INTERNET CAPITAL GROUP INC - 10-Q Quarterly Report

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 THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

Commission File Number 000-26929

INTERNET CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)


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

690 Lee Road, Suite 310, Wayne, PA (Address of principal executive offices)		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. Yes [X] No [ ]

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

The number of shares of the Company’s Common Stock outstanding as of November 6, 2004 was 38,386,600 shares.

INTERNET CAPITAL GROUP, INC.
FORM 10-Q
September 30, 2004

INDEX


	PAGE NO.
PART I — FINANCIAL INFORMATION
ITEM
Item 1—Financial Statements:
Consolidated Balance Sheets—September 30, 2004 (unaudited) and December 31, 2003		4
Consolidated Statements of Operations (unaudited)—Three Months and Nine months Ended September 30, 2004 and 2003		5
Consolidated Statements of Cash Flows (unaudited)—Nine Months Ended September 30, 2004 and 2003		6
Notes to Consolidated Financial Statements		7
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3—Quantitative and Qualitative Disclosures About Market Risk		47
Item 4—Controls and Procedures		47
PART II — OTHER INFORMATION
Item 1—Legal Proceedings		47
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3—Defaults Upon Senior Securities		48
Item 4—Submission of Matters to a Vote of Security Holders		48
Item 5—Other Information		48
Item 6—Exhibits		49
Signatures		50
Exhibit Index

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 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.

Our internet website address is www.internetcapital.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed by us with the Securities and Exchange Commission pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are accessible free of charge through our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission.

INTERNET CAPITAL GROUP, INC.
PARTNER COMPANIES AS OF SEPTEMBER 30, 2004

Agribuys, Inc. (“Agribuys”)
Anthem/CIC Ventures Fund LP (“Anthem”)
Arbinet - thexchange Inc. (“Arbinet”)
Axxis, Inc. (f/k/a FuelSpot.com, Inc.)(“Axxis”)
Blackboard, Inc. (“Blackboard”) (Nasdaq:BBBB)
Captive Capital Corporation (f/k/a eMarket Capital, 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”)
Emptoris, Inc. (“Emptoris”)
Entegrity Solutions Corporation (“Entegrity Solutions”)
Freeborders, Inc. (“Freeborders”)
GoIndustry AG (“GoIndustry”)
ICG Commerce Holdings, Inc. (“ICG Commerce”)
Investor Force Holdings, Inc. (“Investor Force”)
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”)
StarCite, Inc. (“StarCite”)
Syncra Systems, Inc. (“Syncra Systems”)
Tibersoft Corporation (“Tibersoft”)
Universal Access Global Holdings Inc. (“Universal Access”)
Verticalnet, Inc. (“Verticalnet”) (Nasdaq:VERT)

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

INTERNET CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2004			2003
	(Unaudited)
	(in thousands, except per share data)
Assets
Current Assets
Cash and cash equivalents	$	32,003		$	77,581
Restricted cash		378			1,819
Short-term investments		55,733			9
Accounts receivable, net of allowance ($1,898-2004; $2,620-2003)		18,912			25,715
Prepaid expenses and other current assets		6,128			6,315

Total current assets		113,154			111,439
Marketable securities		53,820			6,714
Fixed assets, net		2,269			2,368
Ownership interests in Partner Companies		54,598			52,467
Goodwill		45,196			45,196
Intangibles, net		5,152			6,452
Other		7,447			6,527

Total Assets	$	281,636		$	231,163

Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities
Convertible subordinated notes (Note 9)	$	—		$	173,919
Current maturities of other long-term debt		378			6,298
Accounts payable		15,295			23,334
Accrued expenses		9,441			12,975
Accrued compensation and benefits		7,194			7,907
Accrued restructuring		582			2,512
Deferred revenue		8,572			8,973

Total current liabilities		41,462			235,918
Senior convertible notes (Note 9)		60,000			—
Other liabilities		7,979			9,964
Minority interest		3,888			4,575

		113,329			250,457

Stockholders’ Equity
Preferred stock $0.01 par value; 10,000 shares authorized, none issued or outstanding		—			—
Common stock, $0.001 par value; 2,000,000 shares authorized, 38,387 (2004) and 21,839 (2003) issued and outstanding		38			22
Additional paid-in capital		3,525,596			3,251,068
Accumulated deficit		(3,402,677	)		(3,269,920	)
Unamortized deferred compensation		(4,148	)		(712	)
Notes receivable-stockholders		(300	)		(460	)
Accumulated other comprehensive income		49,798			708

Total stockholders’ equity (deficit)		168,307			(19,294	)

Total Liabilities and Stockholders’ Equity	$	281,636		$	231,163

See notes to Consolidated Financial Statements.

INTERNET CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
	(in thousands, except per share data)
Revenue	$	12,732		$	16,034		$	37,397		$	53,510
Operating expenses
Cost of revenue		6,928			9,261			21,078			32,235
Selling, general and administrative		9,521			9,770			26,918			38,190
Research and development		2,351			2,536			7,342			11,830
Amortization of intangibles		689			1,134			2,183			4,410
Impairment related and other		20			(7,030	)		666			(3,133	)

Total operating expenses		19,509			15,671			58,187			83,532

		(6,777	)		363			(20,790	)		(30,022	)
Other income (loss), net		1,792			(28,612	)		(108,604	)		(25,251	)
Interest income		366			257			937			1,071
Interest expense		(855	)		(4,217	)		(4,058	)		(13,293	)

Loss before minority interest and equity loss		(5,474	)		(32,209	)		(132,515	)		(67,495	)
Minority interest		210			(33	)		1,413			2,445
Equity loss		(1,845	)		(2,704	)		(4,655	)		(12,771	)

Loss from continuing operations		(7,109	)		(34,946	)		(135,757	)		(77,821	)
Income (loss) on discontinued operations		—			(744	)		3,000			(1,642	)

Net loss	$	(7,109	)	$	(35,690	)	$	(132,757	)	$	(79,463	)

*Basic and diluted loss per share:*
Loss from continuing operations	$	(0.19	)	$	(2.43	)	$	(3.85	)	$	(5.64	)
Discontinued operations		—			(0.05	)		0.09			(0.12	)

	$	(0.19	)	$	(2.48	)	$	(3.76	)	$	(5.76	)

Shares used in computation of basic and diluted loss per share		37,003			14,389			35,282			13,795

See notes to Consolidated Financial Statements.

INTERNET CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
	2004			2003
	(in thousands)
Net cash used in operating activities	$	(23,350	)	$	(34,967	)

Investing Activities
Capital expenditures, net		(901	)		(463	)
Proceeds from sales of Partner Company ownership interests		25,354			3,151
Acquisitions of ownership interests in Partner Companies, net		(8,974	)		(11,947	)
Other acquisitions, net		—			(1,595	)
Proceeds from sales of marketable securities		3,349			9,935
Proceeds from / (purchases of) short-term investments, net		(55,733	)		6,986
Reduction of cash due to deconsolidation of a subsidiary		—			(1,759	)

Cash provided by (used in) investing activities		(36,905	)		4,308

Financing Activities
Issuance of senior convertible notes		60,000			—
Redemption of convertible subordinated notes		(39,541	)		—
Repurchase of convertible subordinated notes		—			(5,529	)
Repayment of long term debt and capital lease obligations, net		(6,250	)		(2,326	)
Line of credit borrowings		323			360
Line of credit repayments		—			(89	)
Repayment of loans from employees/stockholders		160			477
Exercise of stock options		—			275

Cash provided by (used in) financing activities		14,692			(6,832	)
Net decrease in Cash and Cash Equivalents		(45,563	)		(37,491	)
Effect of exchange rates on Cash		(15	)		(656	)
Cash and Cash Equivalents at the beginning of period		77,581			117,783

Cash and Cash Equivalents at the end of period	$	32,003		$	79,636

Supplemental non-cash – See Note 9.

See notes to Consolidated Financial Statements.

INTERNET CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

Description of the Company

Internet Capital Group, Inc. (the “Company”) is an information technology company actively engaged in delivering software solutions and services that are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. The Company operates through a network of Partner Companies that deliver those solutions to customers. To help drive the progress of its Partner Companies, 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.

Reverse stock split

In May 2004, the Company recorded a one-for-twenty reverse stock split. The common stock and additional paid-in capital accounts and all share and per share amounts have been retroactively restated in these financial statements to reflect this reverse split.

2. Significant Accounting Policies

Basis of Presentation

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 has been consolidated since the date the Company acquired majority control (collectively, the “Consolidated Subsidiaries”):

THREE MONTHS ENDED SEPTEMBER 30, 2004
CommerceQuest
ICG Commerce

THREE MONTHS ENDED SEPTEMBER 30, 2003
CommerceQuest
ICG Commerce

NINE MONTHS ENDED SEPTEMBER 30, 2004
CommerceQuest
ICG Commerce

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

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.

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

2. Significant Accounting Policies – (Continued)

Consolidation. Partner Companies in which the Company directly or indirectly owns more than 50% of the outstanding voting securities, and for which other stockholders do not possess the right to affect significant management decisions, 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 Sheets 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 subsidiary 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 a reduction of control below 50%, the accounting method is adjusted to the equity or cost method of accounting, as appropriate, for subsequent periods. Also, see Note 3.

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 Company’s Consolidated Statements of Operations. However, cost method Partner Company impairment charges are recognized in the Consolidated Statements 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 carrying value of such Partner Company at that time.

The Company records its ownership interest in equity securities of Partner Companies accounted for under the cost method at cost (reflected in “Ownership interests in Partner Companies”), 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 such as marketable securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

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

2. Significant Accounting Policies – (Continued)

Recent Accounting Pronouncements

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, was issued in May 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise at July 1, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS No. 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of SFAS No. 150.

Also see Note 3.

Concentration of Customer Base and Credit Risk

Approximately 17% of the Company’s revenue for the three and nine months ended September 30, 2003, related to one customer of one of the Company’s consolidated Partner Companies. During 2003, this customer notified such consolidated Partner Company of the exercise of its right to terminate its arrangement to purchase services from such consolidated Partner Company effective January 1, 2004. Accounts receivable from this customer as of December 31, 2003 were not significant.

Accounts Receivable

One of the Company’s consolidated Partner Companies provides services in which the Company’s consolidated Partner Company manages the transaction between its customer and a third party supplier. In these transactions, the Company’s consolidated Partner 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’s consolidated Partner Company an amount, which is generally the Company’s consolidated Partner Company Company’s cost plus a transaction fee, for the goods or services. The Company’s consolidated Partner Company is typically responsible for paying the supplier independent of when and if the Company’s consolidated Partner Company receives payment from its customer. The Company’s consolidated Partner Company receives payment directly from its customer. The Company’s consolidated Partner Company records the gross amount of the associated receivables and payables on the accompanying consolidated balance sheets. However, the Company’s consolidated Partner Company records the net amount of the transaction fee as revenue on the accompanying consolidated statements of operations. As of September 30, 2004 and December 31, 2003, accounts receivable included approximately $11.6 million and $17.3 million, respectively, related to such transactions.

Short-term Investments

Short-term investments are debt securities maturing in less than one year and are carried at amortized cost, which approximates fair value.

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 (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense is recorded for stock options issued to employees that are granted at fair market value. Stock options issued to non-employees are recorded at fair value at the date of grant. Fair value is determined using the Black-Scholes model and the expense is amortized over the vesting period.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123,” which provides optional transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the statement mandates certain disclosures that are incremental to those required by SFAS No. 123. The Company has continued to account for stock-based compensation in accordance with APB No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 148.

In March 2004, the Company issued 0.3 million shares of restricted stock to employees that generally vest over four years with

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

2. Significant Accounting Policies – (Continued)

acceleration provisions based on certain operating metrics. The value of the restricted stock at the date of grant of $2.1 million was recorded as deferred compensation and will be amortized over the vesting period.

In July 2004, the Company issued 0.4 million shares of restricted stock to employees that vest over four years. The value of the restricted stock at the date of grant of $2.3 million was recorded as deferred compensation and will be amortized over the vesting period.

The following table illustrates the effect on the Company’s net loss and net loss per share as if the fair value based method had been applied to all outstanding and unvested awards:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
				(Unaudited)
				(in thousands)
Net loss, as reported	$	(7,109	)	$	(35,690	)	$	(132,757	)	$	(79,463	)
Add stock-based employee compensation expense included in reported net loss		388			363			1,095			2,111
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards		(2,337	)		(4,541	)		(6,938	)		(14,644	)

Pro forma net loss	$	(9,058	)	$	(39,868	)	$	(138,600	)	$	(91,996	)

Basic and diluted net loss per share, as reported	$	(0.19	)	$	(2.48	)	$	(3.76	)	$	(5.76	)
Pro forma basic and diluted net loss per share	$	(0.24	)	$	(2.77	)	$	(3.93	)	$	(6.67	)

The per share weighted-average fair value of options issued by the Company during the three and nine months ended September 30, 2004 was $5.58 and $8.44, respectively, and $15.80 for the nine months ended September 30, 2003.

The following assumptions were used to determine the fair value of stock options granted to employees by the Company for the three and nine months ended September 30, 2004 and 2003:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
	(Unaudited)

Volatility	127.77%	N/A	127.77-132.99%	136.23-138.38%
Average expected option life	3 years	N/A	3 years	3 years
Risk-free interest rate	2.85%	N/A	2.26-2.85%	1.99-2.26%
Dividend yield	0.0%	N/A	0.0%	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

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

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

3. Investments in Partner Companies

The following table summarizes the Company’s goodwill and other intangibles and ownership interests in Partner Companies.


	September 30,		December 31,
	2004		2003
	(Unaudited)
	(in thousands)
Goodwill	$	45,196	$	45,196
Other intangibles		5,152		6,452

	$	50,348	$	51,648

Ownership interests in Partner Companies – Equity Method	$	46,682	$	41,745
Ownership interests in Partner Companies – Cost Method		7,916		10,722

	$	54,598	$	52,467

Included in “Impairment related and other” is an impairment charge of $0.9 million for the nine months ended September 30, 2003 related to a consolidated Partner Company for which the Company had determined that it was not able to recover its full investment.

Equity Method Companies

The following unaudited summarized financial information relates to the twelve Partner Companies accounted for under the equity method of accounting at September 30, 2004 (voting ownership %):

Private Core – CreditTrade (30%), eCredit (32%), Freeborders (48%), GoIndustry (54%), Investor Force (38%), LinkShare (40%), Marketron (38%) and StarCite (37%). Although the Company’s ownership percentage in GoIndustry exceeds 50% at September 30, 2004, the Company has not consolidated its financial statements due to the existence of certain minority voting rights in accordance with Emerging Issues Task Force No. 96-16 “Investor’s Accounting for an Investee when the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.”

Private Emerging – Agribuys (26%), ComputerJobs.com (46%), Co-nect (36%) and Syncra Systems (31%).

This information has been compiled from the unaudited financial statements of the respective Partner Companies.

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

3. Investments in Partner Companies — (Continued)

Balance Sheets


	As of September 30, 2004
	Core		Emerging			Total
			(Unaudited)
			(in thousands)
Cash, cash equivalents and short-term investments	$	56,133	$	5,767		$	61,900
Other current assets		55,218		4,965			60,183
Non-current assets		102,697		2,537			105,234

Total assets	$	214,048	$	13,269		$	227,317

Current maturities of long-term debt	$	6,563	$	1,543		$	8,106
Other current liabilities		75,516		8,633			84,149
Long-term debt		12,003		17,539			29,542
Other non-current liabilities		4,645		—			4,645
Stockholders’ equity (deficit)		115,321		(14,446	)		100,875

Total liabilities and stockholders’ equity (deficit)	$	214,048	$	13,269		$	227,317

Total carrying value	$	45,769	$	913		$	46,682


	As of December 31, 2003
	Core		Emerging			Total
			(Unaudited) (in thousands)
Cash and cash equivalents	$	50,154	$	6,616		$	56,770
Other current assets		57,788		4,908			62,696
Non-current assets		107,162		3,405			110,567

Total assets	$	215,104	$	14,929		$	230,033

Current maturities of long-term debt	$	12,683	$	1,180		$	13,863
Other current liabilities		71,151		8,812			79,963
Long-term debt		13,771		18,001			31,772
Other non-current liabilities		6,263		—			6,263
Stockholders’ equity (deficit)		111,236		(13,064	)		98,172

Total liabilities and stockholders’ equity (deficit)	$	215,104	$	14,929		$	230,033

Carrying value	$	40,305	$	1,004		$	41,309

Carrying value of eMerge Interactive, Inc.						$	436

Total carrying value						$	41,745

The long-term debt (including current portion thereof) of the Company’s equity method Partner Companies primarily consists of secured notes due to other stockholders and other outside lenders of these Partner Companies. The debt is non-recourse to the Company and the Company has not guaranteed any of this long-term debt.

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

3. Investments in Partner Companies — (Continued)

Results of Operations


	Three Months Ended September 30, 2004									Nine Months Ended September 30, 2004
	Core			Emerging			Total			Core			Emerging			Total
							(Unaudited)
							(in thousands)
Revenue	$	41,586		$	5,018		$	46,604		$	123,910		$	16,054		$	139,964

Net loss	$	(4,859	)	$	(3,812	)	$	(8,671	)	$	(10,765	)	$	(9,918	)	$	(20,683	)

Equity Loss	$	(1,690	)	$	(155	)	$	(1,845	)	$	(3,452	)	$	(767	)	$	(4,219	)

Public Partner Companies								—								$	(436	)

							$	(1,845	)							$	(4,655	)


	Three Months Ended September 30, 2003									Nine Months Ended September 30, 2003
	Core			Emerging			Total			Core			Emerging			Total
							(Unaudited)
							(in thousands)
Revenue	$	35,655		$	5,131		$	40,786		$	100,837		$	15,851		$	116,688

Net loss	$	(9,593	)	$	(4,012	)	$	(13,605	)	$	(21,524	)	$	(11,164	)	$	(32,688	)

Equity loss	$	(1,088	)	$	(652	)	$	(1,740	)	$	(3,536	)	$	(2,544	)	$	(6,080	)

Public Partner Companies								(830	)								(4,371	)
Impairment charges								—									(1,381	)
Other								(134	)								(939	)

							$	(2,704	)							$	(12,771	)

During the three months ended March 31, 2004, eMerge Interactive, Inc. (“eMerge Interactive”), and during the year ended December 31, 2003, Verticalnet and Universal Access, three of the Company’s public Partner Companies, previously accounted for under the equity method of accounting, were reclassified to the cost method of accounting as the Company’s ownership level decreased, as did the Company’s ability to exercise significant influence on these entities.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“Interpretation No. 46”). Interpretation No. 46 addresses the consolidation by business enterprises of variable interest entities as defined in Interpretation No. 46. Interpretation No. 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, Interpretation No. 46 is applied to the enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“Interpretation No. 46-R”) to address certain Interpretation No. 46 implementation issues. The effective dates and impact of Interpretation No. 46 and Interpretation No. 46-R are as follows:

(i) Special purpose entities created prior to February 1, 2003: The Company must apply either the provisions of Interpretation No. 46 or early adopt the provisions of Interpretation No. 46-R at the end of the first interim or annual reporting period ending after December 31, 2003.

(ii) Non-special purpose entities created prior to February 1, 2003: The Company is required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

(iii) All entities, regardless of whether a special purpose entity, that were created subsequent to January 31, 2003: The provisions of Interpretation No. 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company is required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

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

3. Investments in Partner Companies — (Continued)

The Company adopted Interpretation No. 46-R during the three months ended March 31, 2004. There was no impact to the Company’s Consolidated Financial Statements as the Company’s ownership interests in its Partner Companies were excluded due to scope exceptions provided for in Interpretation No. 46-R.

Impairments Related to Equity Method Companies

The Company recorded no impairment charges during the three and nine months ended September 30, 2004 related to equity method Partner Companies. The Company recorded $1.4 million in impairment charges during the nine months ended September 30, 2003 related to equity method Partner Companies.

Impairments related to Cost Method Companies

The Company recorded impairment charges of $0.5 million during the three and nine months ended September 30, 2004 related to cost method Partner Companies. The Company recorded $3.5 million in impairment charges during the nine months ended September 30, 2003 related to cost method Partner Companies.

Marketable Securities

Marketable securities represent the Company’s holdings in available-for-sale securities. The cost, unrealized holding gains, and fair value of available-for-sale securities at September 30, 2004 and December 31, 2003 were as follows:


			Unrealized Holding
	Cost		Gains		Fair Value
			(in thousands)
September 30, 2004 (Unaudited)
Blackboard	$	775	$	49,397	$	50,172
Verticalnet		3,135		337		3,472
Other		112		64		176

	$	4,022	$	49,798	$	53,820

December 31, 2003
Verticalnet	$	3,135	$	308	$	3,443
Universal Access		2,869		316		3,185
Other		2		84		86

	$	6,006	$	708	$	6,714

The amounts reflected in the Company’s cost was principally the carrying value on the date these Partner Companies converted to cost method companies from equity method companies. During the three months ended September 30, 2004, the Company recorded a $1.3 million impairment for an other than temporary decline in the fair market value of Universal Access which is included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations. During the three months ended June 30, 2004, the Company recorded a $1.6 million impairment charge for the other than temporary decline in the fair market value of Universal Access which is included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations.

4. Goodwill and Other Intangible Assets

As of September 30, 2004 and December 31, 2003, $45.2 million of goodwill was allocated to the Company’s Core segment. Amortizable intangible assets as of September 30, 2004 and December 31, 2003 of $4.4 million and $5.7 million, respectively, are included in intangible assets in the Company’s Consolidated Balance Sheets. Unamortizable intangible assets of $0.8 million as of September 30, 2004 and December 31, 2003, are included in intangible assets in the Company’s Consolidated Balance Sheets.

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

4. Goodwill and Other Intangible Assets – (Continued)

Other intangible assets that are being amortized over their useful lives are shown in the table below:


		As of September 30, 2004
				(Unaudited)
				(in thousands)
	Useful	Gross Carrying		Accumulated
Amortizable Intangible Assets	Life	Amount		Amortization			Net Carrying Amount
Customer Base	2-5 years	$	6,860	$	(6,860	)	$	—
Technology	2-5 years		23,108		(18,702	)		4,406

		$	29,968	$	(25,562	)	$	4,406


		As of December 31, 2003
				(in thousands)
	Useful	Gross Carrying		Accumulated
Amortizable Intangible Assets	Life	Amount		Amortization			Net Carrying Amount
Customer Base	2-5 years	$	6,860	$	(6,860	)	$	—
Technology	2-5 years		22,379		(16,673	)		5,706

		$	29,239	$	(23,533	)	$	5,706

Amortization expense for intangible assets for the three and nine months ended September 30, 2004 and 2003 was $0.7 million and $2.2 million and $1.1 million and $4.4 million, respectively.

Estimated amortization expense for the remainder of 2004 and succeeding fiscal years is as follows (in thousands):


December 31, 2004 (remainder)	$	690
December 31, 2005		1,805
December 31, 2006		1,025
December 31, 2007		886

	$	4,406

5. Derivative Financial Instruments

In September 2001, the Company entered into a variable share forward contract to hedge 1.8 million shares of its holdings of i2 Technologies, Inc. (“i2 Technologies”) common stock. 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 “Other” assets 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.” During the three months ended September 30, 2004, the fair value of all outstanding warrants decreased $0.3 million, principally as the result of the valuation of Blackboard at September 30, 2004. The estimated fair value of warrants held in Partner Companies was approximately $2.0 million at September 30, 2004 and $0.9 million at December 31, 2003 and is included in “Other” assets in the Company’s Consolidated Balance Sheets.

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

6. Income Taxes

The Company’s deferred tax asset before valuation allowance of $645 million at September 30, 2004 consists primarily of $219 million related to the carrying value of its Partner Companies, capital loss carryforwards of $250 million and net operating loss carryforwards of approximately $148 million.

At September 30, 2004, the Company had net operating loss carryforwards of approximately $399 million that may be used to offset future taxable income. Approximately $62 million of these carryforwards are subject to significant limitations on their utilization due to ownership changes experienced by certain consolidated Partner Companies. Additionally, as a result of the convertible debt for equity exchanges (see Note 9) that were completed in 2003 and 2004, an ownership change, pursuant to Section 382 of the Internal Revenue Code, of the Company has occurred. The annual limitation on the utilization of its net operating loss and capital loss carryforwards is approximately $13 million. These carryforwards expire between 2008 and 2022.

A valuation allowance has been provided for the Company’s net deferred tax asset at September 30, 2004, 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.

7. 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 loss, the Company’s primary source of comprehensive income (loss) is net unrealized holding gains (losses) related to its marketable securities. The following summarizes the components of comprehensive loss:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
				(Unaudited)
				(in thousands)
Net loss	$	(7,109	)	$	(35,690	)	$	(132,757	)	$	(79,463	)
Other comprehensive income (loss):
Unrealized holding gains (losses) in marketable securities		(8,271	)		1,109			49,720			527
Reclassification adjustments/realized net gains (losses) on marketable securities		(1,257	)		—			(630	)		332

Comprehensive income (loss)	$	(16,637	)	$	(34,581	)	$	(83,667	)	$	(78,604	)

8. Net Loss Per Share

The calculations of net loss per share were:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
				(Unaudited)
				(in thousands, except per share data)
Basic and Diluted:
Loss from continuing operations	$	(7,109	)	$	(34,946	)	$	(135,757	)	$	(77,821	)
Income (loss) on discontinued operations		—			(744	)		3,000			(1,642	)

Net Loss	$	(7,109	)	$	(35,690	)	$	(132,757	)	$	(79,463	)

Weighted average common shares outstanding		37,003			14,389			35,282			13,795

Loss from continuing operations	$	(0.19	)	$	(2.43	)	$	(3.85	)	$	(5.64	)
Income (loss) on discontinued operations		—			(0.05	)		0.09			(0.12	)

Net loss per share	$	(0.19	)	$	(2.48	)	$	(3.76	)	$	(5.76	)

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

8. Net Loss Per Share – (Continued)

If a consolidated or equity method Partner Company has dilutive options or securities outstanding, diluted net loss per share is computed first by deducting from 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, 2004 and 2003, the impact of a Partner Company’s dilutive securities has not been included as the impact would be anti-dilutive.

The following dilutive securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:


	September 30, 2004				September 30, 2003
			Weighted Average				Weighted Average
Dilutive security	Shares		price per share		Shares		price per share
Stock options		784,164	$	37.68		812,361	$	32.28
Stock options (exercised with partial recourse loans)		756,128	$	41.70		756,128	$	41.70
Restricted stock		627,828		—		—		—
Convertible subordinated notes		—		—		87,566	$	2,548.80
Senior convertible notes		6,587,621	$	9.11		—		—
Warrants		26,521	$	189.27		14,021	$	352.66

		8,782,262				1,670,076

9. Debt

Senior Convertible Notes

In April 2004, the Company issued $60.0 million of senior convertible notes. The notes bear interest at an annual rate of 5%, payable semi-annually, and mature in April 2009. 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 $9.108 per share. Additionally, subsequent to October 8, 2004, provided that at the time of redemption the Company is in compliance with certain other requirements, the notes may be redeemed by the Company if the Company’s closing stock price exceeds $15.94 per share for at least 20 out of 30 consecutive trading days. The Company recorded interest expense of $0.7 million and $1.4 million for the three and nine months ended September 30, 2004 related to these notes. The Company capitalized deferred financing fees of $1.6 million to be amortized over the life of the notes. Deferred financing fees are included in “Other” assets on the accompanying consolidated balance sheet. For the three and nine months ended September 30, 2004, the Company expensed $0.1 million and $0.2 million relating to these fees.

Convertible Subordinated Notes

In December 1999, the Company issued $566.3 million of convertible subordinated notes. The notes bore interest at an annual rate of 5.5% and were scheduled to mature in December 2004. From 2001 through March 31, 2004, the Company repurchased and extinguished $527.2 million of the original $566.3 million face value of convertible notes for $89.8 million in cash and 23.2 million shares of the Company’s common stock in a series of separate transactions. As of March 31, 2004 and December 31, 2003, the remaining balance of convertible notes was $39.1 million and $173.9 million, respectively. In June 2004, the Company redeemed the remaining $39.1 million face value of convertible notes for $39.5 million, recognizing a $0.4 million loss on the early redemption included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations. Additionally, in June 2004, the Company expensed $0.2 million related to the residual deferred financing fees. The Company recorded interest expense of nil and $2.1 million and $4.0 million and $12.5 million during the three and nine months ended September 30, 2004 and 2003, respectively, related to these convertible notes.

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

9. Debt – (Continued)

For the nine months ended September 30, 2004, the Company exchanged approximately $134.8 million face value of its convertible subordinated notes for approximately 15.9 million shares of its common stock. These exchanges resulted in an expense of $132.6 million in the first quarter of 2004 in accordance with SFAS No. 84 “Induced Conversions of Convertible Debt” and is included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations. Additionally, additional paid-in capital increased by the $134.8 million of face value of convertible notes exchanged and the $132.9 million of fair value of the 15.9 million shares issued in excess of the 0.053 million shares issuable pursuant to the original terms.

During the three months ended September 30, 2003, the Company exchanged approximately $47.9 million face value of its convertible subordinated notes for approximately 2.94 million shares of its common stock. These exchanges resulted in an expense of $30.3 million in the third quarter of 2003 in accordance with SFAS No. 84 “Induced Conversions of Convertible Debt” and is included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations. Additionally, 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 2.94 million shares issued in excess of the 0.02 million shares issuable pursuant to the original terms.

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 November 18, 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. Amounts secured under the Loan Agreement were $0.9 million and are included in “Restricted Cash” on the Company’s Consolidated Balance Sheets as of December 31, 2003. As of September 30, 2004, no letters of credit were outstanding under the loan agreement.

Other Long-Term Debt

During the nine months ended September 30, 2004, the Company settled $6.2 million of principal and $2.3 million of accrued interest relating to secured notes of a consolidated Partner Company for a total of $6.9 million in cash. The resulting $1.6 million gain is reflected in “Other income (loss), net” on the Company’s Consolidated Statements of Operations.

The Company’s other long-term debt of less than $0.4 million at September 30, 2004 relates to its consolidated Partner Companies, and consists of capital lease commitments and borrowings under a line of credit.

10. Discontinued Operations

In 2002, the sale of the assets of Delphion, Inc. occurred. During June 2004, the Company received additional proceeds from the sale of $3.0 million after expiration of an indemnification period. The gain is reflected in “Income (loss) on discontinued operations” in the Company’s Consolidated Statements of Operations.

In the fourth quarter of 2003, the sale of the assets of OneCoast Network Holdings, Inc. (“OneCoast”) occurred. In accordance with SFAS No. 144, this Partner Company has been treated as a discontinued operation. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations and include the losses recognized on disposition in the line item “Income (loss) on discontinued operations” in the Company’s Consolidated Statements of Operations. The Company received no cash proceeds on the transaction and recorded a loss of approximately $10.8 million. OneCoast had revenues of $6.2 million and $17.6 million for the three and nine months ended September 30, 2003. The Company’s share of the losses of OneCoast totaled $0.7 million and $1.6 million for the three and nine months ended September 30, 2003.

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

11. Restructuring

From 2001 to 2004, the Company and its consolidated Partner Companies implemented restructuring plans designed to reduce cost structures by closing and consolidating offices, disposing of fixed assets and reducing their workforces. The restructuring costs include the estimated costs to close offices including costs to fulfill the Company’s obligations under signed lease contracts and the write-off of leasehold improvements. Employee severance and related benefits include the estimated costs of cash severance and non-cash charges for the acceleration of stock options and forgiveness of interest on employee stock option loans. Cash severance was paid in a lump sum or over the shorter of a six-month period or until new employment. Restructuring charges totaled nil and $0.7 million during the three and nine months ended September 30, 2004, respectively. During the three months ended September 30, 2003, the Company settled a lease liability resulting in a credit of $7.0 million as this liability was settled for less than originally estimated. Restructuring charges totaled $3.0 million during the nine months ended September 30, 2003. These charges are included in “Impairment related and other” in the Consolidated Statements of Operations. The following table provides further detail of remaining employee severance and office closure costs.


	Office			Employee severance
	closure			and related
	costs			benefits			Total
				(Unaudited)
				(in thousands)
Accrued restructuring balance at December 31, 2003	$	2,084		$	428		$	2,512
Q1 restructuring charges		546			107			653
Cash payments		(303	)		(295	)		(598	)
Non-cash items expensed immediately/Other		(3	)		(127	)		(130	)

Accrued restructuring balance at March 31, 2004		2,324			113			2,437
Q2 restructuring charges/(credits)		—			(7	)		(7	)
Cash payments		(1,514	)		(73	)		(1,587	)
Non-cash items expensed immediately/Other		(67	)		(7	)		(74	)

Accrued restructuring balance at June 30, 2004		743			26			769
Q3 restructuring charges/(credits)		—			20			20
Cash payments		(207	)		—			(207	)

Accrued restructuring balance at September 30, 2004	$	536		$	46		$	582

The remaining unpaid amount in “Accrued restructuring” in the Company’s Consolidated Balance Sheets as of September 30, 2004 of $0.6 million relates primarily to lease payments due to the consolidation of excess facilities, which will be paid through 2005 using cash from operations.

The Company continually evaluates the balance of the restructuring reserve it records in prior periods based on the remaining estimated amounts to be paid. Differences, if any, between the estimated amounts accrued and the actual amounts paid will be reflected in operating expenses in future periods.

12. 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”) operating segment and the emerging (“Emerging”) 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.

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

12. Segment Information –(Continued)

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.

Syncra Systems is included in the Emerging category for all periods. iSky, Inc. (“iSky”) was sold in the second quarter of 2004. Prior to 2004, iSky and Syncra Systems were included in the Core category.

Approximately 36% and 34% and 38% and 37% of the Company’s consolidated revenue for the three and nine months ended September 30, 2004 and 2003 respectively, relates to sales generated in Europe.

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

(Unaudited)
(in thousands)


										Reconciling Items
							Total			Discontinued Operations									Consolidated
	Core			Emerging			Segment			and Dispositions			Corporate			Other			Results
Three Months Ended September 30, 2004
Revenues	$	12,732		$	—		$	12,732		$	—		$	—		$	—		$	12,732
Net income (loss)	$	(4,495	)	$	(155	)	$	(4,650	)	$	—		$	(4,422	)	$	1,963	*	$	(7,109	)
Assets	$	142,719		$	8,829		$	151,548		$	—		$	130,088		$	—		$	281,636
Capital expenditures	$	(134	)	$	—		$	(134	)	$	—		$	(4	)	$	—		$	(138	)
Three Months Ended September 30, 2003
Revenues	$	16,034		$	—		$	16,034		$	—		$	—		$	—		$	16,034
Net loss	$	(4,454	)	$	(652	)	$	(5,106	)	$	(878	)	$	(380	)	$	(29,326)	*	$	(35,690	)
Assets	$	178,495		$	10,786		$	189,281		$	4,105		$	73,433		$	—		$	266,819
Capital expenditures	$	(185	)	$	—		$	(185	)	$	—		$	(22	)	$	—		$	(207	)
Nine Months Ended September 30, 2004
Revenues	$	37,397		$	—		$	37,397		$	—		$	—		$	—		$	37,397
Net income (loss)	$	(13,853	)	$	(767	)	$	(14,620	)	$	3,000		$	(13,816	)	$	(107,321)	*	$	(132,757	)
Capital expenditures	$	(760	)	$	—		$	(760	)	$	—		$	(141	)	$	—		$	(901	)
Nine Months Ended September 30, 2003
Revenues	$	53,308		$	202		$	53,510		$	—		$	—		$	—		$	53,510
Net income (loss)	$	(28,190	)	$	(2,787	)	$	(30,977	)	$	(2,581	)	$	(19,629	)	$	(26,276)	*	$	(79,463	)
Capital expenditures	$	(441	)	$	—		$	(441	)	$	—		$	(22	)	$	—		$	(463	)

*Other reconciling items to net loss are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Impairment (Note 3)	$	(457	)	$	—		$	(457	)	$	(5,813	)
Minority interest		210			(33	)		1,413			2,445
Other income (loss) (Note 13)		2,210			(29,293	)		(108,277	)		(22,908	)

	$	1,963		$	(29,326	)	$	(107,321	)	$	(26,276	)

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

13. Parent Company Financial Information

Parent Company financial information is provided to present the financial position and results of operations of the Company and its wholly-owned subsidiaries 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, 2004 and December 31, 2003 is included in “Ownership interests in Partner Companies” in the Parent Company Balance Sheets.

Parent Company Balance Sheets


	As of September 30,		As of December 31,
	2004		2003
	(Unaudited)
	(in thousands)
Assets
Cash and cash equivalents	$	11,450	$	49,771
Restricted cash		—		850
Short-term investments		55,733		—
Other current assets		2,274		2,481

Current assets		69,457		53,102
Ownership interests in Partner Companies		108,070		100,367
Marketable securities		53,820		6,714
Other		6,811		4,323

Total assets	$	238,158	$	164,506

Liabilities and stockholders’ equity
Current maturities of convertible subordinated notes	$	—	$	173,919
Other current liabilities		9,851		9,881

Total current liabilities		9,851		183,800
Senior convertible notes		60,000		—

Total liabilities		69,851		183,800
Stockholders’ equity (deficit)		168,307		(19,294	)

Total liabilities and stockholders’ equity	$	238,158	$	164,506

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

13.Parent Company Financial Information – (Continued)

Parent Company Statements of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
				(Unaudited)
				(in thousands)
Revenue	$	—		$	—		$	—		$	—
Operating expenses
General and administrative		3,892			3,628			10,241			12,997
Impairment related and other.		—			(7,070	)		546			(4,150	)

Total operating expenses		3,892			(3,442	)		10,787			8,847

		(3,892	)		3,442			(10,787	)		(8,847	)
Other income (loss), net		1,753			(29,293	)		(105,734	)*		(26,396	)
Interest expense, net		(559	)		(3,822	)		(3,058	)		(11,726	)

Income (loss) before equity loss		(2,698	)		(29,673	)		(119,579	)		(46,969	)
Equity loss		(4,411	)		(6,017	)		(13,178	)		(32,494	)

Net loss	$	(7,109	)	$	(35,690	)	$	(132,757	)	$	(79,463	)

* For purposes of Parent Company reporting, the $3.0 million gain from discontinued operations (see Note 10) is included in “Other income (loss), net.”

Parent Company Statements of Cash Flows


	Nine Months Ended September 30,
	2004			2003
	(Unaudited)
	(in thousands)
Net cash used in operating activities	$	(11,767	)	$	(19,219	)
Investing Activities
Capital expenditures, net		(141	)		(22	)
Proceeds from sales of ownership interests in Partner Companies		25,354			2,459
Acquisitions of ownership interests in Partner Companies		(20,002	)		(24,947	)
Proceeds from sales of marketable securities		3,349			9,935
Proceeds from / (purchases of) short-term investments, net		(55,733	)		6,986

Cash used in investing activities		(47,173	)		(5,589	)
Financing Activities
Issuance of senior convertible notes		60,000			—
Redemption of convertible subordinated notes		(39,541	)		—
Repurchase of convertible subordinated notes		—			(5,529	)
Repayment of loans from employees/stockholders		160			477
Exercise of stock options		—			275

Cash provided by (used) in financing activities		20,619			(4,777	)

Net decrease in Cash and Cash Equivalents		(38,321	)		(29,585	)
Cash and cash equivalents at beginning of period		49,771			81,875

Cash and Cash Equivalents at end of period	$	11,450		$	52,290

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

13. Parent Company Financial Information – (Continued)

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 September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
				(Unaudited)
				(in thousands)
Realized gains on sales of marketable securities	$	3,349		$	—		$	3,349		$	340
Other than temporary decline in fair market value of Universal Access (Note 3)		(1,257	)		—			(2,869	)		—
Partner Company Impairment Charges (Note 3)		(457	)		—			(457	)		(3,488	)
Gain on sales of Ownership interests in Partner Companies		412			855			22,248			1,033
Gain (Loss) on SFAS 133 securities (Note 5)		(307	)		141			1,479			(191	)
Loss on Debt Extinquishments (Note 9)		—			(30,313	)		(133,158	)		(24,186	)
Gain on settlement of debt of Consolidated Partner Company (Note 9)		—			—			1,593			—
Other		13			24			(919	)		96

		1,753			(29,293	)		(108,734	)		(26,396	)
		39			681			130			1,145

		1,792		$	(28,612	)	$	(108,604	)	$	(25,251	)

During the nine months ended September 30, 2004, gains on sales of ownership interests in Partner Companies primarily consists of the following: the Company sold 6,944,445 shares of eMerge Interactive for $14.7 million in cash, recognizing a gain of $14.6 million, and the Company sold its entire interest in Onvia, Inc. (“Onvia”) and recognized a gain of $6.6 million.

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 in our Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 14, 2004 and amended on April 14, 2004.

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 have generated 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 relating to our ownership interests in partner companies. These transactions and events are described in more detail in our Notes to 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.

Introduction

The Consolidated Financial Statements include the consolidated accounts of Internet Capital Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly owned and consolidated (Internet Capital Group, Inc. and all its subsidiaries, hereafter “we,” “ICG,” the “Company” or “Internet Capital Group”) and have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”).

Internet Capital Group is an information technology company actively engaged in delivering software solutions and services that are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. We operate through a network of partner companies that deliver those solutions to customers. 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. Generally, if we own more than 50% of the outstanding voting securities of a partner company, and for which other shareholders do not possess the right to affect significant management decisions, a partner company’s accounts are reflected within our consolidated financial statements. If we own generally between 20% and 50% of the outstanding securities, a partner company’s accounts are not reflected within our consolidated financial statements; 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. 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.

Information for all periods presented below reflects the grouping of ICG partner companies into two segments, consisting of the Core segment and the Emerging 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 (“Emerging”). During fiscal 2003, one of our consolidated Core partner companies, OneCoast disposed of substantially all of its assets. The historical results of OneCoast are presented as “Discontinued Operations.” Additionally, during fiscal 2003 seven of our Emerging partner companies ceased operations. The partner companies included within the segments as of September 30, 2004 for presentation purposes, are consistently the same 27 partner companies for the 2004 and 2003 period.

Loss from continuing operations for the three months ended September 30, 2004 totaled $7.1 million and included net benefits totaling $1.8 million principally of gains on the disposition of marketable securities, and partner company dispositions offset principally by losses on the markdown of marketable securities.

Loss from continuing operations for the three months ended September 30, 2003 totaled $34.9 million and included net charges totaling $21.7 million consisting principally of losses on debt-for-equity exchanges offset by gains on dispositions and restructuring credits.

Liquidity and Capital Resources

The following table summarizes certain balance sheet information for the Parent Company, Internet Capital Group:


	September 30, 2004			December 31, 2003
	(in thousands)
Cash, cash equivalents and short-term investments	$	67,183		$	49,771
Marketable securities	$	53,820		$	6,714
Senior convertible notes due April 2009	$	(60,000	)	$	—
Convertible subordinated notes due December 2004	$	—		$	(173,919	)
Shares of common stock outstanding		38,387			21,839

In April 2004, we issued $60.0 million of senior convertible notes due in April 2009. We used the net proceeds to redeem the current outstanding balance of $39.1 million of December 2004 convertible subordinated notes. The residual will be used for general operation requirements and fundings to existing partner companies as well as potentially new partner companies.

We believe existing cash, cash equivalents and short-term investments and proceeds from the potential sales of all or a portion of our interests in certain partner companies to be sufficient to fund our cash requirements for the foreseeable future, including commitments to existing partner companies, debt obligations and general operations requirements.

At September 30, 2004, as well as the date of this filing, we were not obligated for any 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. The Company and one of its executive officers were limited partners of this venture capital firm. The Company maintains a contingent interest in such firm and the executive officer maintains no such interest. 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.

The following table summarizes our and our consolidated subsidiaries’ cash and cash equivalents, restricted cash and short-term investments:

Summary of Liquidity


	September 30, 2004						December 31, 2003
	ICG Parent		Consolidated				ICG Parent Company		Consolidated
	Company Level		Subsidiaries		Total		Level		Subsidiaries		Total
					(in thousands)
Cash and cash equivalents	$	11,450	$	20,553	$	32,003	$	49,771	$	27,810	$	77,581
Restricted Cash		—		378		378		850		969		1,819
Short-term investments		55,733		—		55,733		—		9		9

Total	$	67,183	$	20,931	$	88,114	$	50,621	$	28,788	$	79,409

Consolidated working capital improved by $196.2 million from December 31, 2003 to September 30, 2004 primarily due to the repurchase and extinguishment of $134.8 million of convertible notes through the issuance of 15.9 million shares of our common stock.


	Nine Months Ended September 30,
	2004			2003
	(in thousands)
Net cash used in operating activities	$	(23,350	)	$	(34,967	)
Net cash provided by (used in) investing activities	$	(36,905	)	$	4,308
Net cash provided by (used in) financing activities	$	14,692		$	(6,832	)

Net cash used in operating activities was approximately $23.4 million for the nine months ended September 30, 2004 compared to $35.0 million during the comparable 2003 period. The decrease is primarily the result of the decreased losses at our consolidated partner companies.

Net cash used in investing activities during the nine months ended September 30, 2004 was $36.9 million versus net cash provided by investing activities of $4.3 million during the comparable 2003 period. The decrease is primarily due to purchases of short-term investments of $55.7 million in 2004 offset by increased proceeds from sales of partner company ownership interests in 2004 versus 2003.

Net cash provided by financing activities was $14.7 million for the nine months ended September 30, 2004 versus net cash used in financing activities of $6.8 million during the comparable 2003 period. The increase in cash provided is principally the result of the $60.0 million issuance of senior convertible notes offset by $39.5 million used to redeem convertible subordinated notes in 2004 and $6.2 million of repayments of long-term debt versus $5.5 million being used to repurchase $12.0 million of principal amount of our convertible subordinated notes in 2003.

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.

Contractual Cash Obligations and Commercial Commitments

As of December 31, 2003, we had $173.9 million in convertible subordinated notes. In the first quarter of 2004, we exchanged $134.8 million face amount of convertible subordinated notes for approximately 15.9 million shares of our common stock, resulting in a remaining balance of convertible subordinated notes at March 31, 2004 of $39.1 million. In April 2004, we issued $60.0 million of senior convertible notes due in April 2009. In June 2004, we used the net proceeds primarily to redeem the then current outstanding balance of $39.1 million of December 2004 convertible subordinated notes.

Off-Balance Sheet Arrangements

We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Our Partner Companies

As of September 30, 2004, we owned interests in 27 partner companies that are categorized below based on segment and method of accounting.

CORE PARTNER COMPANIES (%Voting Interest)


Consolidated	Equity	Cost
CommerceQuest (87%)	CreditTrade (30%)	Blackboard⁽¹⁾
ICG Commerce (76%)	eCredit (32%)	Universal Access⁽²⁾
	Freeborders (48%)	Verticalnet⁽³⁾
	GoIndustry (54%)
	Investor Force (38%)
	LinkShare (40%)
	Marketron (38%)
	StarCite (37%)

(1) We own 2,923,777 shares of Blackboard (see Note 3 subsection “Marketable Securities” to Consolidated Financial Statements.)

(2) We own 1,083,206 shares of Universal Access (see Note 3 subsection “Marketable Securities” to Consolidated Financial Statements.)

(3) We own 2,917,794 shares of Verticalnet (see Note 3 subsection “Marketable Securities” to Consolidated Financial Statements.)

About Our Private Core Companies

CommerceQuest

CommerceQuest is an enterprise software and service provider that enables its customers to rapidly turn business strategy into business processes by fully integrating the work that people do with software systems that optimize business performance. CommerceQuest delivers a complete set of scalable business process management (“BPM”) solutions that leverage existing IT investments to unite people, processes and technology in a service-based architecture that spans the extended enterprise, from the mainframe to the Internet and everything in between.

ICG Commerce

ICG Commerce is a Procurement Services Provider delivering total procurement cost savings through a combination of deep expertise and hosted technology. ICG Commerce provides a comprehensive range of solutions to help companies identify savings through sourcing, realize savings through implementation and purchase-to-pay automation and drive continuous improvements through ongoing category management.

CreditTrade

CreditTrade provides transaction, data and information services to the credit markets. CreditTrade is a broker specializing in credit default swaps and secondary loans.

eCredit

eCredit delivers credit risk management and collections software and services to Fortune 1000 companies and financial institutions. eCredit improves credit and collections decision-making practices to deliver process efficiencies, optimized risk management, reduced operating costs, and increased revenues.

Freeborders

Freeborders provides Product Lifecycle Management (“PLM”) software and services to leading retailers and their suppliers, enabling brands to more effectively manage the increasing complexity of their supply chains. Freeborders solutions help drive profitable revenue growth, speed products to market, improve inventory management, and maintain control, consistency and quality.

GoIndustry

GoIndustry provides corporations, financial institutions, and insolvency practitioners a comprehensive range of industrial asset services, including disposal, valuation and related consulting. Additionally, for large corporations, GoIndustry provides enterprise asset management solutions for used and under-utilized capital assets.

Investor Force

Investor Force is a software technology company specializing in the delivery of revenue and efficiency generating business solutions to the institutional investment community. Investor Force serves a broad array of over 500 institutional investment clients, including money managers, consultants, plan sponsors, and institutional investors. By eliminating manual, time-consuming tasks and providing greater portfolio insight, Investor Force helps firms serve their institutional clients faster and with greater intelligence and productivity.

LinkShare

LinkShare is a provider of internet technology solutions to track, manage, and analyze the performance of sales, marketing, and business development initiatives. Combining patented technology, the reach and distribution of a robust network, and expert account management services, LinkShare empowers clients with the ability to collaborate with partners online and develop cost-efficient pay-for-performance campaigns. LinkShare provides the platform, tools, and reporting to help clients acquire new customers, increase revenues, drive results, and measure success across affiliate, search, and email initiatives.

Marketron

Marketron is a provider of broadcast management solutions for the Radio, TV and Cable industries. Marketron’s fully integrated suite of sales, traffic, finance and business intelligence solutions automates workflow from proposal to billing, enabling groups to optimize inventory and increase revenues.

StarCite

StarCite provides a comprehensive suite of software applications and services to the meeting and events industry. StarCite helps drive efficiencies and cost savings to both corporate buyers and suppliers. More than 400 corporate, association and third-party meeting buyers rely on StarCite’s Enterprise Meeting Solutions for workflow, procurement, supply chain management, spend analysis and attendee management. Thousands of industry suppliers rely on the StarCite Online Marketplace, Supplier Marketing Programs and Enabling Technologies to increase meeting revenues. StarCite’s international division represents destination management companies and other premier international travel suppliers using both technology and traditional means.

EMERGING PARTNER COMPANIES (%Voting Interest)


Consolidated	Equity	Cost
	Agribuys (26%)	Anthem (9%)
	ComputerJobs.com (46%)	Arbinet (2%)

Results of Operations

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 27 partner companies for the three and nine months ended September 30, 2004 and 2003. 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 and operating as a public company. The measure of segment net loss reviewed by us does not include items such as impairment related charges, income taxes 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
For The Three Months Ended September 30, 2004
Revenues	$	12,732		$	—		$	12,732		$	—		$	—		$	—		$	12,732
Net income (loss)	$	(4,495	)	$	(155	)	$	(4,650	)	$	—		$	(4,422	)	$	1,963		$	(7,109	)
For The Three Months Ended September 30, 2003
Revenues	$	16,034		$	—		$	16,034		$	—		$	—		$	—		$	16,034
Net loss	$	(4,454	)	$	(652	)	$	(5,106	)	$	(878	)	$	(380	)	$	(29,326	)	$	(35,690	)
For The Nine Months Ended September 30, 2004
Revenues	$	37,397		$	—		$	37,397		$	—		$	—		$	—		$	37,397
Net income (loss)	$	(13,853	)	$	(767	)	$	(14,620	)	$	3,000		$	(13,816	)	$	(107,321	)	$	(132,757	)
For The Nine Months Ended September 30, 2003
Revenues	$	53,308		$	202		$	53,510		$	—		$	—		$	—		$	53,510
Net income (loss)	$	(28,190	)	$	(2,787	)	$	(30,977	)	$	(2,581	)	$	(19,629	)	$	(26,276	)	$	(79,463	)

For the Three and Nine months Ended September 30, 2004 vs. 2003

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 September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Selected data:				(in thousands)
Revenue	$	12,732		$	16,034		$	37,397		$	53,308

Cost of revenue		(6,928	)		(9,261	)		(21,078	)		(32,146	)
Selling, general and administrative		(5,658	)		(6,142	)		(16,706	)		(24,837	)
Research and development		(2,351	)		(2,536	)		(7,342	)		(11,830	)
Amortization of other intangibles		(689	)		(1,134	)		(2,183	)		(4,410	)
Impairment related and other		(20	)		(40	)		(120	)		(1,017	)

Operating expenses		(15,646	)		(19,113	)		(47,429	)		(74,240	)

Interest and other		109			543			67			649
Equity loss		(1,690	)		(1,918	)		(3,888	)		(7,907	)

Net loss	$	(4,495	)	$	(4,454	)	$	(13,853	)	$	(28,190	)

Revenue

Revenues have decreased for our consolidated Core companies during the three and nine months ended September 30, 2004 versus the same 2003 periods.

During 2003, a customer of one of our consolidated Core companies notified the consolidated partner company of the exercise of its right to terminate its arrangement to purchase services from our consolidated Core company effective January 1, 2004. Revenue from this customer totaled $2.7 million and $8.9 million for the three and nine months ended September 30, 2003, respectively, versus nil for the 2004 periods.

The deconsolidation of Freeborders and eCredit reduced revenue $3.8 million for the nine months ended September 30, 2004, respectively, versus the same 2003 periods.

The residual decreases in revenue for the 2004 versus 2003 periods are due to the challenging sales environment for enterprise software.

We expect 2004 period versus 2003 period revenue to continue to decrease for the rest of 2004 primarily as a result of the loss of the significant customer and the deconsolidation of eCredit and Freeborders in 2003.

Operating Expenses

Operating expenses have decreased for our consolidated Core companies during the three and nine months ended September 30, 2004 versus the same 2003 periods.

In light of the loss of the significant customer and challenging sales environment for enterprise software, ICG Commerce and CommerceQuest reduced operating expenses $3.5 million and $19.6 million for the three and nine months ended September 30, 2004 versus the same 2003 periods, respectively.

Additionally, the deconsolidation of Freeborders and eCredit reduced operating expenses $7.2 million for the nine months ended September 30, 2004, respectively, versus the same 2003 periods.

We expect 2004 period versus 2003 period operating expenses to continue to decrease for the rest of 2004 given actions taken in 2003 to reduce operating expenses in reaction to the loss of the significant customer and the challenging sales environment.

Equity Loss

The following table reconciles the components of equity loss for segment reporting purposes to equity loss for consolidated financial statement reporting:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
				(in thousands)
Share of loss – private companies	$	(1,690	)	$	(1,088	)	$	(3,452	)	$	(3,536	)
Share of loss – public companies		—			(830	)		(436	)		(4,371	)

Segment subtotal	$	(1,690	)	$	(1,918	)	$	(3,888	)	$	(7,907	)

Total revenue of our eight private Core equity method companies improved 17% from $35.7 million in the three months ended September 30, 2003 to $41.6 million in the same 2004 period and also improved 23% from $100.8 million in the nine months ended September 30, 2003 to $123.9 million in the same 2004 period. The revenue growth is primarily the result of increased revenue at our Core equity method companies involved with affiliate online marketing, credit markets, online meetings and online auctions.

Total net income (loss) of our eight private Core equity method companies improved from $(9.6) million in the three months ended September 30, 2003 to $(4.9) million in the same 2004 period. The improvement in net loss in the three months ended September 30, 2004 versus the 2003 period is primarily the result of a goodwill impairment recorded by one of our equity method companies of $5.9 million and increased revenue as discussed in the previous paragraph offset by increased spending to extend products, service and sales. Our share of the net income (loss) of these companies increased during the three months ended September 30, 2004 versus 2003 primarily as a result of our basis in certain companies being reduced to zero in the 2003 period which limited the impact of the aforementioned $5.9 million impairment charge.

Total net income (loss) of our eight private Core equity method companies improved from $(21.5) million in the nine months ended September 30, 2003 to $(10.8) million in the same 2004 period. The improvement of net loss in the nine months ended September 30, 2004 versus the 2003 period is primarily the result of a goodwill impairment recorded by one of our equity method companies of $5.9 million and increased revenue during the period partially offset by increased spending. Our share of the net income (loss) of these companies decreased during the nine months ended September 30, 2004 versus 2003 as a result of the improved net income (loss), but was also impacted by the treatment of Freeborders as an equity method company in 2004 versus consolidated in 2003 and our basis in certain companies being reduced to zero in the 2004 period versus the 2003 period.

As of September 30, 2004, Universal Access and Verticalnet are accounted for under the cost method accounting and eMerge Interactive is no longer a partner company. During the 2003 periods these three publicly-traded partner companies were accounted for under the equity method of accounting.

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 September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Selected data:				(in thousands)
Revenue	$	—		$	—		$	—		$	202
Operating expenses		—			—			—			(445	)
Interest and other		—			—			—			—
Equity loss		(155	)		(652	)		(767	)		(2,544	)

Net loss	$	(155	)	$	(652	)	$	(767	)	$	(2,787	)

The period over period decrease in revenue and operating expenses is due to the deconsolidation of Captive Capital during the second quarter of 2003. Equity loss decreased from the 2003 periods to the 2004 periods primarily as a result of our carrying value in the partner companies being reduced to zero.

Discontinued Operations and Dispositions

The following is a summary of the components included in “Discontinued Operations and Dispositions,” a reconciling item for segment reporting purposes:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2004		2003			2004		2003
			(in thousands)
Net income (loss) attributable to discontinued operations	$	—	$	(744	)	$	3,000	$	(1,642	)
Net loss attributable to equity method companies disposed of		—		(134	)		—		(939	)

	$	—	$	(878	)	$	3,000	$	(2,581	)

During the nine months ended September 30, 2004, we received additional cash proceeds of $3.0 million from the Delphion disposition after the resolution of potential indemnification obligations.

In the fourth quarter of 2003, the sale of the assets of OneCoast occurred. In accordance with SFAS No. 144, this partner company has been treated as a discontinued operation. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations. We received no cash proceeds on the transaction and recorded a loss of approximately $10.8 million. Our share of the losses of OneCoast totaled $0.7 million and $1.6 million, respectively, for the three and nine months ended September 30, 2003.

The impact to our consolidated results of other consolidated and equity method partner companies we have disposed of our ownership interest in or have ceased operations during 2004 and 2003 is also included in the caption “Dispositions” for segment reporting purposes. During the nine months ended September 30, 2003, we recorded $1.4 million in impairment charges related to equity method companies we have disposed of.

Corporate


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
				(in thousands)
General and administrative	$	(3,863	)	$	(3,628	)	$	(10,212	)	$	(12,997	)
Impairment related and other (Note 11)		—			7,070			(546	)		5,094
Interest expense, net		(559	)		(3,822	)		(3,058	)		(11,726	)

Total corporate operating expenses	$	(4,422	)	$	(380	)	$	(13,816	)	$	(19,629	)

General and Administrative

Our general and administrative expenses increased $0.2 million for the three months ended September 30, 2003 to 2004 primarily as a result of an increase in outside services. Our general and administrative expenses decreased $2.8 million for the nine months ended September 2003 to 2004 primarily due to a restructuring of operations.

Interest Income/Expense

The decrease in interest expense, net is primarily attributable to the reduction in convertible notes outstanding at September 30, 2004 versus 2003.

Other


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
				(in thousands)
Other income (loss) (Note 13)	$	2,210		$	(29,293	)	$	(108,277	)	$	(22,908	)
Impairment (Note 3)		(457	)		—			(457	)		(5,813	)
Minority interest		210			(33	)		1,413			2,445

	$	1,963		$	(29,326	)	$	(107,321	)	$	(26,276	)

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 ongoing 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 other impairments tests in accordance with APB No. 18 “Equity Method Investments” and SFAS No. 144 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 the 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. From time to time, 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.

Recent Accounting Pronouncements

(i) Special purpose entities created prior to February 1, 2003: We must apply either the provisions of Interpretation No. 46 or early adopt the provisions of Interpretation No. 46-R at the end of the first interim or annual reporting period ending after December 31, 2003.

(ii) Non-special purpose entities created prior to February 1, 2003: We are required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

(iii) All entities, regardless of whether a special purpose entity, that were created subsequent to January 31, 2003: The provisions of Interpretation No. 46 were applicable for variable interests in entities obtained after January 31, 2003. We are required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

We adopted Interpretation No. 46-R during the three months ended March 31, 2004. The adoption resulted in no impact to our consolidated financial statements as our ownership interests in our partner companies were excluded due to scope exceptions provided for in Interpretation No. 46-R.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” was issued in May 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also includes required disclosures for financial instruments within its scope. For us, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise at July 1, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS No. 150 will be effective for us on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. We currently do not have any financial instruments that are within the scope of SFAS No. 150.

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:

• external factors, such as terrorism, that might erode business and consumer confidence;

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

• capital spending by enterprises and customers;

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

• our ability to maximize value in connection with divestitures;

• our ability to retain key personnel;

• our ability to effectively manage existing capital resources;

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

• our outstanding indebtedness.

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 Report. 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 Report 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.

If general economic conditions are unfavorable our partner companies may be unable to attract or retain customers and our ability to grow our business may be adversely effected.

Numerous external forces, including fear of terrorism, hostilities in the Middle East involving United States armed forces, lack of consumer confidence and interest rate or currency rate fluctuations, could affect the economy. If the economy is unfavorable, our partner companies’ customers and potential customers may be unwilling to spend money on technology-related goods or services. If our partner companies are unable to attract new customers or retain existing customers, our ability to grow our business will be adversely effected.

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:

• 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;

• 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;

• additional sales of our securities;

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

• the recent reverse stock split; and

• our debt obligations.

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

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;

• 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.

A large number of shares of our common stock could be sold in the public market in connection with the exercise of our senior convertible debt, and future sales of our common stock, or the perception that such future sales may occur, may cause our stock price to decline.

A large number of shares of our common stock could be sold into the public market if the holders of our senior convertible notes due April 2009 elect to convert such notes. The notes are convertible at the option of the holder at any time on or before maturity into shares of our common stock at a conversion price of $9.108 per share. The sale of a large number of shares of our common stock, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our ability to obtain capital through an offering of equity securities.

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

Blackboard, Verticalnet and Universal Access are our publicly-traded partner companies. Fluctuations in the price of Blackboard’s, Verticalnet’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, 2004, the market value of the Company’s interest in these publicly-traded partner companies was $53.8 million.

Blackboard’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:

• uncertainty regarding achieving sustained profitability;

• uncertainty regarding providing enterprise software applications to the education industry;

• uncertainty regarding the development and acceptance of online education;

• inability to cover increasing fixed costs if estimates of future revenue fall short of expectations;

• uncertainty regarding license renewal rates;

• uncertainty regarding market acceptance of Blackboard Content System, a new product;

• inability to rapidly increase revenues given revenue is recognized ratably over terms of agreement from 12-48 months;

• uncertainty regarding the impact on operating margins given revenue mix;

• uncertainty regarding product errors or delays;

• lengthy and unpredictable sales cycle for products;

• inability to manage expansion of market;

• uncertainty regarding compatibility of products with third party application; and

• inability to protect intellectual property rights.

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 acquire additional capital;

• inability to retain key management and experienced software personnel;

• inability to generate an operating profit;

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

• dependence on large customers;

• potential errors in new releases and new products;

• inability to keep pace with technological change;

• inability to protect intellectual property rights;

• lengthy sales and implementation cycles for products;

• dilution of existing shareholders; and

• uncertainty regarding pending litigation.

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:

• operations may be disrupted due to the filing of a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code;

• restructuring of debt may substantially reduce the value of common stock, potentially to zero;

• a reorganization attempt or proposed sale may not be approved;

• insufficient cash to satisfy liquidity needs;

• inability to compete due to price compression;

• inability to generate significantly higher revenues and reduce costs to achieve and maintain profitability;

• assumption of indebtedness that could restrict future operating activities;

• 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 databases;

• failure of the market for Universal Transport Exchange services to grow;

• inability of clients’ to pay their obligations;

• 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;

• inability to provide uninterrupted circuit access;

• difficult industry conditions;

• compliance with regulatory requirements; and

• lack of patented technology.

In addition, the report of Universal Access’ independent auditor for the period ended December 31, 2003 indicated that the auditor has substantial doubts about Universal Access’ ability to continue as a going concern. On August 4, 2004, Universal Access filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Northern District of Illinois. Universal Access remains in possession of its assets and properties and continues to operate its businesses as a “debtor-in-possession” pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code.

On September 1, 2004, Universal Access received notice from the Nasdaq Listing Qualifications Panel that Universal Access’s securities would be delisted from The Nasdaq SmallCap Market effective with the open of business on Friday, September 3, 2004, as a result of Universal Access’s failure to satisfy the requirements for continued listing set forth in Marketplace Rules 4310(c)(2)(B) and 4310(c)(4).

Universal Access has indicated that it does not intend to continue filing annual and periodic reports under the Securities Exchange Act of 1934, as amended.

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 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 Blackboard, Verticalnet, 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 have limited operating histories, have not yet attained significant revenues and are operating at or near break-even and may not achieve profitability in the future;

• 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 $281.6 million in total assets as of September 30, 2004, $54.6 million, or 19.4%, consisted of ownership interests in our private 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. This decline would likely affect the price of our common stock. As of September 30, 2004, the value of our publicly-traded partner companies

(Blackboard, Verticalnet and other) was $53.8 million and reflected as “Marketable Securities” in our financial statements. A decline in the market value of our publicly-traded partner companies will likely cause a decline in the price of our common stock.

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.

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 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 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.

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

Certain 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.

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.

Our partner companies may not be able to successfully compete.

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 2003, a partner company’s customer notified such partner company that it was 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 17% of our consolidated company revenue for the year ended December 31, 2003 related 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 affected.

The inability of our partner companies’ customers to pay their obligations to them in a timely manner, if at all, could have an adverse affect 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

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 generally 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.

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 is depressed, our ability and the ability of our partner companies to grow and access the capital markets will be impaired. This may require us or our partner companies to take other actions, such as borrowing money on terms that may be unfavorable, or divesting of assets prematurely 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.

Because we have limited resources to dedicate to our partner companies, some of our 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 may not 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 limited 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.

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. We cannot guarantee that we will receive maximum value in connection with the disposition of our stakes in partner companies. Additionally, we may be unable to find buyers for certain of our assets, which could adversely affect our business.

We may not be able to increase our ownership stakes in select partner companies.

One of our goals is to increase our ownership in a small group of companies that we believe have major growth opportunities. We may not be able to achieve this goal because of limited resources and/or the unwillingness of other stockholders of such companies to enter into a transaction that would result in an increase in our ownership stake.

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, 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 of 1940, as amended (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.

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 $1.0 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, 2004, our recorded amount of carrying basis including goodwill was not impaired, although we cannot assure that our future results will confirm this assessment. We performed our latest annual impairment test during the fourth quarter of 2003 and we will perform our next annual impairment test in the fourth quarter of 2004. 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.

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 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. Additionally, in connection with new rounds of financing, our partner companies may create liquidation preferences that are senior to existing preferences. If we do not participate in these rounds, our rights to receive preferences upon a sale of the Company may be diminished at certain valuations. This dilution and the creation of senior liquidation preferences could result in a reduction in the value of our stakes in such partner companies.

Our outstanding indebtedness could negatively impact our future prospects.

In April 2004, we issued $60.0 million of senior convertible notes due in April 2009. This indebtedness may make it more difficult to obtain additional financing and may inhibit our ability to pursue needed or favorable opportunities.

We may be unable to maintain our listing on the Nasdaq SmallCap Market, which could cause our stock price to fall and decrease the liquidity of our common stock.

Our common stock is currently listed on the Nasdaq SmallCap Market, which has requirements for the continued listing of stock. One of the requirements is that our common stock maintain a minimum bid price of $1.00 per share. If our common stock trades below $1.00 per share or we fail to meet any of the other requirements of the Nasdaq SmallCap Market, our common stock may be delisted from the Nasdaq SmallCap Market. If our common stock is delisted from the Nasdaq SmallCap Market, the trading market for our common stock could decline which could depress our stock price and adversely affect the liquidity 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.

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 than 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.

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’ respective businesses. 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, 2004 include equity positions in companies in the technology industry sector, including: Blackboard, Universal Access and Verticalnet, as well as other minor holdings many of which have experienced significant historical volatility in their stock prices. A 20% adverse change in equity prices, based on a sensitivity analysis of our public holdings as of September 30, 2004, would result in an approximate $10.8 million decrease in the fair value of our public holdings.

Although we typically do not attempt to reduce or eliminate our market exposure on these securities, particularly with respect to securities of our partner companies, we did enter into a forward contract on 1.8 million shares of our holdings in i2 Technologies. The forward contract limited our exposure to and benefits from price fluctuations in the underlying equity securities. As of December 31, 2002, 1.8 million shares of i2 Technologies remained under this arrangement. In addition, 0.5 million shares of i2 Technologies were held in escrow, which were released to us in 2002, and were not hedged that had a market value of $0.5 million at December 31, 2002. The combined value of the forward contract, the underlying hedged securities and the unhedged securities at December 31, 2002 was $10.1 million. The forward contract maturity was September 2003; however, on April 1, 2003, the forward contract was terminated and the Company received $9.6 million in cash. In 2003, the Company also sold the 0.5 million shares released from escrow in 2002 for $0.4 million. We may enter into similar collar arrangements in the future, particularly with respect to available-for-sale securities, which do not constitute ownership interests in our partner companies.

The carrying values of financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and notes payable, approximate fair value because of the short maturity of these instruments. At September 30, 2004, the carrying value of the senior convertible notes was $60.0 million.

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 the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15e and 15d-15e 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, as of the end of the period covered in this report, 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, during the period covered in this report, there were no significant changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially effect, the Company’s internal controls over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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 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 settlement is subject to approval by the United States District Court overseeing the litigation.

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 complaint also named Freeborders, a current partner company, as a defendant, as well as 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. In July 2003, the Court granted defendants’ motion to stay the litigation pending arbitration in California of plaintiffs’ claims against Freeborders. In an effort to avoid such arbitration, plaintiffs moved to dismiss Freeborders from the litigation in March 2004. The Court granted this motion and thereafter, plaintiffs filed a motion to compel arbitration of their claims against the Company and certain other defendants. The Court granted plaintiffs’ motion on October 1, 2004, and further ordered a stay of the plaintiff’s non-arbitrable claims against two individual defendants. The arbitration is currently in a preliminary stage. However, the Company intends to oppose the arbitration of plaintiff’s claims on both procedural and substantive grounds.

On September 30, 2004, Verticalnet and several of its former officers and directors, including an employee of the Company, were named as defendants in a complaint filed in the U.S. District Court for the Eastern District of Pennsylvania. The complaint alleges that in connection with the issuance of Verticalnet stock to plaintiffs pursuant to an acquisition, the plaintiffs were damaged by the defendants’ delays in registering stock, updating the registration of stock, releasing stock from lock-ups and releasing stock from escrows.

ITEM 2. UNREGISTERED SALES OF EQUITY 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.


Consolidated	Equity	Cost
	Co-nect (36%)	Axxis (9%)
	Syncra Systems (31%)	Captive Capital (5%)
		ClearCommerce (11%)
		Emptoris (7%)
		Entegrity Solutions (2%)
		Jamcracker (2%)
		Mobility Technologies (3%)
		Tibersoft (5%)

	(i)		Special purpose entities created prior to February 1, 2003: The Company must apply either the provisions of Interpretation No. 46 or early adopt the provisions of Interpretation No. 46-R at the end of the first interim or annual reporting period ending after December 31, 2003.

	(ii)		Non-special purpose entities created prior to February 1, 2003: The Company is required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

	(iii)		All entities, regardless of whether a special purpose entity, that were created subsequent to January 31, 2003: The provisions of Interpretation No. 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company is required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

(1)		We own 2,923,777 shares of Blackboard (see Note 3 subsection “Marketable Securities” to Consolidated Financial Statements.)

(2)		We own 1,083,206 shares of Universal Access (see Note 3 subsection “Marketable Securities” to Consolidated Financial Statements.)

(3)		We own 2,917,794 shares of Verticalnet (see Note 3 subsection “Marketable Securities” to Consolidated Financial Statements.)

	•		external factors, such as terrorism, that might erode business and consumer confidence;

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

	•		capital spending by enterprises and customers;

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

	•		our ability to maximize value in connection with divestitures;

	•		our ability to retain key personnel;

	•		our ability to effectively manage existing capital resources;

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

	•		our outstanding indebtedness.

	•		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;

	•		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;

	•		additional sales of our securities;

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

	•		the recent reverse stock split; and

	•		our debt obligations.

	•		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;

	•		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.

	•		uncertainty regarding providing enterprise software applications to the education industry;

	•		uncertainty regarding the development and acceptance of online education;

	•		inability to cover increasing fixed costs if estimates of future revenue fall short of expectations;

	•		uncertainty regarding license renewal rates;

	•		uncertainty regarding market acceptance of Blackboard Content System, a new product;

	•		inability to rapidly increase revenues given revenue is recognized ratably over terms of agreement from 12-48 months;

	•		uncertainty regarding the impact on operating margins given revenue mix;

	•		uncertainty regarding product errors or delays;

	•		lengthy and unpredictable sales cycle for products;

	•		inability to manage expansion of market;

	•		uncertainty regarding compatibility of products with third party application; and

	•		inability to protect intellectual property rights.

	•		inability to acquire additional capital;

	•		inability to retain key management and experienced software personnel;

	•		inability to generate an operating profit;

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

	•		dependence on large customers;

	•		potential errors in new releases and new products;

	•		inability to keep pace with technological change;

	•		inability to protect intellectual property rights;

	•		lengthy sales and implementation cycles for products;

	•		dilution of existing shareholders; and

	•		uncertainty regarding pending litigation.

	•		operations may be disrupted due to the filing of a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code;

	•		restructuring of debt may substantially reduce the value of common stock, potentially to zero;

	•		a reorganization attempt or proposed sale may not be approved;

	•		insufficient cash to satisfy liquidity needs;

	•		inability to compete due to price compression;

	•		inability to generate significantly higher revenues and reduce costs to achieve and maintain profitability;

	•		assumption of indebtedness that could restrict future operating activities;

	•		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 databases;

	•		failure of the market for Universal Transport Exchange services to grow;

	•		inability of clients’ to pay their obligations;

	•		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;

	•		inability to provide uninterrupted circuit access;

	•		difficult industry conditions;

	•		compliance with regulatory requirements; and

	•		lack of patented technology.

	•		fluctuations in the market price of the common stock of Blackboard, Verticalnet, 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 have limited operating histories, have not yet attained significant revenues and are operating at or near break-even and may not achieve profitability in the future;

	•		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 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.


Number		Document
10.1		Independent Contractor Agreement by and between Internet Capital Group Operations, Inc., Wayne Strategy Consultants, Inc. and Dr. Michael D. Zisman dated August 17, 2004.

11.1		Statement Regarding Computation of Per Share Earnings (included herein at Note 8 - “Net Loss Per Share” to the Consolidated Financial Statements on Page 16).

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

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


Date: November 9, 2004	INTERNET CAPITAL GROUP, INC.
	By:	/s/Anthony P. Dolanski
		Name:	Anthony P. Dolanski
		Title: Chief Financial Officer (Principal Financial and Principal Accounting Officer) (Duly Authorized Officer)