<PAGE>


================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   -----------
                                    FORM 10-Q
                                   -----------

 X      Quarterly report pursuant to Section 13 or 15(d) of the Securities
---     Exchange Act of 1934

        For the quarterly period ended September 30, 2001

                                       OR

---     Transition report pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934

                         Commission File Number: 0-30925

                           BLUE MARTINI SOFTWARE, INC.

             (Exact name of registrant as specified in its charter)

          Delaware                                           94-3319751
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)

                                2600 Campus Drive
                           San Mateo, California 94403
                    (Address of principal executive offices)

                         Telephone Number (650) 356-4000
              (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 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
                 -----                                     ------


As of October 31, 2001 there were approximately 68,045,000 shares of the
registrant's common stock outstanding.

================================================================================

<PAGE>

                           BLUE MARTINI SOFTWARE, INC.

                                      INDEX

                     PART I. FINANCIAL INFORMATION
                                                                   Page No.
                                                                   --------

Item 1.    Condensed Consolidated Financial Statements:

           Condensed Consolidated Balance Sheets
            September 30, 2001 and December 31, 2000                     3

           Condensed Consolidated Statements of Operations
            Three and nine months ended September 30, 2001 and 2000      4

           Condensed Consolidated Statements of Cash Flows
            Nine months ended September 30, 2001 and 2000                5

           Notes to Condensed Consolidated Financial Statements          6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                    11

Item 3.    Quantitative and Qualitative Disclosures About Market Risk   29



                           PART II. OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K                             30

           Signatures                                                   30




                                       2

<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                           BLUE MARTINI SOFTWARE, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                ASSETS                           September 30, 2001       December 31, 2000
                                                                 ------------------       -----------------
<S>                                                                     <C>                     <C>

Current assets:
    Cash and cash equivalents                                         $   21,508              $   40,101
    Short-term investments                                                83,263                  62,183
    Accounts receivable, net                                               4,179                  12,584
    Prepaid expenses and other current assets                              4,737                   6,942
                                                                    ------------            ------------
        Total current assets                                             113,687                 121,810
Long-term investments                                                         --                  51,402
Property and equipment, net                                                6,242                   8,713
Intangible assets and other, net                                           4,679                   6,373
                                                                    ------------            ------------
        Total assets                                                   $ 124,608               $ 188,298
                                                                    ============            ============



                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                 $     1,921             $     4,434
    Accrued employee compensation                                          7,809                   9,411
    Other current liabilities                                              6,448                  14,233
    Deferred revenues                                                      6,839                  15,249
    Current portion of long-term obligations                                  81                     209
                                                                  --------------           -------------
        Total current liabilities                                         23,098                  43,536
Long-term obligations, less current portion                                  117                     117
                                                                   -------------           -------------
        Total liabilities                                                 23,215                  43,653
                                                                     -----------             -----------

Stockholders' equity:
    Common stock                                                              68                      69
    Additional paid-in-capital                                           254,039                 260,943
    Deferred stock compensation                                          (18,672)                (42,106)
    Accumulated other comprehensive income                                   937                     282
    Accumulated deficit                                                 (134,979)                (74,543)
                                                                      ----------             -----------
        Total stockholders' equity                                       101,393                 144,645
                                                                      ----------              ----------
        Total liabilities and stockholders' equity                     $ 124,608               $ 188,298
                                                                       =========               =========

</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3

<PAGE>

                           BLUE MARTINI SOFTWARE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                   Three Months Ended               Nine Months Ended
                                                      September  30,                  September 30,
                                                 ------------------------      --------------------------
                                                   2001           2000            2001              2000
                                                 ---------     ----------      ----------       ---------
<S>                                                <C>           <C>              <C>              <C>
Revenues:
   License                                       $   3,365     $   11,966      $  17,421        $ 26,457
   Service                                           7,899          9,053         29,980          20,263
                                                 ---------     ----------      ---------        --------
         Total revenues                             11,264         21,019         47,401          46,720
                                                 ---------     ----------      ---------        --------

Cost of revenues:
   License                                             876          1,025          3,233           2,337
   Service                                           7,885         11,594         33,214          28,295
                                                 ---------     ----------      ---------        --------
         Total cost of revenues                      8,761         12,619         36,447          30,632
                                                 ---------     ----------      ---------        --------
         Gross profit                                2,503          8,400         10,954          16,088
                                                 ---------     ----------      ---------        --------

Operating expenses:
   Sales and marketing                               9,007         14,821         40,203          36,248
   Research and development                          3,838          5,835         16,202          15,151
   General and administrative                        1,946          6,151         13,943          14,086
   Restructuring charges                             4,150             --          6,257              --
                                                 ---------     ----------      ---------        --------
         Total operating expenses                   18,941         26,807         76,605          65,485
                                                 ---------     ----------      ---------        --------
         Loss from operations                      (16,438)       (18,407)       (65,651)        (49,397)
Interest income and other, net                       1,461          1,827          5,215           1,966
                                                 ---------     ----------      ---------        --------
         Net loss                                $ (14,977)    $  (16,580)     $ (60,436)       $(47,431)
                                                 =========     ==========      =========        ========

Basic and diluted net loss per common share      $   (0.23)    $    (0.33)     $   (0.95)       $  (1.39)
                                                 =========     ==========      =========        ========

Shares used in computing basic and diluted
   net loss per common share                        64,500         50,760         63,380          34,230
                                                 =========     ==========      =========        ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4

<PAGE>

                           BLUE MARTINI SOFTWARE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                Nine Months Ended
                                                                                  September 30,
                                                                       ----------------------------------
                                                                          2001                   2000
                                                                       ----------             -----------
<S>                                                                       <C>                     <C>

Operating activities:
   Net loss                                                            $  (60,436)            $  (47,431)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
      Depreciation and amortization                                         7,102                  2,717
      Amortization of stock compensation and warrants                      13,192                 23,807
      Provision for doubtful accounts                                       1,175                  1,390
      Restructuring charges and asset impairments                           3,285                     --
      Changes in operating assets and liabilities:
        Accounts receivable                                                 7,230                 (9,872)
        Prepaid expenses and other assets                                   2,399                 (5,203)
        Accounts payable, accrued employee compensation and
         other current liabilities                                         (8,718)                16,173
        Deferred revenues                                                  (8,410)                16,755
                                                                       ----------             -----------
           Net cash used in operating activities                          (43,181)                (1,664)
                                                                       ----------             -----------
Cash flows from investing activities:
   Purchases of property and equipment                                     (5,348)                (6,570)
   Payment on short-term installment plan for the purchase of
      intangible assets                                                    (4,250)                    --
   Sales and maturities (purchases) of investments, net                    30,826                (47,938)
                                                                       ----------             -----------
           Net cash provide by (used for) investing activities             21,228                (54,508)
                                                                       ----------             -----------
Cash flows from financing activities:
   Net proceeds from issuance of common stock                               3,651                  4,635
   Repurchases of common stock                                               (314)                   (89)
   Net proceeds from initial public offering of common stock                   --                158,611
   Repayment of debt and capital lease obligations                           (128)                  (856)
                                                                       ----------             -----------
           Net cash provided by financing activities                        3,209                162,301
                                                                       ----------             -----------
Effect of exchange rate changes on cash                                       151                     --
                                                                       ----------             -----------
Net increase (decrease) in cash and cash equivalents                      (18,593)               106,129
Cash and cash equivalents at beginning of period                           40,101                 10,362
                                                                       ----------             -----------
Cash and cash equivalents at end of period                             $   21,508             $  116,491
                                                                       ==========             ===========

Supplemental disclosures of noncash investing and financing activities:
   Property and equipment acquired under capital lease
     obligations                                                       $       --             $      265
                                                                       ==========             ===========
   Deferred stock compensation                                         $  (10,462)            $   50,836
                                                                       ==========             ===========
   Warrants issued in connection with lease financing and
     marketing arrangement                                             $      164             $   14,008
                                                                       ==========             ===========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5

<PAGE>

                           BLUE MARTINI SOFTWARE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

     The condensed consolidated financial statements included herein are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Blue Martini Software, Inc.
("Blue Martini Software" or the "Company") Annual Report on Form 10-K for the
year ended December 31, 2000. The results of operations for the three and nine
months ended September 30, 2001 are not necessarily indicative of the results
for the entire year ending December 31, 2001.

Note 2.  Net Loss Per Common Share

     Basic net loss per common share is computed using the weighted average
number of outstanding shares of common stock during the period, excluding shares
of restricted stock subject to repurchase. Dilutive net loss per common share is
computed using the weighted average number of common shares outstanding during
the period and, when dilutive, potential common shares from options and warrants
to purchase common stock, and common stock subject to repurchase, using the
treasury stock method, and from convertible preferred stock, using the
"if-converted" method. Potential common shares consist of convertible preferred
stock, unvested restricted common stock, stock options and warrants.

     The following potential common shares have been excluded from the
calculation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive (in thousands):

                                                         Nine Months Ended
                                                            September 30,
                                                  ------------------------------
                                                     2001             2000
                                                   -------          ---------

Shares issuable under stock options                 13,963            7,335
Shares of restricted stock subject to repurchase     3,461            9,202
Shares issuable pursuant to warrants                 2,445            2,445


     The weighted average exercise price of stock options outstanding was $5.51
and $6.35 at September 30, 2001 and 2000, respectively. The weighted average
purchase price of restricted stock was $0.54 and $0.46 at September 30, 2001 and
2000, respectively. The weighted average exercise price of warrants was $1.31 at
September 30, 2001 and $4.94 at September 30, 2000.

                                       6

<PAGE>

Note 3.  Comprehensive Income (Loss)

     Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are recorded as an element
of stockholders' equity, but are excluded from net income. The components of
accumulated comprehensive loss are as follows (in thousands):

<TABLE>
<CAPTION>

                                                   Three Months Ended               Nine Months Ended
                                                      September 30,                   September 30,
                                               -------------------------      --------------------------
                                                  2001            2000           2001            2000
                                               ---------      ----------      ---------       ----------
<S>                                              <C>             <C>             <C>             <C>

Net loss                                       $ (14,977)     $ (16,580)      $ (60,436)      $  (47,431)
Unrealized gains (losses) on available-for-sale
  investments, net of tax                             71           (134)            504             (134)
Change in accumulated translation
  adjustment                                         (45)            --             151               --
                                               ----------     ---------       ---------       ----------
   Total comprehensive loss                    $ (14,951)     $ (16,714)      $ (59,781)      $  (47,565)
                                               =========      =========       =========       ==========
</TABLE>

Note 4.  Cash, Cash Equivalents and Short Term Investments

     The Company considers all highly liquid investments with remaining
maturities of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents include institutional money market funds,
commercial paper and various deposit accounts. Cash equivalents are recorded at
cost, which approximates fair value.

     The Company's investments are classified as "available-for-sale" and are
carried at fair value based on quoted market prices. These investments consist
of corporate obligations that include commercial paper, corporate bonds and
notes, U.S. government agency securities and asset-backed securities. Unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of other comprehensive income
until realized. Realized gains and losses from the sale of available-for-sale
securities are determined on the specific identification basis. The Company has
the intent to maintain a liquid portfolio and has the ability to redeem its
investments at their carrying amounts. Therefore, all investments at September
30, 2001 have been classified as short term. Previously, investments with
original maturities greater than twelve months were classified as long-term
because it was the Company's intent to hold those investment for one year or
more.

Note 5.  Restructuring Charges

     During the quarter ended March 31, 2001, the Company initiated actions
resulting in recognition of a $2.1 million restructuring charge. This charge
included $1.3 million for the cancellation of facility leases, $0.7 million for
severance payments to employees involuntarily terminated and $0.1 million for
the write-down of certain operating assets to be disposed of. These
restructuring actions resulted in the termination of approximately 70 employees.
Asset write-downs were recorded for the net book value of operating assets
consisting principally of personal computer equipment that were abandoned during
the quarter ended March 31, 2001 as a result of the staff reductions.

                                       7

<PAGE>

     In July 2001, the Company announced and began to implement a supplemental
restructuring plan designed to reduce costs and preserve cash. The supplemental
restructuring plan consisted of terminating approximately 130 full-time
employees; canceling or vacating certain facility leases as a result of those
employee terminations; writing off the unamortized costs of abandoned assets;
and canceling contracts that were not critical to the Company's core business
strategy. The total cost of these actions resulted in a restructuring charge of
$4.2 million during the quarter ended September 30, 2001. Of the restructuring
charge approximately $1.0 million related to employee severance, $1.8 million
related to the consolidation of facilities and $1.4 million related to asset
write-downs representing the net book value of personal computer equipment and
leasehold improvements abandoned as a result of the staff reductions.

     We anticipate paying restructuring related costs of approximately $0.7
million during the quarter ending December 31, 2001 and $0.4 million in 2002.

     The following table summarizes the activity related to the cost saving
actions implemented in March 2001 and the supplemental restructuring implemented
in July 2001 (in thousands):
<TABLE>
<CAPTION>
                                  Accrued at                                            Accrued at
                                  December 31,      Total   Non-cash     Cash        September 30,
                                     2000          Expense   Charges   Payments          2001
                                  ------------     -------  --------   --------      -------------
<S>                                 <C>              <C>      <C>        <C>            <C>
Lease cancellations                 $    --        $ 3,077  $    --    $ (2,039)      $ 1,038
Severance and related charges            --          1,682     (133)     (1,519)           30
Asset write-downs                        --          1,498   (1,498)         --            --
                                   ---------       -------  --------   --------       -------
                                    $    --        $ 6,257  $(1,631)   $ (3,558)      $ 1,068
                                   =========       =======  ========   ========       =======
</TABLE>

Note 6.  Impairment of Long-lived Assets

     The Company evaluates its long-lived assets to determine whether any
impairment of these assets has occurred whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. In making such determination, the estimated future undiscounted
cash flows associated with assets to be held and used would be compared to the
asset's carrying amount to determine if a write-down to fair value is required.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the assets.

     During the quarter ended September 30, 2001, the Company evaluated the
future usage of its computer network infrastructure in light of current
operating activities. After this evaluation, management committed to a plan of
disposal for certain of these assets, and accordingly, has classified these
assets as held for disposal and recorded an impairment loss of $586,000 which is
included in the accompany condensed consolidated statements of operations for
the three and nine months ended September 30, 2001. This amount is not included
in the restructuring charges of $4,167,000. assets at September 30, 2001 is
$42,000 and is included in other assets in the accompanying condensed
consolidated balance sheet as of September 30, 2001. Depreciation of these
assets has ceased and it is expected that the assets will be disposed of by
December 31, 2001.

Note 7.  Warrants

     In April 2000, the Company entered into a non-exclusive marketing and
business development agreement with a system integrator to promote and market
Blue Martini's products in Europe, the Middle East and Africa. As part of this
marketing agreement, the Company issued a warrant to purchase 2,400,000 shares
of common stock at an exercise price of $5.00 per share. The warrant is fully
vested and non-forfeitable and is exercisable at the end of eight years and can
be exercised sooner upon the achievement of certain milestones during the first
four years of the marketing agreement.

                                        8

<PAGE>

     On September 28, 2001, the Company and the systems integrator agreed to a
modification of the warrant that reduced the exercise price to $0.78, the market
value of the Company's common stock at the date, covering 2,100,000 shares. As a
result of this modification, the Company recorded a non-cash charge of $164,000
to deferred stock compensation that represents the incremental fair value of the
modified warrant as compared to the value of the original warrant immediately
before the modification. The incremental value of the warrant will be amortized
over the remaining term of the marketing agreement. The incremental value of the
warrant was based on an independent valuation, assuming a risk-free interest
rate of 4.2%, expected volatility of 100%, no dividends and contractual life of
6.5 years for both the modified warrant and the original warrant.

Note 8.  Segment Reporting

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The method for determining
what information to report is based on the way management organizes the
operating segments within the Company for making operating decisions and
assessing financial performance.

     The Company's chief operating decision-maker is considered to be the chief
executive officer ("CEO"). The CEO reviews financial information presented for
purposes of making operating decisions and assessing financial performance. The
financial information is identical to the information presented in the
accompanying consolidated statements of operations and the Company had no
significant foreign operations through December 31, 1999. For the three months
ended September 30, 2001 and 2000, revenues derived from customers outside the
United States, principally in Europe, Asia and Latin America, represented 38%
and 19% of consolidated revenues, respectively. For the nine months ended
September 30, 2001 and 2000, revenues derived from customers outside the United
States represented 28% and 19% of consolidated revenues, respectively. On this
basis, the Company is organized and operates in a single segment: the design,
development and marketing of software applications.

Note 9.  Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Accounting for changes in the values of those derivatives depends on the
intended use of the derivatives and whether they qualify for hedge accounting.
SFAS 133, as amended by SFAS 137 and SFAS 138, was adopted as of January 2001.
The Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the adoption of the new standard
did not effect the consolidated financial statements.

                                       9

<PAGE>

     In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.

     The Company is required to adopt the provisions of Statement 141
immediately, and Statement 142 effective January 1, 2002. Furthermore, goodwill
and intangible assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but before
Statement 142 is adopted in full will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. The Company believes that the adoption of Statements 141
and 142 will not affect its consolidated financial statements.

     In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required and
plans to adopt the provisions of Statement No. 143 for the quarter ending March
31, 2003. The Company believes that the adoption of Statement No. 143 will not
affect its consolidated financial statements.

     On October 3, 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Statement 144 is effective for the Company on
January 1, 2002. The Company believes that the adoption of Statement 144 will
not affect its consolidated financial statements.

                                       10

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

     The following discussion of the financial condition and results of
operations of Blue Martini Software should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and the Notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000. This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
("Securities Act"), and Section 21E of the Securities Exchange Act of 1934
("Exchange Act"), as amended, including statements using terminology such as
"can," "may," "believe," "designated to," "will," "expect," "plan,"
"anticipate," "estimate," "potential," or "continue," or the negative thereof or
other comparable terminology regarding beliefs, plans, expectations or
intentions regarding the future. Forward-looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
the forward-looking statements. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligation to update any forward-looking statement or risk factors.

Overview

     Blue Martini Software competes in the external Customer Relationship
Management (eCRM) market and provides enterprise software applications and
services that enable companies to understand, target and interact with their
customers and business partners across multiple touch points, including
websites, mobile wireless devices, cellular phones, e-mail and online
marketplaces. Our products' analytic capabilities are designed to allow
companies to develop insights regarding customer behavior, and then use these
insights to provide customers with relevant products, content and offerings.

     Blue Martini Software's comprehensive packaged applications are designed to
offer extensive capabilities out-of-the-box, enabling companies to implement
eCRM solutions quickly and accelerate their time to benefit. Our application
suite is designed to be business-user friendly, allowing non-technical employees
to manage the day-to-day online content, campaigns and programs. In addition,
our application suite is extensible, thereby allowing developers to create
differentiating capabilities.

     Blue Martini Software's target customers include senior sales, marketing,
information technology and service executives in larger, established companies.
We primarily target our products to the manufacturing, retail, financial
services and consumer goods industries. As of September 30, 2001, we had
licensed our software applications to more than 100 customers worldwide.

     We recognize revenues in accordance with Statement of Position ("SOP")
97-2, Software Revenue Recognition, as modified by SOP 98-9. SOP 97-2, as
modified, generally requires revenue earned on software arrangements involving
multiple elements such as software products, upgrades, enhancements, post
contract customer support ("PCS"), installation, training, etc. to be allocated
to each element based on the relative fair values of the elements. The fair
value of an element must be based on evidence that is specific to the vendor. If
evidence of fair value does not exist for all elements of a license agreement
and PCS is the only undelivered element, then all revenues for the license
arrangement is recognized ratably over the term of the agreement. If evidence of
fair value of all undelivered elements exists but evidence does not exist for
one or more delivered elements, then revenue is recognized using the residual
method. Under the residual method, the fair value of the undelivered elements is
deferred, and the remaining portion of the arrangement fee is recognized as
revenue.

                                       11

<PAGE>

     Our revenues are derived from the licensing of our application suite and
the sale of related services. The license agreement for our application suite
typically provides for an initial fee to use the software in perpetuity. License
revenues are recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or determinable and
collectibility is probable, assuming no significant future obligations or
customer acceptance rights exist. If an acceptance period is contractually
provided, revenues are recognized upon the earlier of customer acceptance or the
expiration of that period. In instances where delivery is electronic and all
other criteria for revenue recognition have been achieved, the product is
considered to have been delivered when the customer either takes possession by
downloading the software or the access code to download the software has been
provided to the customer. Payments received in advance of revenue recognition
are recorded as deferred revenues.

     Services revenues are principally derived from consulting services,
technical support and training. Our maintenance agreements entitle customers to
receive software updates, maintenance releases and technical support.
Maintenance is typically paid in advance and the related revenues are deferred
and recognized ratably over the term of the maintenance contract, which is
typically one year. A majority of our customers use systems integrators to
implement our product. Consulting services and training are typically sold on a
time-and-materials basis and revenues from these services are recognized when
the services are performed and collectibility is deemed probable.

     We market our application suite through a direct sales force. We also
engage in alliances with systems integrators and technology vendors to assist us
in marketing and selling our application suite and related services. While our
revenues to date have been derived principally from customers in the United
States, international revenues accounted for 38% and 28% of our revenues for the
three and nine months ended September 30, 2001, respectively. For the three and
nine months ended September 30, 2000, international revenues accounted for 19%
of our total revenues. We believe international revenues will represent a
significant portion of our total revenues in the future but may fluctuate as a
percentage of total revenues in the near term as we build out our international
presence. Although we have a limited operating history, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our customers' fiscal year, budgeting
cycles, sales incentive plans, slow summer purchasing patterns and general
economic conditions in markets where we conduct business.

     To date, we have derived a significant portion of our revenues from a small
number of customers. No one customer accounted for more than 10% of our total
revenues for the quarters ended September 30, 2001 and 2000. While we do not
anticipate that any one customer will represent more than 10% of total revenues
in 2001, we do expect that a limited number of customers will continue to
account for a substantial portion of our license revenues in a given quarter. As
a result, if we lose a major customer or if anticipated significant license
contracts are delayed or cancelled, our revenues and operating results in a
particular quarterly period would be adversely affected. In addition, customers
that have accounted for significant revenues in the past may not generate
revenues in any future period. If we fail to obtain a significant number of new
customers or additional orders from existing customers in any period, our
business and operating results would be harmed.

     We believe our success requires expanding our customer base, growing our
relationships with consulting and system integrator partners and continuing to
enhance our application. There can be no assurance that we will be successful in
accomplishing any of these goals. We currently expect to incur a net loss in the
quarter ending December 31, 2001. Our operating expenses are based in part on
our expectations of future revenues and are relatively fixed in the short term.
As such, a delay in completion of new customer license contracts or the
recognition of revenues from one or more license contracts could cause
significant variations in our operating results from quarter to quarter and
could result in net losses in a given quarter being greater than expected.

                                       12

<PAGE>

Results of Operations

     The following table presents selected financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
                                                 Three Months Ended               Nine Months Ended
                                                   September  30,                   September 30,
                                               -----------------------        -------------------------
                                                 2001           2000             2001            2000
                                               ---------      --------        ---------       ---------
<S>                                                <C>          <C>              <C>             <C>
Revenues:
   License                                          30%           57%              37%             57%
   Service                                          70            43               63              43
                                              --------      --------        ---------       ---------
         Total revenues                            100           100              100             100
                                              --------      --------        ---------       ---------
Cost of revenues:
   License                                           8             5                7               5
   Service                                          70            55               70              61
                                              --------      --------        ---------       ---------
         Total cost of revenues                     78            60               77              66
                                              --------      --------        ---------       ---------
         Gross profit                               22            40               23              34
                                              --------      --------        ---------       ---------
Operating expenses:
   Sales and marketing                              80            71               85              78
   Research and development                         34            28               34              32
   General and administrative                       17            29               29              30
   Restructuring charges                            37             -               13               -
                                              --------      --------        ---------       ---------
         Total operating expenses                  168           128              161             140
                                              --------      --------        ---------       ---------
         Loss from operations                     (146)          (88)            (138)           (106)
Interest income and other, net                      13             9               11               4
                                              --------      --------        ---------       ---------
         Net loss                                 (133)%         (79)%           (127)%          (102)%
                                              =========     ========        =========       =========
</TABLE>

Revenues

     License. License revenues decreased from $12.0 million for the three months
ended September 30, 2000 to $3.4 million for the three months ended September
30, 2001. For the nine months ended September 30, 2001, license revenues
decreased to $17.4 million from $26.5 million for the comparable period in 2000.
The decreases in license revenues for the three and nine month periods ended
September 30, 2001 as compared to the comparable periods in 2000 were due to a
decrease in software licenses to new customers. We believe that current economic
conditions have resulted in decreased demand in our target markets, and in
particular, we have experienced an increase in the average length of our sales
cycles as compared to prior years. The future direction of the overall domestic
and global economies will have a significant impact on our overall performance.
To the extent that the current downturn continues or increases in severity, we
believe demand for our products and services, and therefore future revenues,
will be reduced as compared to prior periods.

     Service. Service revenues decreased from $9.1 million for the three months
ended September 30, 2000 to $7.9 million for the three months ended September
30, 2001. The decrease in service revenues for the three months ended September
30, 2001 as compared to the same period in 2000 was due to a reduction in the
number of license contracts signed in the preceding quarters, partially offset
by an increase in maintenance revenues. For the nine months ended September 30,
2001, service revenues increased to $30.0 million from $20.3 million for the
comparable period in 2000. The increase in service revenues for the nine months
ended September 30, 2001 as compared to the same periods in 2000 was due to an
increase in the number of customers under maintenance agreements and an increase
in the total number of consulting service engagements. We expect that our
service revenues will fluctuate as a percentage of total revenues. Service
revenues are anticipated to decrease as a percentage of total revenues over the
long term as systems integrators and other professional services organizations
provide the consulting services, technical support and training that we
currently provide. A reduction in the number of application suite licenses to
new or existing customer will impact services and will result in lower revenues
from our customer training, consulting services and technical support
organizations.

                                       13

<PAGE>

Cost of Revenues

     License. Cost of license revenues consists of royalties payable to third
parties and amortization of purchased intangibles for software that is either
embedded in or bundled with our products. Cost of license revenues decreased
from $1.0 million for the three months ended September 30, 2000 to $0.9 million
for the three months ended September 30, 2001. These amounts represented 9% of
license revenues in 2000 and 26% in 2001. The decrease in cost of licenses in
absolute dollar terms for the three months ended September 30, 2001 as compared
to the same period in 2000 was due to a decrease in our license revenues,
partially offset by higher amortization of purchased intangible assets. For the
nine months ended September 30, 2001, cost of license revenues increased to $3.2
million from $2.3 million for the comparable period in 2000. These amounts
represented 19% and 9% of license revenues for these periods. The increase in
cost of licenses in absolute dollar terms for the nine months ended September
30, 2001 as compared to the same periods in 2000 was principally the result of
amortization of certain intangible assets acquired in December 2000. Our cost of
licenses, when expressed in absolute dollar terms, will be impacted by our
license revenues. Increases or decreases in license revenues will cause cost of
license revenues to increase or decrease, respectively. In addition, to the
extent license revenues increase, we expect cost of license revenues to increase
in absolute dollars but to decline slightly as a percentage of license revenues
as a result of royalty agreements that typically contain declining royalty
rates.

     Service. Cost of service revenues consists primarily of salaries and other
personnel-related expenses, amortization of deferred stock compensation and
depreciation of equipment used to provide consulting services, technical support
and training. Cost of services decreased from $11.6 million for the three months
ended September 30, 2000 to $7.9 million for the three months ended September
30, 2001, and represented 128% of service revenues in 2000 and 100% in 2001. The
decrease in absolute dollars for the three month periods ended September 30,
2001 as compared to the same periods in 2000 was primarily due to the
cost-saving actions implemented in March 2001 and July 2001. For the nine months
ended September 30, 2001, cost of services increased to $33.2 million from $28.3
million for the comparable period in 2000, and represented 111% of service
revenues in 2001 and 140% in 2000. The increase in absolute dollars for the nine
month period ended September 30, 2001 as compared to the same period in 2000
resulted from the expansion of our consulting services, technical support and
training organizations to support the growth in new licenses, partially offset
by a decrease in the amortization of deferred stock compensation. Because our
cost of service revenues are relatively fixed, our cost of services, when
expressed as a percentage of related service revenues, may fluctuate in the near
term, based primarily on our related service revenues.

Operating Expenses

     Sales and Marketing. Sales and marketing expenses consist primarily of the
costs of our direct sales and marketing personnel, amortization of deferred
stock compensation, as well as costs of marketing programs including trade
shows, advertisements, promotional activities and media events. Sales and
marketing expenses decreased from $14.8 million for the three months ended
September 30, 2000 to $9.0 million for the three months ended September 30,
2001. The decrease for the three-month period ended September 30, 2001 as
compared to the same period in 2000 was primarily due to lower spending on
marketing and advertising programs and the cost-saving actions implemented in
March 2001 and July 2001. For the nine months ended September 30, 2001,
marketing and sales expenses increased to $40.2 million from $36.2 million for
the comparable period in 2000. The increase for the nine month period ended
September 30, 2001 as compared to the same period in 2000 was primarily
attributable to an increase in sales and marketing personnel expenses and
increased spending for marketing and advertising programs, partially offset by a
decrease in sales commissions and amortization of deferred stock compensation.

                                       14

<PAGE>

     Research and Development. Research and development expenses consist
primarily of salaries and related expenses for engineering personnel,
amortization of deferred stock compensation, costs of contractors and
depreciation of equipment used in the development of our software application.
Research and development expenses decreased from $5.8 million for the three
months ended September 30, 2000 to $3.8 million for the three months ended
September 30, 2001. The decrease for the three month period ended September 30,
2001 as compared to the same period in 2000 was primarily due to staff
reductions resulting from the restructuring actions we implemented in March 2001
and July 2001 and a reduction in the amortization of deferred stock
compensation. For the nine months ended September 30, 2001, research and
development expenses increased to $16.2 million from $15.2 million for the
comparable period in 2000. The growth in expenses for the nine months ended
September 30, 2001 as compared to the comparable period in 2000 was primarily
due to an increase in personnel-related expenses resulting from the addition of
engineering personnel to support the development and enhancement of our products
and an increase in professional fees related to product development activities,
partially offset by a decrease in the amortization of deferred stock
compensation.

     General and Administrative. General and administrative expenses include
costs associated with our finance, human resources, legal, information systems
and other administrative functions and consist principally of salaries and
related expenses, professional fees, amortization of deferred stock
compensation, provisions for doubtful accounts and depreciation. General and
administrative expenses decreased from $6.2 million for the three months ended
September 30, 2000 to $1.9 million for the three months ended September 30,
2001. For the nine months ended September 30, 2001, general and administrative
expenses decreased to $13.9 million from $14.1 million for the comparable period
in 2000. The decrease in general and administrative expenses for the three and
nine months ended September 30, 2001 as compared to the comparable periods in
2000 were primarily due to the cost-saving actions implemented in March 2001 and
July 2001, decreased amortization of deferred stock compensation and a decrease
in the provision for doubtful accounts, partially offset by an increase
in depreciation expense.

     Restructuring charges. During the quarter ended March 31, 2001, we
initiated actions resulting in recognition of a $2.1 million restructuring
charge. This charge included $1.3 million for the cancellation of facility
leases and $0.7 million for severance payments to employees involuntarily
terminated and $0.1 million for the write-down of certain operating assets to be
disposed of. These restructuring actions resulted in the termination of
approximately 70 employees. Asset write-downs were recorded for the net book
value of operating assets consisting principally of personal computer equipment
that were abandoned during the quarter ended March 31, 2001 as a result of the
staff reductions.

     In July 2001, we announced and began to implement a supplemental
restructuring plan designed to reduce costs and preserve cash. The supplemental
restructuring plan consisted of terminating approximately 130 full-time
employees; canceling or vacating certain facility leases as a result of those
employee terminations and writing off the unamortized costs of abandoned assets.
The total cost of these actions resulted in a restructuring charge of $4.2
million during the quarter ended September 30, 2001. Of the restructuring charge
approximately $1.0 million related to employee severance, $1.8 million related
to the consolidation of facilities and $1.4 million related to asset write-downs
representing the net book value of personal computer equipment and leasehold
improvements abandoned as a result of the staff reductions.

     We anticipate paying restructuring related costs of approximately $0.7
million during the quarter ending December 31, 2001 and $0.4 million in 2002.

                                       15

<PAGE>

     During the quarter ended September 30, 2001, the Company evaluated the
future usage of its computer network infrastructure in light of current
operating activities. After this evaluation, management committed to a plan of
disposal for certain of these assets, and accordingly, has classified these
assets as held for disposal and recorded an impairment loss of $586,000, which
is included in marketing and sales, research and development and general and
administrative expenses, in the accompany condensed consolidated statements of
operations for the three and nine months ended September 30, 2001. The carrying
value of the assets at September 30, 2001 is $42,000 and are included in other
assets in the accompanying condensed consolidated balance sheet as of September
30, 2001. Depreciation of these assets has ceased and it is expected that the
assets will be disposed of by December 31, 2001.

     Stock Compensation. Deferred stock compensation represents the difference
between the exercise price of stock option grants to employees and the deemed
fair value of our common stock at the time of those grants. We recorded deferred
stock compensation of $2.2 million for the period from inception to December 31,
1998, $10.4 million in 1999 and $50.6 million in 2000. We are amortizing
deferred stock compensation to expense over the period during which the stock
options vest, generally four years, using an accelerated method allowed by
generally accepted accounting principles. Such amortization amounted to $950,000
and $8.8 million for the three months ended September 30, 2001 and September 30,
2000, respectively, and $10.5 million and $20.7 million for the nine months
ended September 30, 2001 and 2000, respectively. Amortization expense for the
three and nine months ended September 30, 2001 was reduced by $3.1 million and
$5.7 million, respectively, to reflect adjustments associated with unvested
options forfeited by terminated employees.

     During the nine months ended September 30, 2001 and the comparable period
in 2000, we granted and immediately vested, stock options to non-employees. In
connection with these grants, we recorded non-cash compensation expense of
$56,000 for the nine months ended September 30, 2001 and $1.4 million for the
comparable period in 2000. This reflects the fair value of these stock options
based on the Black-Scholes option-pricing model.

     The net amortization of deferred stock compensation, and the expense
associated with stock options granted to non-employees is summarized in the
table below, the amounts reported for the following items in the accompanying
consolidated statement of operations are net of adjustment to reduce expenses
for unvested options forfeited by terminated employees:

<TABLE>
<CAPTION>
                                          Three Months Ended               Nine Months Ended
                                             September 30,                   September 30,
                                      -------------------------      ---------------------------
(In thousands)                            2001            2000            2001             2000
                                      -----------    ----------      ----------       ----------
<S>                                        <C>            <C>            <C>               <C>
Cost of revenues                        $  1,409         2,079        $  3,322         $  5,173
Sales and marketing                         (30)         1,916           1,600            5,220
Research and development                   (105)         1,784           1,150            5,157
General and administrative                 (324)         3,010           4,526            6,581
                                        --------      ---------       ---------       ----------
                                        $   950       $  8,789        $ 10,598         $ 22,131
                                        ========      =========       =========       ==========
</TABLE>

     Amortization of deferred stock compensation is estimated to total $12.7
million for 2001, $5.5 million for 2002, $1.9 million for 2003 and $0.1 million
for 2004. Amortization of deferred stock compensation will be reduced in future
periods to the extent options are terminated prior to being vesting.

                                       16

<PAGE>

Interest Income and Other, Net

     Interest income and other, net consists of interest income from cash, cash
equivalents and available-for-sale investments partially offset by interest
expense associated with capital leases and foreign currency transaction gains
and losses. Interest income and other, net decreased from $1.8 million for the
three months ended September 30, 2000 to $1.5 million for the three months
September 30, 2001. The decrease resulted from lower average balance of cash and
investments and a decrease in interest rates in 2001 as compared to the some
period in 2000. For the nine months ended September 30, 2001, interest income
and other, net increased to $5.2 million from $2.0 million in the comparable
period in 2000. The increase was due primarily to higher balances of cash, cash
equivalents and investments as a result of our initial public offering in July
2000. Foreign currency transaction losses for the three and nine months ended
September 30, 2001 were $5,000 and $227,000, respectively. For the three and
nine months ended September 30, 2000, foreign currency transaction gains and
losses were immaterial.

Income Taxes

     From inception to September 30, 2001, we have incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. Because of our limited operating history, our losses incurred to date
and the difficulty in accurately forecasting our future results, management does
not believe that the realization of the related deferred income tax asset meets
the criteria required by generally accepted accounting principles. Therefore, we
have recorded a 100% valuation allowance against the deferred income tax assets.

Liquidity and Capital Resources

     As of September 30, 2001, we had cash, cash equivalents and short-term
investments of approximately $104.8 million.

     For the nine months ended September 30, 2001, net cash used in operating
activities was $43.2 million compared to $1.7 million in the comparable period
of 2000. Net cash used in operating activities for the first nine months of 2001
and for the comparable period in 2000 was primarily the result of net losses of
$60.4 million and $47.4 million, respectively, which included amortization of
deferred stock compensation, warrants and intangible assets of $14.7 million for
the first nine months of 2001 and $23.8 million for the comparable period in
2000.

     Net cash of $21.4 million was provided by investing activities for the nine
months ended September 30, 2001 resulting from maturities of available-for-sale
investments, partially offset by cash used to purchase computer hardware and
software, office furniture and equipment and intangible assets. For the nine
months ended September 30, 2000, net cash used for investing activities was
$54.5 million and principally related to the purchase of short and long-term
investments, and to purchase computer hardware and software, office furniture
and equipment.

     Net cash provided by financing activities was $3.2 million for the nine
months ended September 30, 2001 and $162.3 million for the comparable period in
2000. The cash provided by financing activities for the nine months ended
September 30, 2001 was principally related to proceeds from shares issued under
our stock option and employee stock purchase plans. The cash provided by
financing activities for the first nine months of 2000 was principally related
to the net proceeds received from our initial public offering of common stock in
July 2000, net of issuance costs.

                                       17

<PAGE>

     In March 2001, we initiated cost-saving actions resulting in recognition of
a $2.1 million restructuring charge. As of September 30, 2001, these cost-saving
actions were substantially complete and included total cash payments of $1.8
million, principally for employee severance and lease cancellation fees. In July
2001, we announced and began to implement a supplemental restructuring plan
designed to reduce costs and preserve cash that resulted in a restructuring
charge of $4.2 million recorded during the quarter ended September 30, 2001.
Through September 30, 2001, the supplemental restructuring plan had resulted in
total cash payments of approximately $1.8 million. Payments of approximately
$1.1 million associated with remaining lease liabilities for abandoned
facilities as a result of the staff reductions will continue through 2002. See
Note 5 to the condensed consolidated financial statements for a further
discussion of our restructuring charges.

     Our liquidity, capital resources and results of operations in any period
could be impacted by the exercise of outstanding stock options and warrants. For
example, at September 30, 2001, we had outstanding options to purchase 14.0
million shares of our common stock at a weighted average exercise price of $5.51
per share, and had approximately 13.4 million additional shares reserved for
future grant under our stock option plans. In addition, we have issued warrants
which are now exercisable to purchase 2.4 million shares of common stock at an
weighted average exercise price of $1.31 per share. Accordingly, our liquidity
and capital resources may be impacted in future periods by cash proceeds upon
exercise of these securities and from securities reserved for future issuance
under our stock option plans. In addition, our per share results of operations
could also be impacted by the increased number of outstanding shares. However,
we cannot predict the timing or amount of proceeds from the exercise of these
securities, if they are exercised at all.

     We expect that for the foreseeable future, our operating expenses and
planned capital expenditures will constitute a significant use of our cash
balances. In addition, we may use cash to fund acquisitions or invest in other
businesses, technologies or product lines. We currently anticipate that our
existing cash and investments will be sufficient to meet our presently
anticipated working capital, capital expenditure and our operating requirements
for at least the next twelve months. However, we may require additional funds
either within this time period or at some future date. We may seek to raise
these additional funds through public or private debt or equity financing to
meet these additional working capital requirements. There can be no assurance
that this additional financing will be available, or if available, will be on
reasonable terms and not dilutive to our stockholders. If adequate funds are not
available on acceptable terms, our business and operating results could be
adversely affected. If we were to seek additional financing today, we do not
believe it would be available on reasonable terms.

Factors That May Impact Future Operating Results

Our short operating history makes it difficult to evaluate our business and
prospects.

     You must consider our business and prospects given the risks, expenses and
challenges we might encounter because we are at an early stage of development in
a new and rapidly evolving market. We were founded in June 1998 and licensed our
first software product in late March 1999, and our sales and service
organizations are new. Due to our short operating history, our future financial
performance is not predictable and may not meet analyst projections for revenues
or other operating results, thereby disappointing investors and resulting in a
significant decline in our stock price.

                                       18

<PAGE>

We have incurred losses during our operating history and expect losses to
continue for the foreseeable future and we may not achieve or maintain
profitability.

     We have incurred net losses in each quarterly period since our inception.
As of September 30, 2001, we had an accumulated deficit of $135.0 million. We
expect to continue to incur losses on both a quarterly and annual basis for the
foreseeable future. Moreover, we expect to continue to incur significant costs
of services as well as substantial operating expenses. Further, we will incur
substantial stock compensation expense in future periods, which represents
non-cash charges incurred due to the issuance of stock options prior to the
closing of our initial public offering on July 28, 2000. Therefore, we will need
to significantly increase our revenues to achieve and maintain profitability and
a positive cash flow. We may not be able to generate sufficient revenues to
achieve profitability.

The current economic downturn has significantly impacted demand for our products
and services and may adversely impact future revenues.

     The existence or even the anticipation by potential customers of economic
downturns in the markets in which we operate has in the quarter ended September
30, 2001 and may continue in future periods to decrease the demand for our
applications, cause pricing pressures for our products and substantially reduce
our sales activity. For the quarter ended September 30, 2001, we signed five new
license contracts which represented a decrease from the number of new license
contracts signed in prior quarters. As a result of current macroeconomic
conditions, customers have during the quarter ended September 30, 2001 postponed
or cancelled, and may continue in future periods to unexpectedly postpone or
cancel, planned eCRM projects, including the evaluation and purchase of new
applications or upgrades to existing applications.

     Because our budgeting and forecasting are dependent upon estimates of
revenue growth in the markets we target, the prevailing economic uncertainty
renders estimates of anticipated license contract signings and future revenues
difficult to make. The future performance of the overall domestic and global
economies will have a significant impact on our overall performance. To the
extent that the current downturn continues or increases in severity, or results
in a similar downturn worldwide, we believe demand for our products and
services, and therefore future revenues, could be further reduced.

Our product has a long and variable sales cycle, which makes it difficult to
predict our future results and may cause our operating results to vary
significantly.

     Our revenues and results of operations are difficult to predict and may
fluctuate substantially from quarter to quarter. For example, certain indicators
that we relied upon in developing our license revenue forecasts, such as our
historical pattern of transaction timing and anticipated sales cycles, did not
prove reliable during the first nine-months of 2001. Despite engaging with a
number of customer prospects during this period, we continued to see extended
sales cycles and postponed customer IT spending. To the extent that there
continues to be uncertainty or perceived uncertainty in global economies, we
believe our operating results could be materially and adversely affected.

     The period between initial contact with a prospective customer and the
licensing of our application suite varies and can range from three to more than
twelve months. The timing of revenues from the licensing of our application
suite is difficult to forecast for a variety of reasons, including the following
factors:

     o   A significant portion of our license agreements are completed within
         the last few weeks of each quarter. Recently, this pattern has become
         more pronounced, and as a result, any revenue shortfalls for a
         quarterly period may not be known until late in the quarter;

                                       19

<PAGE>

     o   Our sales cycle is long and complex as customers consider a number of
         factors before committing to purchase our application suite. Factors
         considered by customers when evaluating our application suite include
         product benefits, cost and time of implementation, ability to operate
         with existing and future computer systems and the ability to
         accommodate increased transaction volume and product reliability. As a
         result, we spend significant time and resources informing prospective
         customers about our application suite, which may not result in a
         completed transaction and impact our operating margins;

     o   Because the licensing of our application suite is often an
         enterprise-wide decision by our customers that involves many factors,
         our ability to license our product may be impacted by changes in the
         strategic importance of eCRM projects to our customers, budgetary
         constraints or changes in customer personnel;

     o   The contract value of individual license agreements can vary
         significantly, therefore, delays in the signing of one or more large
         license agreements or the loss of a significant customer order could
         have a material impact on our revenues and results of operations
         because a substantial portion of our quarterly revenues are derived
         from a small number of customers;

     o   The existence or even the anticipation by potential customers of
         economic downturns in the markets in which we operate has in the
         quarter ended September 30, 2001 and may continue in future periods to
         decrease the demand for our applications, cause pricing pressures for
         our products and substantially reduce our sales activity. As a result
         of these macroeconomic conditions, customers have during the quarter
         ended September 30, 2001 and may continue in future periods to
         unexpectedly postpone or cancel planned eCRM projects, including the
         evaluation and purchase of new applications or upgrades to existing
         applications;

     o   Customer evaluation, purchasing and budgeting processes vary
         significantly from company to company, and a customer's internal
         approval and expenditure authorization process can be difficult and
         time consuming. Delays in approvals, even after selection of a vendor,
         could impact the timing and amount of revenues recognized in a
         quarterly period;

     o   Changes in our sales incentive plans may have an unpredictable impact
         on our sales cycle and contracting activities; and

     o   The number, timing and significance of enhancements to our application
         suite and the introduction of new software by our competitors and us
         may affect customer-purchasing decisions.

     Several factors may require us to defer recognition of license revenue for
a significant period of time after entering into a license agreement, including
instances where we are required to deliver either unspecified additional
products or specified upgrades for which we do not have
vendor-specific-objective-evidence of fair value. While we have a standard
software license agreement that provides for revenue recognition provided that
delivery has taken place, collectibility from the customer is probable and
assuming no significant future obligations or customer acceptance rights exist,
customer negotiations and revisions to these terms could impact our ability to
recognize revenues at the time of delivery. Also, the additional time needed to
negotiate mutually acceptable terms that culminate in an agreement to license
our application suite could also extend the sale cycle.

     Slowdowns or variances from internal expectations in our quarterly license
contracting activities may impact our service offerings and may result in lower
revenues from our customer training, consulting services and technical support
organizations. Our ability to maintain or increase service revenues is highly
dependent on our ability to increase the number of license agreements we enter
into with customers.

     Because our operating expenses are based on our expectations for future
revenues and are relatively fixed in the short term, any revenue shortfall below
expectations could have an immediate and significant adverse effect on our
consolidated results of operations and financial condition.

                                       20

<PAGE>

Cost-reduction efforts may not result in anticipated savings and may adversely
impact our productivity and service levels.

     We announced reductions in our workforce of approximately 13% in March 2001
and 25% in July 2001 and instituted various cost control measures. These cost
control efforts involve various aspects of our business operations. Given
current economic conditions and our declining revenues over the last several
quarters, we may be required to take additional cost saving actions to reduce
our losses and to conserve cash. The failure to achieve these cost savings could
have a material adverse effect on our financial condition. Moreover, even if we
are successful with these efforts and generate the anticipated cost savings,
there can be no assurance that these actions will not adversely impact our
employee morale and productivity and our business and results of operations.

Because a small number of customers have accounted, and are likely to continue
to account, for a substantial portion of our revenues, our revenues could
decline due to the loss or delay of a single customer order.

     A relatively small number of customers account for a significant portion of
our total quarterly revenues. The loss or delay of individual orders could have
a significant impact on revenues and operating results. Three customers
accounted for 19% of our revenues for the three-month period ended September 30,
2001, while in the same period of 2000, three customers accounted for 25% of our
total revenues. We expect that revenues from a limited number of new customers
will continue to account for a large percentage of total revenues in future
periods. Our ability to attract new customers will depend on a variety of
factors, including the performance, quality, breadth, depth and price of our
current and future products. Our failure to add new customers that make
significant licenses of our application suite and services would reduce our
future revenues.

     We record as deferred revenues payments from customers that do not meet our
revenue recognition policy requirements. Since some of our quarterly revenues
are recognized from deferred revenues, our quarterly results will depend
primarily upon entering into new agreements to generate revenues for that
quarter. New agreements may not result in revenues in the quarter in which the
agreement was signed and commissions and royalties may become payable, and we
may not be able to predict accurately when revenues from these agreements will
be recognized. Similarly, declines in deferred revenues from prior quarters may
disappoint investors and could result in a significant decline in our stock
price. We expect the level of our deferred revenues to fluctuate in future
periods.

All of our revenues to date have been derived from the licensing of our
application suite and the sale of related services, and if we fail to
successfully upgrade or enhance our application suite and introduce new
products, our revenues would decline.

     All of our revenues to date have been derived from the licensing of our
application suite and the sale of related services. For the nine months ended
September 30, 2001, 37% of our total revenues were derived from the licensing of
our application suite as compared to 57% in the same period of 2000. Since
introducing our products in March 1999, license revenues have accounted for half
of our total revenues. The decrease in the percentage of revenues derived from
license sales for the nine months ended September 30, 2001 resulted primarily
from a decrease in the license sales when compared to the same period ended
September 30, 2000 and an increases in service revenues for the same period. Our
future revenues will depend, in significant part, on our successful development
and license of new and enhanced versions of our application suite and of other
new products. If we are not able to successfully develop new products or these
new products do not achieve market acceptance, our revenues would be reduced.

                                       21

<PAGE>

We may not be able to maintain our competitive position against current and
potential competitors

     We compete in the highly competitive eCRM market which is subject to rapid
technological change. We compete with providers of stand-alone point solutions
such as BroadVision, Inc., E.phipany, Inc. and Vignette Corporation. We also
compete with component vendors such as Art Technology Group, Inc. and Microsoft
Corporation. Our competitors also include enterprise resource planning software,
customer relationship management software and supply chain software vendors such
as Oracle Corp., PeopleSoft, Inc., SAP AG, Seibel Systems, Inc. and i2
Technologies, Inc. Another principle source of competition is from internal
information technology departments at potential customers which may develop
systems that provide for some or all of the functionality of our applications.

     Compared to us, many of these competitors have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial resources. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. Competitive pressures and our
perceived viability in this market may make it difficult for us to acquire and
retain customers, and it may require us to reduce the price of our products
which could reduce our revenues and result in increased operating losses.

We are the target of several securities class action complaints and are at risk
of securities class action litigation, which could result in substantial costs
and divert management attention and resources.

     During July 2001, several securities class action complaints were filed
against us, the underwriters of our initial public offering, our directors and
certain of our officers in the United States District Court for the Southern
District of New York. The complaint alleges that the underwriters entered into
certain arrangements with investors in connection with our initial public
offering, and that these alleged arrangements should have been and were not
disclosed in the registration statement and prospectus. The complaints seek
unspecified monetary damages and attorneys fees and other costs. We expect that
these cases will be consolidated into a single case. The Company believes that
it has meritorious defenses against the lawsuits and intends to defend itself
vigorously.

     In addition, in the past, other types of securities class action litigation
have been brought against companies following a decline in the market price of
their securities. This risk is especially acute for us because technology
companies have experienced greater than average stock price volatility in recent
years, particularly since mid-2000 and, as a result, technology companies have
been subject to a greater number of securities class action claims than
companies in other industries. We may in the future be the target of additional
securities class action litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
harm our business.

Our failure to develop and maintain strong relationships with consulting and
system integrator firms (CSIs) would harm our ability to market our application
suite, which could reduce future revenues and increase our expenses.

     A significant portion of our sales are influenced by the recommendation of
our application suite by systems integrators, consulting firms and other third
parties that help deploy our application suite for our customers. Losing the
support of these third parties may limit our ability to penetrate our existing
or potential markets. These third parties are under no obligation to recommend
or support our application suite and could recommend or give higher priority to
the products and services of other companies or to their own products. Our
inability to gain the support of CSIs or a shift by these companies toward
favoring competing products could negatively affect our software license and
service revenues.

                                       22

<PAGE>

     Some CSIs also engage in joint marketing and sales efforts with us. If our
relationships with CSIs fail, we will have to devote substantially more
resources to the sales and marketing of our application suite. In many cases,
these parties have extensive relationships with our existing and potential
customers and influence the decisions of these customers. A number of our
competitors have longer and more established relationships with these CSIs than
we do, and as a result these CSIs may be more likely to recommend competitors'
products and services and increase our expenses.

Our failure to develop and maintain strong relationships with systems
integrators would harm our ability to implement our application suite.

     Systems integrators assist our customers with the installation and
deployment of our application suite, in addition to those products of our
competitors, and perform custom integration of computer systems and software. If
we are unable to develop and maintain relationships with systems integrators, we
would be required to hire additional personnel to install and maintain our
application suite, which would result in delays in our ability to recognize
revenue and higher expenses.

If our application suite does not successfully function for customers with large
numbers of transactions, customers or product offerings, we may lose sales and
suffer decreased revenues.

     Our application suite must be able to accommodate a large number of
transactions, customers and product offerings. Large-scale usage presents
significant technical challenges that are difficult or impossible to predict. To
date, our application suite has been deployed by only a limited number of
customers and, therefore, we cannot assure you that our application suite is
able to meet our customers' demands for large-scale usage. If our customers
experience difficulty with our application suite during periods of high traffic
or usage, it could damage our reputation and reduce our revenues.

If our product does not operate with a wide variety of hardware, software and
operating systems used by our customers, our revenues would be harmed.

     We currently serve a customer base that uses a wide variety of constantly
changing hardware, software applications and operating systems. Our application
suite will only gain broad market acceptance if it can support a wide variety of
hardware, software applications and systems. If our product is unable to support
a variety of these products, our revenues would be harmed. Our business depends
on the following factors, among others:

     o   our ability to integrate our application suite with multiple hardware
         systems and existing software systems and to modify our product as new
         versions of packaged applications are introduced;

     o   our ability to anticipate and support new standards, especially
         Internet-based standards;

     o   our ability to integrate additional software modules under development
         with our existing application suite; and

     o   Defects in our application suite could diminish demand for our
         application suite and result in loss of revenues, decreased market
         acceptance, injury to our reputation and product liability claims.

     We have in the past discovered software errors and performance problems
with our application suite after commencement of commercial shipment, and as a
result, have experienced injury to our reputation, increased expenses, delays in
the shipment of our application suite and our customers have experienced
difficulty in deploying and operating our application suite.

     Errors in our application suite may be caused by defects in third-party
software incorporated into our application suite. If so, we may not be able to
fix these defects without the cooperation of these software providers. Since
these defects may not be as significant to our software providers as they are to
us, we may not receive the rapid cooperation that we may require. We may not
have the contractual right to access the source code of third-party software
and, even if we access the source code, we may not be able to fix the defect.

                                       23

<PAGE>

     Since our customers use our application suite for critical business
applications such as e-commerce, any errors, defects or other performance
problems of our application suite could result in damage to the businesses of
our customers. Consequently, these customers could delay or withhold payment to
us for our software and services, which could result in an increase in our
provision for doubtful accounts or an increase in collection cycles for accounts
receivable, both of which could disappoint investors and result in a significant
decline in our stock price. In addition, these customers could seek significant
compensation from us for their losses. Even if unsuccessful, a product liability
claim brought against us would likely be time consuming and costly and harm our
reputation, and thus our ability to license to new customers. Even if a suit is
not brought, correcting errors in our application suite could increase our
expenses.

If we fail to introduce new versions and releases of our application suite in a
timely manner, customers may license competing products and our revenues may
decline.

     We may fail to introduce or deliver new products on a timely basis, if at
all. In the past, we have experienced delays in the commencement of commercial
shipments of enhancements to our application suite. To date, these delays have
not had a material impact on our revenues. If we are unable to ship or implement
new products or enhancements to our application suite when planned or at all, or
fail to achieve timely market acceptance of these new products or enhancements,
we may suffer lost sales and could fail to increase our revenues. Our future
operating results will depend on demand for our application suite, including new
and enhanced releases that are subsequently introduced.

We may not successfully enter international markets or generate significant
revenues abroad, which could harm our business.

     We have established sales offices in the United Kingdom, Canada, Germany,
Sweden, France, Netherlands, Italy, Hong Kong, Singapore, Japan and Australia.
If we fail to successfully license our application suite in international
markets our business could be harmed. We anticipate devoting significant
resources and management attention to expanding international opportunities.
Expanding internationally subjects us to a number of risks, including:

     o  greater difficulty in staffing and managing foreign operations;
     o  expenses associated with foreign operations and compliance with
        applicable laws;
     o  changes in a specific country's or region's political or economic
        conditions;
     o  expenses associated with localizing our product for foreign countries;
     o  differing intellectual property rights;
     o  protectionist laws and business practices that favor local competitors;
     o  longer sales cycles and collection periods or seasonal reductions in
        business activity;
     o  multiple, conflicting and changing governmental laws and regulations;
        and
     o  foreign currency restrictions and exchange rate fluctuations.

Because competition for qualified personnel is intense, we may not be able to
retain or recruit personnel, which could impact the development and license of
our application suite.

     If we are unable to hire or retain qualified personnel or if newly hired
personnel, including our president and chief operating officer, fail to develop
the necessary skills or to reach expected levels of productivity, our ability to
develop and market our application suite will be weakened. Our success also
depends on the continued contributions of our key management, engineering, sales
and marketing and professional services personnel. In particular, Monte Zweben,
our Chairman and Chief Executive Officer, would be difficult to replace.

     Our ability to increase our sales will depend on our ability to recruit,
train and retain top quality sales people who are able to target prospective
customers' senior management, and who can generate and service large accounts.
There is a shortage of qualified sales personnel in our industry and competition
for them is intense.

                                       24

<PAGE>

Failure of our prospective technology customers to receive necessary funding
could harm our business.

     Our customers include rapidly growing technology companies. Most privately
and publicly held technology companies require outside cash sources to continue
operations. Recently, funding has been less available for technology companies
as a result of the stock market decline and public and private investor concern
regarding technology-based businesses. These factors have reduced demand for our
application suite from technology-based customers and reduced demand for
additional services from current technology-based customers. Failure by existing
customers in this industry to receive or generate adequate funding has and may
continue to result in provisions for uncollectible accounts receivable from such
companies.

Increasing government regulation of the Internet, imposition of sales and other
taxes on products sold by our customers over the Internet and privacy concerns
relating to the Internet could reduce the license of our application suite and
harm our business.

     Federal, state or foreign agencies may adopt laws or regulations affecting
the use of the Internet as a commercial medium. We expect that laws and
regulations relating to user privacy, pricing, content and quality of products
and services could indirectly affect our business.

     Current federal legislation limits the imposition of state and local taxes
on Internet-related sales at this time. Congress may choose not to renew this
legislation in 2002, in which case state and local governments would be free to
impose taxes on electronically purchased goods. The imposition of new sales or
other taxes could limit the growth of Internet commerce in general and, as a
result, the demand for our application suite and services.

     Businesses use our application suite to capture information regarding their
customers when those customers contact them on-line with customer service
inquiries. Privacy concerns may cause visitors to withhold personal data, which
would limit the effectiveness of our application suite. More importantly, even
the perception of privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of our application suite.

If we are unable to meet rapid changes in technology, our existing application
suite could become obsolete.

     The market for our application suite is marked by rapid technological
change, frequent new product introductions, Internet-related technology
enhancements, uncertain product life cycles, changes in client demands and
evolving industry standards. We cannot be certain that we will successfully
develop and market new products, new product enhancements or new products
compliant with present or emerging Internet technology standards. New products
based on new technologies or new industry standards can render existing products
obsolete and unmarketable. To succeed, we will need to enhance our current
application suite and develop new products on a timely basis to keep pace with
developments related to Internet technology and to satisfy the increasingly
sophisticated requirements of our clients. Enterprise application software
technology is complex and new products and product enhancements can require long
development and testing periods. Any delays in developing and releasing enhanced
or new products could harm our business.

We have no issued patents. If we are unable to protect our intellectual property
or become subject to intellectual property infringement claims, we may lose a
valuable asset or incur costly and time-consuming litigation.

     Our success depends in part on the development and protection of the
proprietary aspects of our technology as well as our ability to operate without
infringing on the proprietary rights of others. To protect our proprietary
technology, we rely primarily on a combination of trade secret, copyright,
trademark and patent laws, as well as confidentiality procedures and contractual
restrictions.

                                       25

<PAGE>

     We have no issued patents. We presently have several United States patent
applications pending. It is possible that some or all of the patents that we
have applied for will not be issued, and even if issued, that some or all may be
successfully defended. It is also possible that we may not develop proprietary
products or technologies that are patentable, that any patent issued to us may
not provide us with any competitive advantages or that the patents of others
will harm our ability to do business.

     Despite our efforts to protect our proprietary rights and technology,
unauthorized parties may attempt to copy aspects of our products or obtain the
source code to our software or use other information that we regard as
proprietary or could develop software competitive to ours. Our means of
protecting our proprietary rights may not be adequate, and our competitors may
independently develop similar technology or duplicate our product. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Any such resulting litigation could result in substantial costs and
diversion of resources that could have a material adverse effect on our
business, operating results and financial condition.

     It is possible that in the future, a third party may bring suit claiming
that we or our current or future products infringe their patents, trade secrets
or copyrights. Any claims, with our without merit, could be costly and
time-consuming to defend, divert our management's attention or cause product
delays. We have no patents that we could use defensively against any company
bringing such a claim. If our product was found to infringe a third party's
proprietary rights, we could be required to enter into royalty or licensing
agreements to be able to sell our product. Royalty and licensing agreements, if
required, may not be available on terms acceptable to us, if at all, which could
harm our business.

Rising energy costs and power system shortages in California may result in
increased operating expenses and reduced net income, and harm our operations due
to power loss.

     During the first half of 2001, California experienced significant power
shortages, which resulted in significantly higher energy costs when compared to
the same period of 2000. Because our principal operating facilities are located
in California, our operating expenses may increase significantly if this trend
continues. In addition, California has on some occasions implemented, and may in
the future continue to implement, rolling blackouts throughout the state. If
blackouts interrupt our power supply, we may be temporarily unable to operate.
Any such interruption in our ability to continue operations could delay the
development, marketing and sale of our application suite. Future interruptions
could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue, any of which could
have an adverse effect on our operating results.

Our directors and executive officers maintain significant control over Blue
Martini Software, which may lead to conflicts with other stockholders over
corporate governance.

     Our directors, executive officers and holders of 5% or more of our
outstanding common stock beneficially owned approximately 56% of our outstanding
common stock as of October 31, 2001. Monte Zweben, our Chairman and Chief
Executive Officer, together with related entities, beneficially owned
approximately 39% of our common stock as of this date. These stockholders,
acting together, and Mr. Zweben, individually, will be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and significant corporate transactions, such as mergers or
other business combination transactions. This control may delay or prevent a
third party from acquiring or merging with us.

                                       26

<PAGE>

Intangible asset risk.

     We have approximately $4.3 million of intangible assets and $1.7 million of
prepaid license royalties to third parties. At September 30, 2001, we believe
our intangible assets and prepaid license royalties are recoverable. However,
changes in the economy, the business in which we operate and our own relative
performance could change the assumptions used to evaluate the recoverability of
intangible asset and prepaid royalties. We continue to monitor those assumptions
and their effect on the estimated recoverability of our intangible assets.

There may be sales of a substantial amount of our common stock in the near
future that could cause our stock price to fall.

     Some of our current stockholders hold a substantial number of shares, which
they are able to sell in the public market, subject to restrictions under the
Securities Act. Sales of a substantial number of shares of our common stock
within a short period of time could cause our stock price to fall. In addition,
the sale of these shares could impair our ability to raise capital through the
sale of additional stock.

We have implemented anti-takeover provisions that could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.

     Provisions of our amended and restated 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. These provisions include:

     o   establishment of a classified board of directors requiring that not all
         members of the board may be elected at one time;
     o   authorizing the issuance of "blank check" preferred stock that could
         be issued by our board of directors to increase the number of
         outstanding shares and thwart a takeover attempt;
     o   prohibiting cumulative voting in the election of directors, which would
         otherwise allow less than a majority of stockholders to elect director
         candidates;
     o   limitations on the ability of stockholders to call special meetings of
         stockholders;
     o   prohibiting  stockholder  action by written  consent  and  requiring
         all  stockholder  actions to be taken at a meeting of our stockholders;
         and
     o   establishing advance notice requirements for nominations for election
         to the board of directors or for proposing matters that can be acted
         upon by stockholders at stockholder meetings.

     In addition, Section 203 of the Delaware General Corporations Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of the Company.

Recent Developments

     On October 29, 2001, we announced the appointment of Michael J. Borman as
president and chief operating officer, with responsibility over our revenue
operations, including global sales and professional services. Mr. Borman will
report to Monte Zweben, chairman and chief executive officer. Prior to joining
Blue Martini Software, Mr. Borman was employed by IBM, most recently serving as
vice president for Unix sales.

     In September 2001, each of James C. Gaither and A. Michael Spence, PhD.
submitted their resignations from our Board of Directors. Such resignations were
not related to any disagreement with Blue Martini Software. Mr. Gaither's term
as director was to expire at the 2004 annual meeting of stockholders and Dr.
Spence's term as director was to expire at the 2003 annual meeting of
shareholders. Vacancies on the board of directors may be filled only by persons
elected by a majority of the remaining directors. A director elected by the
board of directors to fill a vacancy shall serve for the remainder of the full
term of the director being replaced.

                                       27

<PAGE>

Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Accounting for changes in the values of those derivatives depends on the
intended use of the derivatives and whether they qualify for hedge accounting.
SFAS 133, as amended by SFAS 137 and SFAS 138, was adopted as of January 2001.
The Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the adoption of the new standard
did not effect consolidated financial statements.

     In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.

     The Company is required to adopt the provisions of Statement 141
immediately, and Statement 142 effective January 1, 2002. Furthermore, goodwill
and intangible assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but before
Statement 142 is adopted in full will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. The Company believes that the adoption of Statements 141
and 142 will not affect its consolidated financial statements.

     In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required and
plans to adopt the provisions of Statement No. 143 for the quarter ending March
31, 2003. The Company believes that the adoption of Statement No. 143 will not
affect its consolidated financial statements.

                                       28

<PAGE>

     On October 3, 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Statement 144 is effective for the Company on
January 1, 2002. The Company believes that the adoption of Statement 144 will
not affect its consolidated financial statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

     Through September 30, 2001, the majority of our recognized revenues have
been denominated in United States dollars and were from both domestic and
international customers. Our exposure to foreign currency exchange rate changes
has been immaterial. We expect that future license and service revenues will
continue to be derived from international markets and may be denominated in the
currency of the applicable market. Through September 30, 2001, we have expanded
our international operations and have hired personnel in Europe and Asia
Pacific. We have incurred operating expenses denominated in foreign currencies.
Our future operating results may become subject to significant fluctuations
based upon changes in the exchange rates of foreign currencies in relation to
the United States dollar. We expect to continue to engage in international sales
denominated in United States dollars. An increase in the value of the United
States dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations and, when appropriate, may use economic
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future. Through September 30, 2001, the Company had
not engaged in foreign currency hedging activities.

 Interest Rate Risk

     Our exposure to financial market risk, including changes in interest rates,
relates primarily to our investment portfolio. We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed rate securities with
maturities not exceeding 18 months. We do not invest in any derivative
instruments. The fair value of our investment portfolio or related income would
not be significantly impacted by either a 100 basis point increase or decrease
in interest rates due mainly to the relatively short-term nature of our
available-for-sale investment portfolio.

                                       29

<PAGE>

PART II.  OTHER INFORMATION
---------------------------

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     The following exhibits are filed herewith:

 Exhibit
  Number                    Description
 -------                    -----------

  3.1   Amended and Restated Certificate of Incorporation of the Registrant.1
  3.2   Amended and Restated Bylaws of the Registrant.2
  4.1   Specimen Stock Certificate.3
 10.1   2000 Equity Incentive Plan, as amended. 4
 10.2   2000 Employee Stock Purchase Plan, as amended. 4

--------------------------------------------------------------------------------
1    Incorporated by reference to the Registrant's Form 10-Q for the six-month
     period ended June 30, 2000.
2    Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (No. 333-55374).
3    Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (No. 333-36062), as amended.
4    Incorporated by reference to the Registrant's Annual Report on Form 10-K
     for the year ended December 31, 2000.


(b)  Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended September 30,
2001.


SIGNATURES

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

Dated:  November 13, 2001

                                 BLUE MARTINI SOFTWARE, INC.
                                 (Registrant)


                                 /S/ Monte Zweben
                                 ----------------
                                 Monte Zweben
                                 Chairman and Chief Executive Officer

                                 /S/ John E. Calonico, Jr.
                                 -------------------------
                                 John E. Calonico, Jr.
                                 Vice President and Chief Financial Officer
                                 (Principal Financial Accounting Officer)

                                       30