	)

For the Three and Nine Months Ended September 30, 2003 and 2002

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.


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

Selected data:			2003			2002			2003			2002

			(in thousands)
Revenue			$	22,239		$	27,205		$	70,978		$	77,407

	Cost of revenue			(12,774	)		(16,454	)		(42,692	)		(51,852	)
	Selling, general and administrative			(8,997	)		(12,609	)		(33,626	)		(44,530	)
	Research and development			(2,536	)		(5,548	)		(11,830	)		(18,967	)
	Amortization of intangibles			(1,584	)		(2,883	)		(5,760	)		(9,114	)
	Impairment related and other			(40	)		(2,056	)		701			(9,321	)

		Operating expenses		(25,931	)		(39,550	)		(93,207	)		(133,784	)

Interest and other				412			(1,195	)		304			(1,216	)
Equity loss				(2,657	)		(2,406	)		(9,910	)		(30,391	)

Net loss			$	(5,937	)	$	(15,946	)	$	(31,835	)	$	(87,984	)

Revenue

Revenue was $22.2 million for the three months ended September 30, 2003 versus $27.2 million for the same period of 2002. Revenue decreased $2.5 million due to lower software and service revenue at CommerceQuest, ICG Commerce and OneCoast during the 2003 period versus the 2002 period, $1.4 million due to deconsolidating eCredit during 2003 and $1.1 million due to the sale of a product line of OneCoast in the fourth quarter of 2002.

Revenue was $71.0 million for the nine months ended September 30, 2003 versus $77.4 million for the nine months ended September 30, 2002. Revenue decreased due to lower software and services revenue at CommerceQuest, deconsolidating eCredit and lower revenue at OneCoast principally as a result of the sale of a product line. These decreases were offset by increases of $6.7 million due to higher revenue at ICG Commerce and the inclusion of an additional consolidated partner company that was not included during the 2002 period.

Operating Expenses

Operating expenses were $25.9 million for the three months ended September 30, 2003 versus $39.6 million for the same period of 2002. These operating expenses have decreased $9.9 million as a result of ICG Commerce, CommerceQuest and OneCoast implementing cost reduction programs and $3.8 million due to deconsolidating eCredit.

Operating expenses were $93.2 million for the nine months ended September 30, 2003 versus $133.8 million for the same period of 2002. These operating expenses have decreased $30.3 million as a result of ICG Commerce, CommerceQuest and OneCoast implementing cost reduction programs and $14.6 million due to deconsolidating eCredit. These decreases were partially offset by an increase of $4.3 million due to the inclusion of an additional consolidated partner company.

Equity Loss

A significant portion of our net results from our core equity method 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 and any impairment losses related to these companies is recorded in our consolidated statements of operations under “Equity loss”.

Our share of income and losses of core equity method companies increased to $2.7 million for the three months September 30, 2003 versus $2.4 million for the comparable 2002 period. The increase is principally the result of an increase in equity loss as eCredit is accounted for as an equity method company in the 2003 period versus consolidated during the 2002 period. Our share of income and losses of Core equity method companies decreased to $9.9 million for the nine months ended September 30, 2003 versus $30.4 million for the comparable 2002 period principally as a result of lower net losses at these companies as revenues increase and operating expenses decrease as cost reduction programs are implemented.

Additionally, during the three months ended September 30, 2003, Universal Access completed a financing transaction and Verticalnet exchanged debt for equity. As a result of these transactions, our ownership level decreased and these companies will no longer be accounted for under the equity method of accounting. Our aggregate shares of the net income/loss of Universal Access and VerticalNet amounted to a loss of $0.5 million and income of $1.3 million for the three months ended September 30, 2003 and 2002, respectively and losses of $3.1 million and $16.9 million for the nine months ended September 30, 2003 and 2002.

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 and nine months ended September 30, 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 emerging partner companies.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

Selected data:	2003			2002			2003			2002

	(in thousands)
Revenue	$	—		$	133		$	202		$	349
Operating expenses		—			(457	)		(445	)		(1,324	)
Equity loss		(47	)		(4,502	)		(1,076	)		(16,725	)

Net loss	$	(47	)	$	(4,826	)	$	(1,319	)	$	(17,700	)

Our consolidated emerging companies have generated negligible revenues to date. The period over period decreases in operating expenses is primarily a result of deconsolidating Captive Capital during the second quarter of 2003.

Our share of income and net losses of emerging companies was nil and $1.1 million for the three and nine months ended September 30, 2003 versus $4.5 million and $16.7 million for the same periods of 2002. The decreases are principally the result of our basis in these companies being reduced to zero, our ownership interest being reduced and reduced losses at these companies.

Impairment losses related to emerging equity method companies totaled $3.0 million for the nine months ended September 30, 2002 and are included in “other” for segment reporting purposes. See “Other” subsection below. There were no impairment losses related to emerging equity method companies for the three months ended September 30, 2003 and 2002 or the nine months ended September 30, 2003.

Discontinued Operations and Dispositions

During 2002, two consolidated subsidiaries, Delphion and Logistics.com, 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. , Delphion and Logistics.com had aggregate revenue of $4.3 million and $12.1 million for the three and nine months ended September 30, 2002, respectively. Our share of these companies’ losses totaled $4.8 million and $15.3 million for the three and nine months ended September 30, 2002, respectively. The assets and liabilities of Delphion should be settled by mid-2004 other than the escrow and indemnifications under the purchase agreement by which we sold our interests in Delphion.

The impact to our results of the consolidated partner companies that we have disposed of our ownership interest in or have ceased operations during the three and nine months ended September 30, 2003 and 2002 is also included in the caption “Dispositions” for segment reporting purposes.

Impairment losses related to equity method partner companies we disposed of totaled $1.4 million and $6.5 million for the nine months ended September 30, 2003 and 2002, respectively, and are included in “other” for segment reporting purposes. See subsection below.

Our share of the income and losses of those equity method companies that we disposed of was losses of nil and $0.3 million for the three months ended September 30, 2003 and 2002, respectively, and losses of $0.4 million and $5.8 million for the nine months ended September 30, 2003 and 2002, respectively.

Corporate


	Three Months ended September 30,						Nine Months ended September 30,

	2003			2002			2003			2002

				(in thousands)
General and administrative	$	(3,628	)	$	(5,741	)	$	(12,997	)	$	(20,777	)
Impairment related and other		7,070			—			5,094			(1,499	)
Interest expense, net		(3,822	)		(3,687	)		(11,726	)		(15,294	)

Total corporate operating expenses	$	(380	)	$	(9,428	)	$	(19,629	)	$	(37,570	)

General and Administrative

Our general and administrative costs consist primarily of employee compensation, insurance, 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. See “Restructuring” below. Included in these expenses is stock-based compensation of $0.4 million and $2.1 million and $1.2 million and $5.5 million for the three and nine months ended September 30, 2003 and 2002, respectively, consisting primarily of amortization expense related to options granted below fair value in 1999 and grants of restricted stock to employees during 2001. Stock-based compensation for 2003 decreased versus 2002 as the result of more restricted stock grants vesting in 2002.

Restructuring (Impairment Related and Other)

During 2003 and 2002, we restructured our operations to better align our general and administrative expenses with the reduction in the number of our partner companies. The restructuring resulted in charges of $2.0 million and $1.5 million for the nine months ended September 30, 2003 and 2002, respectively. Additionally, during the three months ended September 30, 2003, we settled a lease obligation for $7.1 million less than we had estimated. These items are included in the “Impairment Related and Other” section of our consolidated statement of operations. (See Note 10 to our consolidated financial statements).

Interest Income/Expense

The increase/decrease in interest expense, net is primarily attributable to the reduction in the amount of cash offset by a reduction in convertible notes outstanding at September 30, 2003 versus September 30, 2002.

Other


	Three Months Ended September 30,					Nine Months Ended September 30,

	2003			2002		2003			2002

				(in thousands)
Impairments (Note 2)		—			—	$	(5,813	)	$	(19,403	)
Other income (loss) (Note 12)	$	(29,293	)	$	44,929		(22,908	)		107,345
Minority interest		(33	)		3,182		2,445			14,459

	$	(29,326	)	$	48,111	$	(26,276	)	$	102,401

Liquidity and Capital Resources

As of September 30, 2003, at the parent company level, we had $52.3 million in cash and cash equivalents and $4.2 million in restricted cash for total liquidity of $56.5 million. In addition, our consolidated partner companies had cash, cash equivalents, restricted cash and short-term investments of $29.0 million. Consolidated working capital decreased to $46.9 million at September 30, 2003 compared to $73.6 million at December 31, 2002, primarily as a result of net cash outflows from operations, repurchase of convertible notes and fundings we made to partner companies during the nine months ended September 30, 2003.

Net cash used in operating activities was approximately $37.5 million for the nine months ended September 30, 2003 compared to $67.6 million during the same prior year period. The decrease is primarily the result of the decreased losses at our consolidated partner companies.

Net cash provided by investing activities during the nine months ended September 30, 2003 was $6.5 million versus net cash used in investing activities of $6.5 million during the comparable 2002 period. The increase is primarily due to proceeds from partner company dispositions, sales of available-for-sale securities and reduced acquisitions of ownership interests in 2003 versus 2002.

Net cash used in financing activities was approximately $7.0 million for the nine months ended September 30, 2003 versus $56.1 million during the same prior year period. The decrease in cash used is principally the result of $49.0 million being used to repurchase $162.9 million of principal amount of our convertible notes in 2002 versus $5.5 million being used to repurchase $12.0 million of principal amount of our convertible notes in 2003.

We believe existing cash, cash equivalents and short-term investments, proceeds from the issuance of debt and equity securities of our consolidated partner companies to third parties and proceeds from the potential sales of all or a portion of our interests in certain partner companies are expected to be sufficient to fund our cash requirements through September 2004, including commitments to existing partner companies, debt obligations and general operations requirements. However, as of November 14, 2003, we have outstanding $193.8 million in face value of convertible notes due December 21, 2004. We currently do not have sufficient cash, cash equivalents, restricted cash, short-term investments and available-for-sale securities to satisfy these convertible notes at maturity.

From 2001 through November 14, 2003, we have repurchased and extinguished $372.5 million of the original $566.3 million face value of December 2004 convertible notes for $89.8 million in cash and 103.1 million shares of our common stock in a series of separate transactions. We are attempting to satisfy or refinance the remaining $193.8 million in convertible notes. This may require us to raise additional debt and/or equity financing, which may not be available at all, or may only be available on terms unfavorable to us. If we are successful in satisfying or refinancing the debt, our financial resources may be reduced and the interests of the holders of our common stock may be significantly diluted. Additionally, the terms of a refinancing may require that we reorganize pursuant to a pre-packaged or pre-arranged bankruptcy. We can provide no assurance that we will be successful in satisfying or refinancing the convertible notes. If we are not successful in satisfying or refinancing these obligations, we may default on our obligations which could render us insolvent and we could file for or be forced into bankruptcy.

At September 30, 2003, we were obligated for $7.0 million of funding and guarantee commitments to existing 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 to a venture capital firm. One of our executive officers is a limited partner of this venture capital firm. 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 ownership interests in new and existing partner companies in the next twelve months; however, such acquisitions will generally be made at our discretion. 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 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.

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 outstanding indebtedness;

• 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; 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.

Our business involves a number of risks, some of which are beyond our control. You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this Report before deciding to invest in our shares. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties that we do not currently know or that we currently believe to be immaterial may also adversely affect our business.

Risks Particular to Internet Capital Group

We may not be able to pay our long-term debt when it matures or we may restructure this debt and, in each case, this could result in substantial dilution of the interests of our common stock and/or a bankruptcy.

Our outstanding indebtedness could negatively impact our future prospects.

If we are unable to satisfy our debt service requirements, substantial liquidity problems could result, which would negatively impact our future prospects. As of November 14, 2003, we had $193.8 million in outstanding convertible subordinated notes and $9.2 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 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.

If our common stock ceases to be listed for trading 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.

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 Nasdaq 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 would be provided with a third grace period lasting 90 calendar days to regain compliance. On July 23, 2003, we received a delisting determination from the Nasdaq staff stating that we had not regained compliance with the Nasdaq SmallCap Market’s $1.00 per share minimum bid price requirement.

On October 10, 2003, we received a notice from the NASDAQ Stock Market regarding the continuation of our listing status on the NASDAQ SmallCap Market. Based upon our compliance with all SmallCap Market initial listing standards (other than the minimum bid price requirement), the NASDAQ Listing Qualifications Panel (the “Panel”) granted us an exception to the bid price requirement through December 1, 2003, to allow for further developments in the SEC rulemaking process. Pursuant to the terms of the amended

rule change proposal , the Panel also indicated its potential willingness to further extend our exception to no later than April 24, 2004, if we have not regained compliance by December 1, 2003. Nonetheless, the Panel has indicated that it will revisit our exception upon the SEC’s adoption, amendment, or rejection of the rule change proposal.

In order to regain compliance with the Nasdaq 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 be afforded an additional grace period, or that if an additional grace period is granted that we will achieve compliance with the $1.00 per share minimum bid price before such grace period is exhausted, or that we will continue to satisfy all of the other listing requirements of the Nasdaq SmallCap Market.

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 or maintain 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.

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

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

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

• our debt obligations;

• 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 information technology and e-commerce industries;

• negative public perception of the prospects of information technology 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.

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

If our partner companies do not succeed, the value of our assets and the price of our common stock may decline. Economic, governmental, industry and internal company factors outside our control affect each of our partner companies. 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 $266.8 million in total assets as of September 30, 2003, $55.3 million, or 20.7%, consisted of ownership interests in our partner companies accounted for under the equity and cost methods of accounting. 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 $20.6 million in the aggregate as of September 30, 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.

If our partner companies are not able to raise capital from other outside sources, then they may need to cease 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. We allocate our resources to focus on those partner companies that we believe present the greatest potential to increase 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.

If public and private capital markets are not favorable for the information technology and e-commerce sectors, we may not be able to execute on our strategy.

Our success depends on the acceptance by the public and private capital markets of information technology and e-commerce companies in general, including initial public offerings of those companies. The information technology and e-commerce markets have experienced significant volatility recently and the market for initial public offerings of information technology and e-commerce 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 our industry 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 information technology and e-commerce companies generally;

• changes in equity losses or income;

• the acquisition or divestiture of interests in partner companies;

• the repurchase, exchange or restructuring 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 information technology and e-commerce markets;

• 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.

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.

If one or more 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.

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

Our accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis, including goodwill, in our partner companies could change in the near term and the effect of such changes on the financial statements could be significant. 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, we have recorded cumulative impairment charges of $1.3 billion to write off certain partner company holdings. As of September 30, 2003, our recorded amount of carrying basis including goodwill was not impaired, although we cannot assure that our future results will confirm this assessment. We will be performing our annual impairment test during the fourth quarter of 2003. It is possible that a significant write-down or write-off of partner company carrying basis, including goodwill, may be required in the future, or that a significant loss will be recorded in the future upon the sale of a partner company. A write-down or write-off of this type could cause a decline in the price of our common stock.

We may compete with 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 our partner companies to acquire interests in information technology and e-commerce companies and our partner companies may compete with each other for information technology e-commerce opportunities. This competition 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 partner companies, we may not be able to control significant business decisions of our partner companies. In addition, although we currently own a controlling interest in several of our partner companies, we may not maintain this controlling interest. Equity interests in partner companies in which we lack control or share control involve 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 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 certain partner companies, 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.

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

If the capital markets’ interest in our industry remains depressed, our ability and the ability of our partner companies to grow and access the capital markets will be impaired. This may 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. 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.

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.

When we divest all or part of an interest in a partner company, we may not receive maximum value for our position. We may divest our interests in partner companies to generate cash or for strategic reasons. For partner companies with publicly-traded stock, we may be unable to sell our interest at then-quoted market prices. 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. 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.

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

We have identified certain partner companies that we believe offer the greatest value proposition as core partner companies. 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 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.

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 businesses of information technology and e-commerce 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 that 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.

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. 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. The price of our publicly-traded partner companies common stock has been highly volatile. As of September 30, 2003, the market value of our publicly-traded partner companies was $20.6 million. Our assets as reflected in our balance September 30, 2003 sheet, were $266.8 million, of which $7.9 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:

• inability to retain key management and experienced software personnel;

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

• inability to generate an operating profit;

• inability to establish brand awareness;

• inability to acquire additional funding;

• inability to compete in the market for the products and services it offers;

• inability to protect intellectual property rights;

• inability to maintain listing on the Nasdaq SmallCap Market;

• lengthy sales and implementation cycles for products; and

• dilution of existing shareholders

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 and industry developments;

• failure to achieve brand recognition;

• difficulty in evaluating current business segments due to limited operating history;

• inability to protect intellectual property rights;

• 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;

• inability to combat use of bid flow information;

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

• government agencies’ and small businesss’ unwillingness to purchase and sell business services and products online;

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

• inability to retain executive officers, directors and key employees;

• regulation and legal restrictions on proprietary bid aggregation technology; and

• inability to successfully integrate any future acquisition;

• failure to expand current technology infrastructure and network software system; and

• dependence on licensed technology from third parties.

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;

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

• unwillingness of clients to outsource the obtaining of circuits;

• 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 manage future expansion effectively;

• inability to retain key personnel and hire additional personnel;

• dependence on several large clients;

• inability to develop new service offerings and expand marketing channels;

• control by a significant stockholder may discourage third party offers to acquire the company;

• recent reverse stock split may cause a decline in stock price and total market capitalization; and

• inability to provide uninterrupted circuit access.

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. 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.

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.

If our partner companies are unable to compete successfully against their competitors, our partner companies may fail. Competition for information technology and e-commerce products and services is intense. As the markets for information technology and e-commerce grow, 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.

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.

Our partner companies may fail to retain significant customers.

During the three months ended June 30, 2003, a partner company’s customer notified such partner company that it is exercising its right to terminate its arrangement to purchase services from such partner company effective January 1, 2004. This customer may compete with this partner company in the future. Approximately 12% of our consolidated company revenue for the three months ended September 30, 2003, relates to such customer. If our partner companies are not able to retain significant customers, such partner companies’ and our 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, if 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 one or more significant 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.

The complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of our partner companies and the demands of quick delivery of products and services to market, create the risk that our partner companies will be unable to protect their proprietary rights. 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, these representations 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 RISK

We are exposed to equity price risks on the marketable portion of our equity securities. Our public holdings at September 30, 2003 include equity positions in the following companies in the technology industry sector:

• eMerge Interactive;

• Universal Access;

• Onvia.com; and

• Verticalnet,

many of which have experienced significant historical volatility in their respective stock prices. A 20% adverse change in equity prices, based on a sensitivity analysis of our public holdings as of September 30, 2003, would result in an approximate $4.1 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. 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

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) as of the end of the period covered in this report. 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.

In addition, we reviewed our internal controls and there have been no significant changes in our internal controls or in other factors that could significantly affect those 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 an opinion dated February 19, 2003 In July 2003, a committee of the Company’s Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide for, among other things, a release of the Company and of the individual defendants (who had been previously dismissed without prejudice) for the wrongful conduct alleged in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of the Company’s insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the United States District Court overseeing the litigation.

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 asserted 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 sought damages, interest, attorneys’ fees and costs. The Company 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 acts and practices. The cross-complaint alleged, 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 sought compensatory damages, interest, restitution of the security deposit and an injunction against further withholding of the security deposit amount, attorneys’ fees and costs. This lawsuit was settled in August, 2003. In connection with the settlement, ICG paid $550,000 in cash and issued 1.5 million restricted shares of the Company’s common stock.

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 and Freeborders 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. The litigation currently is in its preliminary stage. The Court recently granted defendants’ motion to stay the litigation pending arbitration of plaintiffs’ claims against defendants other than the Company.

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		First Amendment to Letter of Credit Agreement dated as of October 20, 2003 by and between Comerica Bank, ICG Holdings, Inc. and Internet Capital Group, Inc.

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 13)

31.1		Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

On August 7, 2003, the Company furnished a Current Report on Form 8-K dated August 7, 2003, to report under Item 9, the Company’s press release and financial information for the three-month period ended June 30, 2003.

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: November 14, 2003

	By:	/s/Anthony P. Dolanski

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

EXHIBIT INDEX


Number		Document

10.1		First Amendment to Letter of Credit Agreement dated as of October 20, 2003 by and between Comerica Bank, ICG Holdings, Inc. and Internet Capital Group, Inc.

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 13)

31.1		Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002

	•		our outstanding indebtedness;

	•		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; and

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

	•		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.

	•		our debt obligations;

	•		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 information technology and e-commerce industries;

	•		negative public perception of the prospects of information technology 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.

	•		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 information technology and e-commerce companies generally;

	•		changes in equity losses or income;

	•		the acquisition or divestiture of interests in partner companies;

	•		the repurchase, exchange or restructuring 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 information technology and e-commerce markets;

	•		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.

	•		inability to retain key management and experienced software personnel;

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

	•		inability to generate an operating profit;

	•		inability to establish brand awareness;

	•		inability to acquire additional funding;

	•		inability to compete in the market for the products and services it offers;

	•		inability to protect intellectual property rights;

	•		inability to maintain listing on the Nasdaq SmallCap Market;

	•		lengthy sales and implementation cycles for products; and

	•		dilution of existing shareholders

	•		lack of commercial acceptance of eMerge Interactive’s products and services; - - inability to respond to competitive and industry developments;

	•		failure to achieve brand recognition;

	•		difficulty in evaluating current business segments due to limited operating history;

	•		inability to protect intellectual property rights;

	•		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;

	•		inability to combat use of bid flow information;

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

	•		government agencies’ and small businesss’ unwillingness to purchase and sell business services and products online;

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

	•		inability to retain executive officers, directors and key employees;

	•		regulation and legal restrictions on proprietary bid aggregation technology; and

	•		inability to successfully integrate any future acquisition;

	•		failure to expand current technology infrastructure and network software system; and

	•		dependence on licensed technology from third parties.

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

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

	•		unwillingness of clients to outsource the obtaining of circuits;

	•		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 manage future expansion effectively;

	•		inability to retain key personnel and hire additional personnel;

	•		dependence on several large clients;

	•		inability to develop new service offerings and expand marketing channels;

	•		control by a significant stockholder may discourage third party offers to acquire the company;

	•		recent reverse stock split may cause a decline in stock price and total market capitalization; and

	•		inability to provide uninterrupted circuit access.

	•		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.

	•		eMerge Interactive;

	•		Universal Access;

	•		Onvia.com; and

	•		Verticalnet,