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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C.  20549**

**FORM10–Q**

**(Mark One)**
|   | ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------|---------------------------------------------------------------------------------------------------|

**For The Quarterly Period Ended June 30, 2001**

 
|   |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
|--------|--------|-------------------------------------------------------------------------------|
|   |   | **EXCHANGE  ACT OF 1934**                                                     |

**FOR THETRANSITION PERIOD FROM _________TO ________**

**Commission file number 0–27794**

**SEGUE SOFTWARE, INC.******(Exact name of registrant as specified inits charter)

 
| **Delaware**                                                    |   | **95–4188982**                   |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |   | (I.R.S.  Employer Identification No.) |
|                                                            |   |                                  |
| **201 Spring Street Lexington, MA 02421**                       |
| (Address  of principal executive offices)                       |

 ****Registrant's telephone number, including area code: **(781) 402-1000**

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such a shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

Thenumber of shares of Registrant's Common Stock outstanding as of August 8, 2001was 9,390,865

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**SEGUESOFTWARE, INC.**

**FORM10-Q**

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2001INDEX**

| PART I.    | FINANCIAL INFORMATION                                                                                                  |   |
|------------|------------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                   |   |
| Item  1.   | Condensed  Consolidated Financial Statements:                                                                          |   |
|       |                                                                                                                   |   |
|       | Condensed  Consolidated Balance Sheets (unaudited)   June 30, 2001 and December 31, 2000                |   |
|       |                                                                                                                   |   |
|       | Condensed  Consolidated Statements of Operations (unaudited) Three months and six months  ended June 30, 2001 and 2000 |   |
|       |                                                                                                                   |   |
|       | Condensed  Consolidated Statements of Cash Flows (unaudited) Three months and six months  ended June 30, 2001 and 2000 |   |
|       |                                                                                                                   |   |
|       | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                      |   |
|       |                                                                                                                   |   |
| Item  2.   | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                 |   |
|       |                                                                                                                   |   |
| Item  3.   | Quantitative  and Qualitative Disclosures about Market Risk                                                            |   |
|       |                                                                                                                   |   |
| PART II.   | OTHER INFORMATION                                                                                                      |   |
|       |                                                                                                                   |   |
| Item 1.    | Legal Proceedings                                                                                                      |   |
|       |                                                                                                                   |   |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                   |   |
|       |                                                                                                                   |   |
| Item 6.    | Exhibits and Reports  on Form 8-K                                                                                 |   |
|       |                                                                                                                   |   |
| Signatures |                                                                                                                   |   |
|       |                                                                                                                   |   |

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**SEGUE SOFTWARE, INC.CONDENSED CONSOLIDATED BALANCESHEETS(IN THOUSANDS EXCEPT PER SHARE DATA)(UNAUDITED)**

|                                                            | June 30,   2001                                                                                        |    | December 31,  2000 |    |   |
|-----------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|---------|--------------------|---------|--------|
|                                                            |                                                                                                        |    |                    |    |   |
| ASSETS                                                          |                                                                                                   |
| Current  assets:                                                |                                                                                                   |    |               |    |   |
|                                                            | Cash  and cash equivalents                                                                             | $       | 5,170              |    | $      | 9,379 |   |   |
|                                                            | Short-term  investments                                                                                | 4,925   |               | 7,839   |   |   |
|                                                            | Accounts  receivable, net of allowances of $1,125 and $665                                             | 6,804   |               | 12,176  |   |   |
|                                                            | Other  current assets                                                                                  | 1,678   |               | 1,710   |   |   |
|                                                            |                                                                                                   |         |               |         |   |   |
|                                                            | Total  current assets                                                                                  | 18,577  |               | 31,104  |   |   |
|                                                            |                                                                                                   |    |               |    |   |   |
| Property  and equipment, net                                    | 4,696                                                                                                  |    | 5,774              |    |   |
| Goodwill,  net                                                  | 2,258                                                                                                  |    | 3,011              |    |   |
| Other  assets                                                   | 162                                                                                                    |    | 12                 |    |   |
|                                                            |                                                                                                        |    |                    |    |   |
|                                                            | Total  assets                                                                                          | $       | 25,693             |    | $      | 39,901 |   |   |
|                                                            |                                                                                                        |    |                    |    |   |
|                                                            |                                                                                                   |    |               |    |   |
| LIABILITIES AND  STOCKHOLDER' EQUITY                            |                                                                                                   |
| Current  liabilities:                                           |                                                                                                   |    |               |    |
|                                                            | Accounts  payable                                                                                      | $       | 1,640              |    | $      | 1,525 |   |
|                                                            | Accrued  compensation and benefits                                                                     | 2,106   |               | 2,834   |   |
|                                                            | Accrued  royalties                                                                                     | 100     |               | 100     |   |
|                                                            | Accrued  expenses                                                                                      | 2,644   |               | 2,912   |   |
|                                                            | Deferred  revenue                                                                                      | 9,122   |               | 11,480  |   |
|                                                            |                                                                                                   |         |               |         |   |
|                                                            | Total  current liabilities                                                                             | 15,612  |               | 18,851  |   |
|                                                            |                                                                                                   |    |               |    |   |
| Stockholders'  equity:                                          |                                                                                                   |    |               |    |
|                                                            | Preferred  stock, par value $.01 per share;  9,000 shares authorized; no shares issued and outstanding | -       |               | -       |   |
|                                                            |                                                                                                   |    |               |    |   |
|                                                            | Common  stock, par value $.01 per share;  30,000 shares authorized; 9,535 and 9,472 shares issued      | 95      |               | 95      |   |
|                                                            |                                                                                                   |    |               |    |   |
|                                                            | Additional  paid-in capital                                                                            | 58,055  |               | 57,684  |   |
|                                                            | Cumulative  translation adjustment                                                                     | (387    | )                  | (391    | )      |
|                                                            | Accumulated  deficit                                                                                   | (47,082 | )                  | (35,738 | )      |
|                                                            |                                                                                                   |         |               |         |   |
|                                                            | 10,681                                                                                                 |    | 21,650             |    |
| Less  treasury stock, at cost, 145 and 145 shares, respectively | (600                                                                                                   | )       | (600               | )       |
|                                                            |                                                                                                        |    |                    |    |
|                                                            | Total  stockholders' equity                                                                            | 10,081  |               | 21,050  |   |
|                                                            |                                                                                                   |         |               |         |   |
|                                                            | Total  liabilities and stockholders' equity                                                            | $       | 25,693             |    | $      | 39,901 |   |
|                                                            |                                                                                                        |    |                    |    |
|                                                                 |                                                                                                        |         |                    |         |        |  |  |  |  |

The accompanying notes are an integralpart of the consolidated financial statements.
**Segue Software, Inc.Condensed Consolidated Statements of Operations(In thousands, except per share data)Unaudited**
 **Three  Months Ended  June 30,** **Six  Months Ended  June 30,**           **2001**** ****2000** **2001**** ****2000**** **         Revenue:         Software$3,657 $9,833 $9,179 $19,060  Services5,817 5,189 12,101 10,105        Total  revenue9,474 15,022 21,280 29,165          Cost  of revenue:         Cost  of software156 583 397 1,263  Cost  of services1,907 2,155 4,400 4,561        Total  cost of revenue2,063 2,738 4,797 5,824          Gross  margin7,411 12,284 16,483 23,341                   Operating  expenses:         Sales  and marketing7,570 9,786 15,932 17,689  Research  and development2,053 2,552 4,530 5,069  General  and administrative2,053 2,110 4,586 4,812  Amortization  of goodwill377 377 753 753  Restructuring  and other charges2,257 - 2,257 -        Total  operating expenses14,310 14,825 28,058 28,323               Loss  from operations(6,899)(2,541)(11,575)(4,982)Other  income, net130 274 347 548               Loss  before provision for income taxes(6,769)(2,267)(11,228)(4,434)Provision  for income taxes66 51 116 102               Net  loss$(6,835)$(2,318)$(11,344)$(4,536)              Net  loss per share - basic and diluted$(0.73)$(0.25)$(1.21)$(0.49)         Weighted  average shares outstanding - basic and diluted9,388 9,387 9,371 9,350          
The accompanying notes are an integralpart of the consolidated financial statements.
**SEGUESOFTWARE, INCCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)**
 Six  months ended  June 30,  2001 2000    Cash  flows from operating activities:     Net  loss$(11,344)$(4,536) Adjustments  to reconcile net loss to net cash     Provided  by (used in) operating activities:     Depreciation  and amortization2,039 2,483  Changes  in operating assets and liabilities:     Accounts  receivable5,325 (1,632) Other  current assets32 (620) Accounts  payable136 37  Accrued  expenses, royalties, compensation and benefits(900)224  Deferred  revenue(2,359)2,320         Net  cash used in operating activities(7,071)(1,724)   Cash  flows from investing activities:     Additions  to property and equipment(272)(1,222) Additions  to other assets(150)141  Maturities  of short-term investments8,944 25,122  Purchases  of short-term investments(6,030)(28,959)        Net  cash provided by (used in) investing activities2,492 (4,918)   Cash  flows from financing activities:     Proceeds  from exercise of stock options and stock purchase plan371 718    Net  cash provided by financing activities371 718    Effect  of exchange rate changes on cash(1)(28)   Net  decrease in cash and cash equivalents(4,209)(5,952)Cash  and cash equivalents, beginning of period9,379 7,429    Cash  and cash equivalents, end of period$5,170 $1,477    
Theaccompanying notes are an integral part of the consolidated financial statement
**SEGUE SOFTWARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

**1.**          **BASIS OF PRESENTATION**

             The financial statements includedherein have been prepared by Segue, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. We believe that the disclosuresare adequate to make the information presented not misleading. However, it issuggested that these financial statements be read in conjunction with Segue'saudited financial statements for the year ended December 31, 2000,included in its 2000 Annual Report on Form 10-K.

             This financial informationreflects, in the opinion of management, all adjustments of a normal recurringnature necessary to present fairly the results for the interim periods. Resultsof interim periods may not be indicative of results for the full year.

**2.**          **NET LOSS PER COMMON SHARE**

             The following table sets forth thecomputation of basic and diluted loss per share (in thousands, except per sharedata):
 Three months ended   June 30, Six months ended   June 30,     2001 2000 2001 2000               Net  loss$(6,835)$(2,318)$(11,344)$(4,536)Weighted  average shares used in net loss per share—basic and diluted9,388 9,387 9,371 9,350          Net  loss per common share—basic and diluted$(0.73)$(0.25)$(1.21)$(0.49)
             Options to purchase 3,427,977 and2,803,812 shares of common stock, respectively, were excluded from thecalculation of diluted earnings per share for the three months ended June 30,2001 and 2000, respectively, because their inclusion would be anti-dilutive.**3.**          **RESTRUCTURING AND OTHER CHARGES**
             During the second quarter of 2001,in reaction to the revenue shortfall due to the current economic downturn,Segue executed a restructuring plan. The restructuring included a 20% reductionin workforce, the closing of the research and development laboratory in the LosGatos, California office with a shifting of some resources to Segue’s Austrianfacility, consolidation of space in Segue’s Lexington and Los Gatos facilitiesand the elimination of Segue’s inside sales organization in favor of a newenterprise-oriented sales model and process. As a result, Segue recognized restructuring and other charges of $2.3million. The restructuring and other charges included approximately $1.4million for facility-related costs including the accrual of estimated leaseobligations associated with the closure of excess office facilities andapproximately $859,000 for severance and other employee-related costs for thetermination of 73 employees.   The $1.4million for facility related costs is comprised of an estimated $4.8 millionfor future rents on unoccupied space plus $200,000 miscellaneous costs relatedto subleasing the space less $3.6 million of estimated sublease income.  An active marketing effort has commenced tosublease space both in Lexington and Los Gatos. As of August 1, 2001, Segue haspaid approximately  $761,000 related tothe restructuring and other charges.
**4.**          **PROVISION FOR INCOME TAXES**

             Seguerecorded provisions for foreign and state income taxes of $66,000 and $116,000for the three and six months ended June 30, 2001, respectively, and$51,000 and $102,000 for the same periods last year. There was no tax benefitrecorded for losses generated in the U.S. in either period due to theuncertainty of realizing such benefits.

**5.**          **COMPREHENSIVE LOSS**

             EffectiveJanuary 1, 1998, Segue adopted Statement of Financial Accounting StandardsNo. 130, "Reporting Comprehensive Income"("SFAS 130"). SFAS 130 requires the reporting ofcomprehensive income in addition to net income from operations. Comprehensiveincome is a more inclusive reporting methodology that includes disclosure ofcertain financial information that historically has not been recognized in thecalculation of net income. To date, Segue's comprehensive income items haveconsisted exclusively of foreign translation adjustments. Prior to the secondquarter of 2000 comprehensive loss substantially equaled net loss. For thethree and six months ended June 30, 2001, comprehensive loss was $6,641,000 and$11,340,000, respectively.

**6.          COMMITMENTS AND CONTINGENCIES**

             Underthe provision of Segue’s lease obligation at its Lexington facility, Segue hasan obligation to provide a security deposit of approximately $1.5 million ifSegue’s current assets, as defined in the lease, become less than $20.0million, as evidenced by Segue’s annual audited financial statements as of eachof December 31st. Segue is required to provide annual auditedfinancial statements for fiscal year ending December 31st by March31st of the following year. As of June 30, 2001, current assets, as defined in the lease, were $16.9million.

             On or about April 27, 1999, aputative class action complaint was filed in the United States District Courtfor the District of Massachusetts against Segue, its Chief Executive Officerand a former Chief Financial Officer of Segue, captioned Nathan Rice v.SegueSoftware, Inc., et al., Civil No. 99-CV-10891-RGS. The classaction complaint alleged the defendants violated the federal securities laws bymaking material misrepresentations and omissions in certain public disclosuresduring the period beginning on October 13, 1998 through April 9,1999, inclusive. The public disclosures relate to, among other things, Segue'spast and future financial performance and results. On or about May 3,1999, another similar putative class action complaint was filed against Segue,its Chief Executive Officer and a former Chief Financial Officer of Segue inthe United States District Court for the District of Massachusetts, captioned AnthonyMoumouris v. Segue Software, Inc., et al., Civil No. 99-CV-10933RGS***.*** These cases wereconsolidated under the caption In Re Segue Software, Inc. SecuritiesLitigation, Civil No. 99-CV-10891-RGS and the plaintiffs filed a consolidated amended complaint onSeptember 27, 1999 alleging a putative class period of July 14, 1998through April 9, 1999, inclusive. The complaints sought an unspecifiedamount of damages. On November 8, 1999 each of the defendants filed amotion to dismiss the amended complaint for failure to state a cause of action,and on July 26, 2000, the United States District Court for the District ofMassachusetts granted Segue's Motion to Dismiss the putative securities classaction litigation brought against the above three defendants. The dismissal wasentered "with prejudice." The plaintiffs appealed the decision to theFirst Circuit, and, in December 2000 while the appeal was still pending,the parties and Segue's insurers reached an agreement in principle to settlethe matter for an agreed upon settlement amount. Segue's Directors' andOfficers' insurance will contribute a substantial portion of such settlementamount which has been placed in escrow. In April 2001, Segue paid $200,000, itsshare of the settlement, to the escrow agent. The settlement has been preliminarily approved by the court, and issubject to final court approval and shareholder approval.
**7.          SEGMENT REPORTING**

             Operatingsegments are defined as components of the enterprise about which separatefinancial information is available that is reviewed regularly by the chiefoperating decision maker, or decision–making group, in deciding how toallocate resources and in assessing their performance.  Information on Segue’s operating segmentsfollows:
 Three  months ended June 30,     Six  months ended June 30,  2001   2000     2001   2000  Revenue Gross  Margin Revenue Gross  Margin Revenue Gross  Margin Revenue Gross  Margin                 (in  thousands)       Operating  Segment:                eBusiness  product licenses$3,614   $9,759   $9,136   $18,851   Client/server  testing product licenses43   74   43   209                 Total  software$3,657 $3,501 $9,833 $9,250 $9,179 $8,782 $19,060 $17,797                           Training  and consulting$2,203 $1,103 $2,059 $586 $4,604 $1,962 $4,204 $1,011 Maintenance3,614 2,807 3,130 2,448 7,497 5,739 5,901 4,533           Total  services$5,817 $3,910 $5,189 $3,034 $12,101 $7,701 $10,105 $5,544                              Total  revenue$9,474 $7,411 $15,022 $12,284 $21,280 $16,483 $29,165 $23,341          
             Thefollowing table presents revenue and long-lived asset information by geographicarea as of and for the quarters and six months ended June 30, (in thousands):
   Total  Revenue        Three  months ended Six  months ended Long  Lived Assets  June  30, June  30, June  30,  2001 2000 2001 2000 2001 2000            (in  thousands)                  United  States$8,373 $13,636 $18,384 $26,855 $3,951 $4,956 Foreign1,101 1,386 2,896 2,310 907 848         $9,474 $15,022 $21,280 $29,165 $4,858 $5,804        
**8.          LIQUIDITY**

             Asdisclosed in the financial statements, Segue had a net loss of $11,344,000during the first six months of fiscal 2001, and has had significant losses inthe recent prior fiscal years. Additionally, Segue’s operations usedsignificant cash during the first six months of fiscal 2001. The recoverabilityof a major portion of the recorded asset amounts shown in the accompanyingbalance sheet is dependent upon continued operations of Segue, which in turn isdependent upon the Segue’s ability to increase sales and to succeed in itsfuture operations. The financial statements do not include any adjustmentsrelating to the recoverability and classification of recorded asset amounts,and classification and amounts of liabilities that might be necessary shouldSegue be unable to continue.

             Managementhas taken significant steps to streamline its operations and will continue todo so as the situation warrants.  Thesesteps included reducing headcount, infrastructure and other expenses andlimiting capital expenditures. Management believes based on its understanding of the marketplace thatfuture sales will occur in a sufficient manner to allow Segue to continue as aviable business.

             AlthoughSegue believes there is currently sufficient cash to meet its working capitalneeds, delays in the timing of future sales or sales levels below management’sexpectations may cause the Company to re-evaluate and adjust its operations.

**9.   RECENT ACCOUNTINGDEVELOPMENTS**

             In June 1998, the FinancialAccounting Standards Board ("FASB") issued SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities", whichwas effective for fiscal years beginning after June 15, 1999. SFAS No. 133must be adopted prospectively and retroactive application is not permitted.SFAS No. 133 requires the Company to record all derivatives on the balancesheet at fair value. Changes in derivative fair values will either berecognized in earnings as offsets to the changes in fair value of relatedhedged assets, liabilities and firm commitments or for forecasted transactions,deferred and recorded as a component of accumulated other comprehensive income(loss) in stockholders' equity until the hedged transactions occur and arerecognized in earnings. The ineffective portion of a hedging derivative'schange in fair value will immediately be recognized in earnings. InJune 1999, the FASB issued SFAS No. 137, "Accounting forDerivative Instruments and Hedging Activities—Deferral of the Effective Date ofFASB Statement No. 133", which delayed the effective date. SFASNo. 133 is now effective for fiscal years beginning after June 15,2000. We adopted SFAS No. 133 on January 1, 2001, and there was nomaterial effect on our consolidated financial position or results ofoperations.
             On July 20, 2001, FASB issued SFASNo. 141 “Business Combination”, and SFAS No. 142, “Goodwill and IntangibleAssets”. SFAS No. 141 is effective for all business combinations initiatedafter June 30, 2001.  SFAS No. 142 iseffective for fiscal years beginning after December 15, 2001; however, certainprovisions of this Statement apply to goodwill and other intangible assetsacquired between July 1, 2001 and the effective date of SFAS 142.  Major provisions of these Statements andtheir effective dates for Segue are as follows:
 ·all business combinations initiated  after June 30, 2001 must use the purchase method of accounting.  The pooling of interest method of  accounting is prohibited except for transactions initiated before July 1.  2001. ·intangible assets acquired in a  business combination must be recorded separately from goodwill if they arise  from contractual or other legal rights or are separable from the acquired  entity and can be sold, transferred, licensed, rented or exchanged, either  individually or as part of a related contract, asset or liability. ·goodwill, as well as intangible assets  with indefinite lives, acquired after June 30, 2001, will not be amortized.  Effective January 1, 2002, all previously recognized goodwill and intangible  assets with indefinite lives will no longer be subject to amortization. ·effective January 1, 2002, goodwill and  intangible assets with indefinite lives will be tested for impairment annually  and whenever there is an impairment indicator. ·all acquired goodwill must be assigned  to reporting units for purposes of impairment testing and segment reporting.
                         Segue will continue toamortize goodwill recognized prior to July 1, 2001, under its current methoduntil January 1, 2002, at which time annual and quarterly goodwill amortizationof  $1.5 million and $377,000,respectively, will no longer be recognized. By December 31, 2002, we will havecompleted a transitional fair value based impairment test of goodwill as ofJanuary 1, 2002.  Impairment losses ifany, resulting from the transitional testing will be recognized in the quarterended March 31, 2002, as a cumulative effect of a change in accountingprinciple.
**ITEM 2. MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**RESULTS OF OPERATIONS**

             Thefollowing table sets forth certain unaudited quarterly results of operationsexpressed as a percentage of total revenue for the periods indicated:
 **Percentage of Revenue for  Three Months Ended June 30,** **Percentage of Revenue for  Six Months Ended June 30,**        **2001** **2000** **2001** **2000**** **         Revenue:         Software38.6%65.5%43.1%65.4% Services61.4 34.5 56.9 34.6        Total  revenue100.0 100.0 100.0 100.0          Cost  of revenue:         Cost  of software1.7 3.9 1.9 4.4  Cost  of services20.1 14.3 20.6 15.6        Total  cost of revenue21.8 18.2 22.5 20.0          Gross  margin78.2 81.8 77.5 80.0          Operating  expenses:         Sales  and marketing79.9 65.1 74.9 60.6  Research  and development21.7 17.0 21.3 17.4  General  and administrative21.7 14.1 21.6 16.5  Amortization  of goodwill3.9 2.5 3.5 2.6  Restructuring  and other charges23.8 - 10.6 -        Total  operating expenses151.0 98.7 131.9 97.1                Loss  from operations(72.8)(16.9)(54.4)(17.1)Other  income net1.4 1.8 1.6 1.9      Loss  before provision for income taxes(71.4)(15.1)(52.8)(15.2)Provision  for income taxes0.7 0.3 0.5 0.3      Net  loss(72.1)%(15.4%)%(53.3)%(15.5%)%     
**SOFTWARE REVENUE**

             Software revenue decreased 63% to$3.7 million during the second quarter of 2001 from $9.8 million forthe same period in 2000. For the six months ended June 30, 2001, softwarerevenue decreased 52% to $9.2 million as compared to $19.1 million for the sixmonths ended June 30, 2000.  The majorfactors attributed to the decrease of second quarter software revenue ascompared to the same quarter in 2000 were the combination of the poorInformation Technology capital spending environment, the collapse of thedot-com market and increased competition. International software revenue accounted for 16%, or $569,000 and 20%,or $1.9 million, of total software revenue for the three and six months endedJune 30, 2001, respectively, as compared to 13%, or $1.3 million and 11%, or$2.0 million for the same periods in 2000. The decrease of international software revenue, in absolute dollars, inthe second quarter was due to the economic slowdown of the European market.

**SERVICES REVENUE**

             Services revenue increased 12% to$5.8 million during the second quarter of 2001 from $5.2 million inthe same quarter of 2000. For the six months ended June 30, 2001, servicesrevenue increased 20% to $12.1 million as compared to $10.1 million for the sixmonths ended June 30, 2000.  As comparedto the three and six months ended June 30, 2000, training and consultingrevenue increased 7% and 10% for the same periods in 2001, respectively.  The increase of training and consultingrevenue for the second quarter 2001 as compared to the same quarter prior yearis mostly attributed to recognizing, in accordance with the Company policies,the unused portion of deferred training and consulting contracts that wereentered into twelve months ago. The training and consulting contract ispredominately a 12 month period.  Forthe three and six months ended June 30, 2001, recognized maintenance revenueincreased 15% and 27% respectively, as compared to the same periods in 2000.  The increase in recognized maintenancerevenue was driven largely by the larger cumulative installed base of softwarecontracts under maintenance, which are predominately amortized over a12 month period.
**COST OF SOFTWARE**

             Costof software decreased 73% to $156,000 during the second quarter of 2001 from$583,000 in the same quarter of 2000. For the six months ended June 30, 2001,cost of software decreased 69% to $397,000 from $1.3 million as compared to thesame period of 2000. As a percentage of software revenue, cost of software inthe second quarter of 2001 decreased to 4% from 6% in the correspondingprior-year period. For the six months ended June 30, 2001, cost of software asa percentage of software revenue decreased to 4% from 7% in the same periodlast year. The decrease in cost of software, both in amount and as a percentageof product revenue, was primarily due to the decrease in amortizationassociated with the completed technology that was acquired in 1997 and whichwas fully amortized at December 31, 2000 which amounted to $247,000 perquarter.  In addition, the eliminationof sales of royalty bearing products also contributed to the decrease. Thedecrease in the dollar amount of cost of software is also attributable to thelower volume of sales.

**COST OF SERVICES**

             Cost of services decreased 12% to$1.9 million during the second quarter of 2001 from $2.2 million inthe same quarter of 2000.  For the sixmonths ended June 30, 2001, cost of services decreased 4% to $4.4 million from$4.6 million in the same period in 2000. During the second quarter of 2001, cost of services as a percentage ofservices revenue decreased to 33% from 42% in the same quarter last year.  For the six months ended June 30, 2001, costof services as a percentage of services revenue decreased to 36% from 45% inthe corresponding prior year period. Cost of services consists primarily of costs of providing customertechnical support, training and consulting. Cost of services as a percentage ofservices revenue may vary based on the profitability of individual consultingengagements and the utilization rate of in-house consultants. Cost of trainingand consulting in the second quarter of 2001 decreased 25% to $1.1 millionas compared to $1.5 million at the same quarter of 2000. For the six monthsended June 30, 2001, cost of training and consulting decreased 17% to $2.6million as compared to $3.2 million in the corresponding prior-year period. Thedecrease is primarily personnel related expenses as a result of the workforcereduction during the second quarter of 2001. For the three and six months ended June 30, 2001, cost of maintenanceincreased 18% and 29% to $807,000 and $1.8 million respectively, as compared to $682,000 and $1.4 million,respectively, for the same periods of 2000. The increases are mainly due tocosts to support the increase of maintenance revenue in 2001, which is largerthan its revenue base in 2000.  Theincrease is also attributable to the expansion of our global technical supportcenter in Belfast, Northern Ireland as a result of shifting the US supportactivities to Belfast.

**SALES AND MARKETING**

             Sales and marketing expensesdecreased 23% to $7.6 million during the second quarter of 2001 from$9.8 million in the second quarter of 2000.  For the six months ended June 30, 2001, sales and marketingexpenses decreased 10% to $15.9 million from $17.7 million in the correspondingprior-year period.  The decreases areprimarily personal related costs due to the elimination of our inside salesworkforce as the result of the restructuring in the second quarter and theaggressive cost cutting effort. Additionally, commission expenses in the second quarter of 2001 havedecreased as a result of the lower volume of sales.

**RESEARCH AND DEVELOPMENT**

             Research and development expensesdecreased 20% to $2.1 million during the second quarter of 2001 from $2.6million in the same quarter of 2000. For the six months ended June 30, 2001, research and developmentexpenses decreased 11% to $4.5 million from $5.1 million in the correspondingprior-year period.  The decreases aremainly personnel related costs and travel costs due to the workforce reductionand the closing of the Los Gatos laboratory in the second quarter of 2001.

**GENERAL AND ADMINISTRATIVE**

             General and administrative expensesremained essentially the same at $2.1 million for both the second quartersof 2001 and 2000.  For the six monthsended June 30, 2001, general and administrative expenses decreased 5% to $4.6million compared to $4.8 million in the corresponding prior-year period.  The overall decreases were primarilyattributed to the decreased legal expenses in the first quarter of 2001, inpart due to settling litigation, decreased audit related expenses as comparedto the first quarter of 2000, which had costs associated with the restatement ofour prior years' Form 10-Qs and Form 10-Ks. Additionally, theelimination of employees and contract employees as part of the second quarterrestructuring process also contributed to the decrease. However, the decreaseswere partially offset by an increase in bad debt expenses of $603,000 ascompared to the first six months of 2000 due to the recent declining economicconditions and the adjustment of foreign currency transaction losses of$190,000 during the first six months of 2001.

**AMORTIZATION OF GOODWILL**

             Amortization of goodwill was$377,000 for each of the second quarters of 2001 and 2000.  For each of the six months ended June 30,2001 and 2000, amortization of goodwill was $753,000.****RESTRUCTURING AND OTHER CHARGES**

             During the second quarter of 2001,in reaction to the revenue shortfall due in part to the current economicdownturn, we executed a restructuring plan, which is expected to result insavings, once fully implemented, of approximately $5.9 million on an annualbasis.  Among the expected savings aresavings in rent of $800,000, wages of $5.1 million.  The restructuring included a 20% reduction in our workforce, theclosing of the research and development laboratory in our Los Gatos, Californiaoffice with a shifting some of resources to our Austrian facility,consolidation of space in our Lexington and Los Gatos facilities and theelimination of our inside sales organization in favor of a newenterprise-oriented sales model and process. As a result, we recognized restructuring and other charges of $2.3million. The restructuring and other charges included approximately $1.4million for facility-related costs including the accrual of estimated leaseobligations associated with the closure of excess office facilities andapproximately $859,000 for severance and other employee-related costs for thetermination of 73 employees.  The $1.4million for facility related costs is comprised of an estimated $4.8 millionfor future rents on unoccupied space plus $200,000 miscellaneous costs relatedto subleasing the space less $3.6 million of estimated sublease income.  An active marketing effort has commenced tosublease space both in Lexington and Los Gatos. As of August 1, 2001, we havepaid approximately  $761,000 related tothe restructuring and other charges.

**OTHER INCOME, NET**

             Other income, net decreased 53% to$130,000 during the second quarter of 2001 from $274,000 in the same quarter of2000. For the six months ended June 30, 2001, other income, net decreased 37%to $347,000 from $548,000 as compared to the six months ended June 30, 2000.Other income consists of mostly interest income on cash equivalents andshort-term investments. The decrease of interest income was primarily due tothe decrease in interest on lower balances of short-term investments and lowerinterest rates.

**PROVISION FOR INCOME TAXES**

             We recorded a provision for foreignand state income taxes of $66,000 and $116,000 for the three and six monthsended June 30, 2001, respectively.  Forthe three and six months ended June 30, 2000 we recorded a provision forforeign and state income of $51,000 and $102,000 respectively.   There was no tax benefit recorded forlosses generated in the US in any period due to the uncertainty of realizingsuch benefits.

**LIQUIDITY AND CAPITAL RESOURCES**

             As of June 30, 2001, our principalsources of liquidity included cash, cash equivalents and short-term investmentstotaling $10.1 million as compared to $17.2 million as ofDecember 31, 2000.

             During the first six months of2001, we used $7.1 million for operating activities, resulting from thenet loss, adjusted for depreciation of fixed assets and amortization ofgoodwill, as well as increases in accrued expenses and deferred revenue offsetby decreases in accounts receivable and other assets.

             Our primary investing activitieswere liquidations of short-term investments. We generated $2.9 millionfrom maturing investments in the six months ended June 30, 2001.

             We generated funds of $371,000 fromfinancing activities related to the issuance of stock under the employee stockpurchase plan and exercise of stock options during the six months of 2001.

             Ourcorporate headquarters in Lexington, Massachusetts is currently under a lease,which expires in October 2007. The annual rental rate is approximately$2.3 million. We have the right to terminate the lease onSeptember 30, 2004 for a fee of approximately $2.3 million.  In addition, we have an obligation toprovide a security deposit of approximately $1.5 million if our current assets,as defined in the lease, become less than $20.0 million, as evidenced bySegue’s annual audited financial statements as of each of December 31st.  We are required to provide audited financialstatements for fiscal year ending December 31st by March 31stof the following year.  As of June 30,2001, current assets, as defined in the lease, were $16.9 million.
             InDecember 2000, we settled certain lawsuits, including both theBlack & White litigation and, subject to final court approval, thesecurities litigation matter that is referenced in Item 1 of Part II ofthis Form 10-Q and we accrued Segue's portion of the settlement,approximately $750,000. No amounts were paid on these lawsuit settlements in2000. As of May 2001, we had paid the accrued settlement amount in full.

             During the second quarter of 2001,in reaction to the revenue shortfall due to the current economic downturn, weexecuted a restructuring plan, which is expected to result in savings oncefully implemented of approximately $5.9 million on an annual basis.  Among the expected savings are savings inrent of $800,000, wages of $5.1 million. The restructuring included a 20% reduction in workforce, the closing ofthe research and development laboratory in our Los Gatos, California officewith a shifting of some resources to our Austrian facility, consolidation ofspace in our Lexington and Los Gatos facilities and the elimination of ourinside sales organization in favor of a new enterprise-oriented sales model andprocess.  As a result, we recognizedrestructuring and other charges of $2.3 million. The restructuring and othercharges included approximately $1.4 million for facility-related costsincluding the accrual of estimated lease obligations associated with theclosure of excess office facilities and approximately $859,000 for severanceand other employee-related costs for the termination of 73 employees.  The $1.4 million for facility related costsis comprised of an estimated $4.8 million for future rents on unoccupied spaceplus $200,000 miscellaneous costs related to subleasing the space less $3.6million of estimated sublease income. An active marketing effort has commenced to sublease space both inLexington and Los Gatos. As of August 1, 2001, we paid approximately  $761,000 related to the restructuring andother charges.

             We have historically had losses.This accompanied by the economic downturn of 2001 and the slowdown ofInformation Technology capital spending has required Segue to continueutilizing significant amounts of cash and cash equivalents to fund operations.

             We have reduced expenses asdescribed above and curtailed capital spending and other uses of cash.

             Long-term cash requirements, otherthan for normal operating expenses, are anticipated for the development of newsoftware products and enhancements of existing products, the possible openingof additional international offices, and the possible acquisition of softwareproducts or technologies complementary to our business.

             Assuming that Segue can execute oncurrent plans to grow revenue and the economy does not worsen, we believe thatcash, cash equivalents and short-term investments as well as cash flows fromoperations will be sufficient to meet our working capital and debt requirementsfor the next twelve months.  However, ifthere are no changes in the business or the economy worsens, we may need toobtain additional financing in order to sustain our capital resourcesrequirements during the next twelve months. Depending on the direction of theeconomy in general, and more specifically the Information Technology spending,there may or may not be a need for such action.  However, there can be no assurance that if necessary, we would besuccessful in obtaining financing, or that if necessary, we could do so onterms acceptable or favorable to Segue.

             To date, inflation has not had amaterial impact on our financial results.

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

             TheCompany's prospects are subject to many uncertainties and risks. ThisForm 10-Q also contains certain forward-looking statements within themeaning of the Private Securities Reform Act of 1995. The Company's futureresults may differ materially from its current results and actual results coulddiffer materially from those projected in the forwardlooking statements as aresult of certain risk factors, including but not limited to those set forthbelow, other one-time events and other important factors disclosed previouslyand from time to time in Segue's other filings with the SEC.
             **Ourquarterly results may fluctuate***.*  Segue's quarterly revenue and operating results are difficult topredict and may fluctuate significantly from quarter to quarter. If ourquarterly revenue or operating results fall below the expectations of investorsor public market analysts, the price of its common stock could fallsubstantially. Our quarterly revenue may fluctuate significantly for severalreasons, including: the timing and success of introductions of our new productsor product enhancements or those of our competitors; uncertainty created bychanges in the market, including in particular the decline in the dot-comeBusiness market; difficulty in predicting the size and timing of individualorders; software bugs or other product quality problems; competition andpricing; customer order deferrals as a result of general economic decline;increases in operating expenses; ability to increase sales from enterprisecompanies; and general economic conditions. A substantial portion of Segue'soperating expenses are related to personnel, facilities and marketing and salesprograms. The level of spending for such expenses cannot be adjusted quicklyand is based, in significant part, on our expectations of future revenues. Ifactual revenue levels are below management's expectations for a certainquarter, results of operations are likely to be adversely affected.Furthermore, Segue has often recognized a substantial portion of its productrevenues in the last month of a quarter, with these revenues frequentlyconcentrated in the last weeks or days of a quarter. As a result, productrevenues in any quarter are substantially dependent on orders booked andshipped in the latter part of that quarter and revenues from any future quarterare not predictable with any significant degree of accuracy. Segue typicallydoes not experience order backlog. For these reasons, Segue believes thatperiod-to-period comparisons of its results of operations are not necessarilymeaningful and should not be relied upon as indications of future performance.

             **We maynot be profitable in the future.**  Since Segue began operations, it has generally experiencedlosses. Losses have resulted in an accumulated deficit of approximately$47.1 million as of June 30, 2001. Segue had net income of $144,000 in1996; a net loss of $2.5 million in 1997, which included a charge of$117,000 for purchased research and development in process and $718,000 forseverance charges; a net loss of $5.1 million in 1998, which included acharge of $1.5 million related to our acquisitions of Eventus andBlack & White, and a charge of $667,000 related to write-offs of anNRE fee and guaranteed royalties; a net loss of $15.9 million in 1999,which included $2.0 million for restructuring costs, $481,000 forseverance of senior executives; a net loss of $8.6 million in 2000, which included$750,000 for various litigation settlement costs, and a loss of$11.6 million for the six-month ended June 30, 2001, which included $2.3million for restructuring charges. During the first six months of 2001, weexperienced revenue shortfalls. We initiated cost savings measures in an effortto reduce quarterly expenses and enhance the possibility of breakeven by thefourth quarter of 2001. This cost saving measures may not be effective, and arenot necessarily indicative of future operating results. Failure to achieveprofitability may adversely affect the market price of Segue's common stock.

             **Segue maynot derive substantial incremental revenue from its alliances and SilkElitePartner Program**.  In aneffort to augment product revenue derived from the efforts of its direct salesforce, Segue has focused on expanding its key strategic alliances and onbuilding a successful SilkElite Partner Program.  The SilkElite partners program focuses on resellers, consultingpartners and distributors.  SilkElitePartners both resell Segue products and use Segue software products in thedelivery of consulting services.  Thesuccess of the expansion of key strategic alliances and the SilkElite Programis uncertain, faces strong competition, and takes time and significantresources to develop.  Should Segue failto generate substantial incremental revenue from its strategic alliances or itsSilkElite Program, the financial results and stock price could be adverselyaffected.

             **Ourfuture success will depend on our ability to respond rapidly and effectively totechnological and other market changes, including the successful introductionof new and enhanced products***.* The nature of the web-based automated software testing and eBusinesstesting markets in which we compete is characterized by rapidly changingtechnology, rapidly evolving customer needs and desires, changes in industrystandards and practices and frequent releases of new product or enhancements bycompetitors. To be competitive, Segue must develop and introduce productenhancements and new products that address the increasingly sophisticated andvaried needs of our existing and potential customers. Over ninety percent 90%of Segue's product revenue in 2000 and the first half of 2001 were generatedfrom its SilkPerformer and SilkTest products. In the second quarter of 2001, weintroduced our new web-based enterprise-monitoring product, SilkVision.  Segue is making efforts to enhance itscurrent products.  If we fail to developand introduce new products and enhancements successfully and on a timely basis,to maintain our level of product revenue from SilkPerformer and SilkTest orfail to generate substantial incremental revenue from our new SilkVisionproduct, our business may be materially adversely affected.

**             We mayface liquidity issues.**  We have taken steps to streamline ouroperations, including reducing headcount, infrastructure and other expenses,and limiting capital expenditures in order to compensate in part for our recentdecline in revenues and to achieve greater efficiencies. Segue believes thatbased on potential incremental revenue from its strategic alliances, itsSilkElite Partner Program, and its new SilkVision product, that future saleswill be sufficient to allow us to continue as a viable business.  If future sales are not sufficient, however,we may have to raise additional financing to fund working capital needs.   If we fail to generate substantialincremental revenue, and we are not successful raising additional financing, wemay not have sufficient capital resources and our business may be materiallyadversely affected.

**             We maynot be successful in subletting excess space.**  Segue is taking steps to sublet its excessspace. The real estate market is changing rapidly and these efforts may not besuccessful and, hence, may cause us more than anticipated and cause us not torealize our estimated cost savings.

             **Sellingproducts and services through alliances and partnerships may limit our controland interaction with end users of our products***.*  As a result, our ability to forecast salesaccurately, evaluate customer satisfaction and recognize emerging customerrequirements may be limited. Our ability to develop and maintain customergoodwill could also be affected.

             **We mayhave difficulty managing organizational change***.*  In 2000 and early 2001, Segue reorganizedits sales force, appointed new leaders in its support services, consulting andproduct development areas, created a new strategic alliance program, appointeda new head of international sales, added a General Counsel, a new VicePresident of Product Marketing, added a new Senior Vice President of WorldwideSales, eliminated the inside sales group, introduced a new sales process andshifted research and development resources. The success of these organizational changes is uncertain and there canbe no guarantee that the intended efficiencies will be accomplished with theseadjustments.
             **Seguefaces significant competition from other software companies***.*  The market for web-based software qualitymanagement and testing tools is intensely competitive and subject to rapidtechnological change. We expect competition to intensify even further in thefuture. Segue currently encounters competition from a number of public andprivate companies, including Mercury Interactive Corporation, Rational SoftwareCorporation and Compuware Corporation. Many of our current and potentialcompetitors have longer operating histories, greater name recognition, largerinstalled customer bases, and significantly greater financial, technical andmarketing resources than we do. Therefore, they may be able to respond morequickly to new or changing opportunities, technologies, standards or customerrequirements or may be able to devote greater resources to the promotion andsale of their products than we can. An increase in competition could result inprice reductions and loss of market share. Such competition and any resultingreduction in profitability could have a material adverse effect on ourbusiness, operating results and financial condition.

             **Segue'sbusiness could be adversely affected if its products contain errors***.*  Software products as complex as ours maycontain undetected errors or "bugs" which result in product failures.The occurrence of errors could result in loss of or delay in revenue, loss ofmarket share, failure to achieve market acceptance, diversion of developmentresources, significant repair and replacement costs, injury to our reputation,or damage to our efforts to build brand awareness, any of which could have amaterial adverse effect on our business, operating results and financialcondition.

             **Certainlawsuits have been filed against Segue.**  On or about April 27, 1999, a putativeclass action complaint was filed in the United States District Court for theDistrict of Massachusetts against Segue, its Chief Executive Officer and aformer Chief Financial Officer of Segue, captioned Nathan Rice v. SegueSoftware, Inc., et al., Civil No. 99-CV-10891-RGS. The classaction complaint alleged the defendants violated the federal securities laws bymaking material misrepresentations and omissions in certain public disclosuresduring the period beginning on October 13, 1998 through April 9,1999, inclusive. The public disclosures relate to, among other things, Segue'spast and future financial performance and results. On or about May 3,1999, another similar putative class action complaint was filed against Segue,its Chief Executive Officer and a former Chief Financial Officer of Segue inthe United States District Court for the District of Massachusetts, captioned AnthonyMoumouris v. Segue Software, Inc., et al., Civil No. 99-CV-10933-RGS.These cases were consolidated under the caption In Re SegueSoftware, Inc. Securities Litigation, Civil No. 99-CV-10891-RGS  and the plaintiffs filed a consolidatedamended complaint on September 27, 1999 alleging a putative class periodof July 14, 1998 through April 9, 1999, inclusive. After the courtgranted Segue's motion to dismiss and pending appeal of this order, Segue andthe plaintiffs agreed to settle this matter. The settlement has beenpreliminarily approved by the trial court and notification and approval ofaffected shareholders is in process. After the contribution by insurancecarrier, which amounts have been placed in escrow, the settlement, if finallyapproved by the court, will not have a materially adverse effect on Segue'sfinancial results. If the settlement is not finally approved by the trial courtand shareholders, there is a risk the plaintiffs will proceed with their appealand succeed in obtaining a reversal of the district court's dismissal of thismatter, which could expose Segue to a claim for damages in an amount which theplaintiffs have not yet specified but which could, if successful, have a materialadverse effect on Segue's financial results.

             Variousother claims, charges and litigation have been asserted or commenced againstSegue arising from or related to contractual or employee relations. Managementdoes not believe these claims will have a material adverse effect on thefinancial position or results of operations of Segue.
             **We musthire and retain skilled personnel in a tight labor market. **Qualified personnel are in great demandthroughout the software industry. Our success depends in large part upon ourability to attract, train, motivate and retain highly skilled employees,particularly sales and marketing personnel, software engineers and other seniorpersonnel. The failure to attract and retain the highly skilled personnel thatare integral to our direct sales, product development, service and supportteams may limit the rate at which we an generate sales and develop new productsor product enhancements. Our ability to retain our qualified staff may beimpacted by our financial results over the first two quarters of 2001. All ofthis could have a material adverse effect on our business, operating resultsand financial condition.

             **We facemany risks associated with international business activities.**  We derived approximately 12% of totalrevenue from international customers in the second quarter of 2001 and 14% inthe first six months of 2001. The international market for software products ishighly competitive and we expect to face substantial competition in this marketfrom established and emerging companies. Segue faces many risks associated withinternational business activities including currency fluctuations, impositionof government controls, export license requirements, restrictions on the exportof critical technology, political and economic instability, tailoring ofproducts to local requirements, trade restrictions, changes in tariffs andtaxes, difficulties in staffing and managing international operations, longeraccounts receivable payment cycles and the burdens of complying with a widevariety of foreign laws and regulations. To the extent we are unable tocontinue to expand international sales in a timely and cost-effective manner,our business could be materially adversely affected.

             **Segue'ssuccess depends on our ability to protect our software and other proprietarytechnology***.* The unauthorized reproduction or other misappropriation of ourproprietary technology could enable third parties to benefit from Segue'stechnology without paying us for it. This could have a material adverse effecton our business, operating results and financial condition. Although we havetaken steps to protect our proprietary technology, these efforts may beinadequate. We currently rely on a combination of patent, trademark, copyrightand trade secret laws and contractual provisions to protect our proprietaryrights in our products. Currently, we have three issued patents and a fourthpending. There can be no assurance that these patents would be upheld ifchallenged. Moreover, the laws of other countries in which we market ourproducts may afford little or no effective protection of our intellectualproperty. If we resort to legal proceedings to enforce our intellectualproperty rights, the proceedings could be burdensome and expensive and couldinvolve a high degree of risk. If we were to discover that any of Segueproducts violated third party proprietary rights, or protect our trade secrets,there can be no assurance that we would be able to obtain licenses oncommercially reasonable terms to continue licensing our software withoutsubstantial reengineering or that any effort to undertake such reengineeringwould be successful. Any claim of infringement could cause Segue to incursubstantial costs defending against the claim, even if the claim is invalid,and could distract management resources from our business. Furthermore, a partymaking such a claim could secure a judgment that requires us to pay substantialdamages or result in an injunction. Any of these events could have a materialadverse effect on our business, operating results and financial condition.**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
             The following discussion about ourmarket risk disclosures involves forward-looking statements. Actual resultscould differ materially from those discussed in the forward-looking statements.We are exposed to market risk related to changes in interest rates and foreigncurrency exchange rates. We do not use derivative financial instruments forspeculative or trading purposes.

             INTEREST RATE RISK. Segue isexposed to market risk from changes in interest rates primarily through itsinvesting and borrowing activities. In addition, our ability to finance futureacquisition transactions may be impacted if we are unable to obtain appropriatefinancing at acceptable rates. Our investing strategy to manage interest rateexposure is to invest in short-term, highly secure and liquid investments. Wemaintain a portfolio of highly liquid cash equivalents and short-terminvestments (primarily in high-grade corporate commercial paper). As of June30, 2001, the fair value of our short-term investments approximated marketvalue.

             FOREIGN CURRENCY RISK. Segue facesexposure to movements in foreign currency exchange rates. These exposures may changeover time as business practices evolve and could have a material adverse effecton our business, financial condition and results of operations. We do not usederivative financial instruments or other financial instruments to hedgeeconomic exposures or for trading. Historically, our primary exposures havebeen related to the operations of our foreign subsidiaries. As of June 30,2001, the total impact of foreign currency changes was $387,000 after anadjustment of $190,000 for foreign currency transaction losses during the firstsix months of 2001. The introduction of the Euro as a common currency for mostmembers of the European monetary union took place in our fiscal year of 1999.As of June 30, 2001, the impact of Euro has not been significant to ourbusiness.

**PARTII. OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

Onor about April 27, 1999, a putative class action complaint was filed inthe United States District Court for the District of Massachusetts againstSegue, its Chief Executive Officer and a former Chief Financial Officer ofSegue, captioned Nathan Rice v.Segue Software, Inc., et al.,Civil No. 99-CV-10891-RGS. The class action complaint alleged thedefendants violated the federal securities laws by making materialmisrepresentations and omissions in certain public disclosures during theperiod beginning on October 13, 1998 through April 9, 1999,inclusive. The public disclosures relate to, among other things, Segue's pastand future financial performance and results. On or about May 3, 1999,another similar putative class action complaint was filed against Segue, itsChief Executive Officer and a former Chief Financial Officer of Segue in theUnited States District Court for the District of Massachusetts, captioned AnthonyMoumouris v. Segue Software, Inc., et al., Civil No. 99-CV-10933RGS***.*** These cases wereconsolidated under the caption In Re Segue Software, Inc. SecuritiesLitigation, Civil No. 99-CV-10891-RGS and the plaintiffs filed a consolidated amended complaint onSeptember 27, 1999 alleging a putative class period of July 14, 1998through April 9, 1999, inclusive. The complaints sought an unspecifiedamount of damages. On November 8, 1999 each of the defendants filed amotion to dismiss the amended complaint for failure to state a cause of action,and on July 26, 2000, the United States District Court for the District ofMassachusetts granted Segue's Motion to Dismiss the putative securities classaction litigation brought against the above three defendants. The dismissal wasentered "with prejudice." The plaintiffs appealed the decision to theFirst Circuit, and, in December 2000 while the appeal was still pending,the parties and Segue's insurers reached an agreement in principle to settlethe matter for an agreed upon settlement amount. Segue's Directors' andOfficers' insurance will contribute a substantial portion of such settlementamount which has been placed in escrow, and, with this insurance contribution,the settlement will not have a material adverse affect upon Segue's financialposition or results of operation. The settlement has been preliminarilyapproved by the court, and is subject to final court approval and shareholderapproval.

Variousother claims, charges and litigation have been asserted or commenced againstSegue arising from or related to contractual or employee relations. Managementdoes not believe these claims will have a material adverse effect on thefinancial position or results of operations of Segue.
**ITEM 4. SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

(a) The 2001 Annual Meeting of Stockholders of Segue Software,Inc. (the "Annual Meeting") was held on June 8, 2001.

(b)At the Annual Meeting, the following individuals were elected to Segue's Boardof Directors, constituting all members of Segue's Board of Directors:
 Votes For Votes Withheld   James H. Simons8,260,405 209,230 Stephen B. Butler8,154,464 315,171 Leonard E. Baum8,253,415 216,220 John R. Levine8,260,405 209,230 Howard L. Morgan8,260,405 209,230 Jyoti Prakash8,161,454 308,181 Robert W. Powers, Jr.8,260,405 209,230 Edmund  F. Kelly8,260,405 209,230
(c) The following additional proposals were considered at theAnnual Meeting:
 Votes Votes Votes For Against Withheld   Approval of the 1996 Employee Stock Purchase  Plan Amendment8,208,752 232,360 28,523       Ratification  of the appointment of Grant Thornton LLP  independent public accountants for the fiscal year  ending December 31, 20018,414,115 36,770 18,750
**ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K**
(a)Exhibits   None.  (b)Reports on Form 8-K None.
**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

Date:August 14, 2001.
 **SEGUE SOFTWARE, INC.**     By: /s/ STEPHEN B. BUTLER      Stephen B. Butler   Chief Executive Officer     By: /s/ DOUGLAS ZACCARO     Douglas Zaccaro   Chief Financial Officer    
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