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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended March 31, 2004



OR



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



Commission File Number: 0-30925



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BLUE MARTINI SOFTWARE, INC.

(Exact name of Registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 94-3319751                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification 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)



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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 ̈



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



As of April 29, 2003, there were approximately 12,072,334 shares of the
Registrants common stock outstanding.



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##### Table of Contents

BLUE MARTINI SOFTWARE, INC.



INDEX



|                                 |  |                                                                                                    |  |        
|-------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -------
|                                 |  |                                                                                                    |  | PageNo.
|PART I.    FINANCIAL INFORMATION
|                                 |  |                                                                                                   
|Item 1.                          |  | Condensed Consolidated Financial Statements:                                                       |  |        
|                                 |  |                                                                                                   
|                                 |  | Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                   |  | 3      
|                                 |  |                                                                                                   
|                                 |  | Condensed Consolidated Statements of Operations for the Three months ended March 31, 2004 and 2003 |  | 4      
|                                 |  |                                                                                                   
|                                 |  | Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2004 and 2003 |  | 5      
|                                 |  |                                                                                                   
|                                 |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6      
|                                 |  |                                                                                                   
|Item 2.                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 10     
|                                 |  |                                                                                                   
|Item 3.                          |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 17     
|                                 |  |                                                                                                   
|Item 4.                          |  | Evaluation Disclosure Controls and Procedures                                                      |  | 18     
|                                
|PART II.    OTHER INFORMATION   
|                                 |  |                                                                                                   
|Item 1.                          |  | Legal Proceedings                                                                                  |  | 20     
|                                 |  |                                                                                                   
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                   |  | 21     
|                                 | 
|Signatures                       |  | 22                                                                                                



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##### Table of Contents

PART I.    FINANCIAL INFORMATION



|ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- |  | -------------------------------------------



BLUE MARTINI SOFTWARE, INC.



Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)



|                                                                                                                                      |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                      |  | March 31,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                                |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                       |  |               |          |   |                  |   |          |  
|Cash and cash equivalents, including restricted cash of $940 in 2004 and $962 in 2003                                                 |  | $             | 9,743    |   |                  | $ | 15,323   |  
|Short-term investments                                                                                                                |  |               | 32,044   |   |                  |   | 30,865   |  
|Accounts receivable, net of allowance of $604 in 2004 and 2003                                                                        |  |               | 4,810    |   |                  |   | 3,787    |  
|Prepaid expenses and other current assets                                                                                             |  |               | 1,433    |   |                  |   | 1,334    |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                  |  |               | 48,030   |   |                  |   | 51,309   |  
|Property and equipment, net                                                                                                           |  |               | 397      |   |                  |   | 469      |  
|Other assets                                                                                                                          |  |               | 302      |   |                  |   | 302      |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                          |  | $             | 48,729   |   |                  | $ | 52,080   |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|                                                                                                                                      |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                  |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                      |  | $             | 583      |   |                  | $ | 891      |  
|Accrued employee compensation                                                                                                         |  |               | 2,868    |   |                  |   | 2,951    |  
|Other accrued liabilities                                                                                                             |  |               | 4,210    |   |                  |   | 4,216    |  
|Accrued restructuring charges                                                                                                         |  |               | 794      |   |                  |   | 794      |  
|Deferred revenues                                                                                                                     |  |               | 4,474    |   |                  |   | 4,872    |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                             |  |               | 12,929   |   |                  |   | 13,724   |  
|Accrued restructuring, less current portion                                                                                           |  |               | 1,392    |   |                  |   | 1,637    |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                     |  |               | 14,321   |   |                  |   | 15,361   |  
|                                                                                                                                      |  |              
|Stockholders equity:                                                                                                                 |  |               |          |   |                  |   |          |  
|Common stock, $0.001 par value, authorized 500,000 shares authorized; 11,950 in 2004 and 11,542 in 2003 shares issued and
outstanding |  |               | 259,292  |   |                  |   | 258,155  |  
|Accumulated other comprehensive loss                                                                                                  |  |               | (987     | ) |                  |   | (850     | )
|Accumulated deficit                                                                                                                   |  |               | (223,897 | ) |                  |   | (220,586 | )
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                            |  |               | 34,408   |   |                  |   | 36,719   |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                            |  | $             | 48,729   |   |                  | $ | 52,080   |  
|                                                                                                                                      |  |               |          |   |                  |   |          |  



See accompanying notes
to condensed consolidated financial statements.



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BLUE MARTINI SOFTWARE, INC.



Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)



|                                                                     |  |                              |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                     |  | Three Months Ended March 31, |       
|                                                                     |  | 2004                         |        |   | 2003 |  
|Revenues:                                                            |  |                              |        |   |      |   |        |  
|License                                                              |  | $                            | 3,350  |   |      | $ | 1,756  |  
|Service                                                              |  |                              | 5,544  |   |      |   | 5,901  |  
|                                                                     |  |                              |        |   |      |   |        |  
|Total revenues                                                       |  |                              | 8,894  |   |      |   | 7,657  |  
|Cost of revenues:                                                    |  |                              |        |   |      |   |        |  
|License                                                              |  |                              | 263    |   |      |   | 318    |  
|Service*                                                             |  |                              | 3,093  |   |      |   | 4,117  |  
|                                                                     |  |                              |        |   |      |   |        |  
|Total cost of revenues                                               |  |                              | 3,356  |   |      |   | 4,435  |  
|                                                                     |  |                              |        |   |      |   |        |  
|Gross profit                                                         |  |                              | 5,538  |   |      |   | 3,222  |  
|                                                                     |  |                              |        |   |      |   |        |  
|Operating expenses:                                                  |  |                              |        |   |      |   |        |  
|Sales and marketing*                                                 |  |                              | 4,942  |   |      |   | 4,253  |  
|Research and development*                                            |  |                              | 2,459  |   |      |   | 2,484  |  
|General and administrative*                                          |  |                              | 1,581  |   |      |   | 1,804  |  
|Amortization of deferred stock compensation                          |  |                              | 96     |   |      |   | 468    |  
|                                                                     |  |                              |        |   |      |   |        |  
|Total operating expenses                                             |  |                              | 9,078  |   |      |   | 9,009  |  
|                                                                     |  |                              |        |   |      |   |        |  
|Loss from operations                                                 |  |                              | (3,540 | ) |      |   | (5,787 | )
|Interest income and other, net                                       |  |                              | 229    |   |      |   | 356    |  
|                                                                     |  |                              |        |   |      |   |        |  
|Net loss                                                             |  | $                            | (3,311 | ) |      | $ | (5,431 | )
|                                                                     |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per common share                          |  | $                            | (0.28  | ) |      | $ | (0.51  | )
|                                                                     |  |                              |        |   |      |   |        |  
|Shares used in computing basic and diluted net loss per common share |  |                              | 11,780 |   |      |   | 10,550 |  
|                                                                     |  |                              |        |   |      |   |        |  

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|* |  | Amounts exclude amortization of deferred stock compensation for the three months ended March 31, 2004 and 2003 as follows:
|- |  | --------------------------------------------------------------------------------------------------------------------------



Cost of service revenues: $0 in 2004; $128 in 2003.

Sales and marketing: $96 in 2004; $(9) in 2003.

Research and development: $0 in 2004; $105 in 2003.

General and administrative: $0 in 2004; $244 in 2003.



See accompanying notes to condensed consolidated financial statements.



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BLUE MARTINI SOFTWARE, INC.



Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                       |  |                              |         |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                       |  | Three Months Ended March 31, |        
|                                                                                       |  | 2004                         |         |   | 2003 |  
|Operating activities:                                                                  |  |                              |         |   |      |   |         |  
|Net loss                                                                               |  | $                            | (3,311  | ) |      | $ | (5,431  | )
|Adjustments to reconcile net loss to net cash used in operating activities:            |  |                              |         |   |      |   |         |  
|Depreciation of property and equipment and amortization of intangible and other assets |  |                              | 104     |   |      |   | 332     |  
|Amortization of deferred stock compensation                                            |  |                              | 96      |   |      |   | 468     |  
|Changes in operating assets and liabilities:                                           |  |                              |         |   |      |   |         |  
|Accounts receivable                                                                    |  |                              | (1,023  | ) |      |   | 184     |  
|Prepaid expenses and other current assets                                              |  |                              | (99     | ) |      |   | 524     |  
|Accrued restructuring charges                                                          |  |                              | (245    | ) |      |   | (378    | )
|Accounts payable, accrued employee compensation and other accrued liabilities          |  |                              | (397    | ) |      |   | (1,132  | )
|Deferred revenues                                                                      |  |                              | (398    | ) |      |   | 849     |  
|                                                                                       |  |                              |         |   |      |   |         |  
|Net cash used in operating activities                                                  |  |                              | (5,273  | ) |      |   | (4,584  | )
|                                                                                       |  |                              |         |   |      |   |         |  
|Cash flows from investing activities:                                                  |  |                              |         |   |      |   |         |  
|Purchases of property and equipment                                                    |  |                              | (32     | ) |      |   | (202    | )
|Purchases of short-term investments                                                    |  |                              | (17,715 | ) |      |   | (19,096 | )
|Sales and maturities of short-term investments                                         |  |                              | 16,537  |   |      |   | 30,843  |  
|                                                                                       |  |                              |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                    |  |                              | (1,210  | ) |      |   | 11,545  |  
|                                                                                       |  |                              |         |   |      |   |         |  
|Cash flows from financing activities:                                                  |  |                              |         |   |      |   |         |  
|Net proceeds from issuance of common stock                                             |  |                              | 1,041   |   |      |   | 238     |  
|                                                                                       |  |                              |         |   |      |   |         |  
|Net cash provided by financing activities                                              |  |                              | 1,041   |   |      |   | 238     |  
|                                                                                       |  |                              |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                           |  |                              | (138    | ) |      |   | (252    | )
|                                                                                       |  |                              |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                              | (5,580  | ) |      |   | 6,947   |  
|Cash and cash equivalents at beginning of period                                       |  |                              | 15,323  |   |      |   | 7,729   |  
|                                                                                       |  |                              |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                             |  | $                            | 9,743   |   |      | $ | 14,676  |  
|                                                                                       |  |                              |         |   |      |   |         |  



See accompanying notes
to condensed consolidated financial statements.



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BLUE MARTINI SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1.    Basis of Presentation



The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the entire year ending December 31, 2004.



The preparation of the unaudited condensed consolidated financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Blue
Martini Software, Inc. (Blue Martini or the Company) Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 15, 2004 and a subsequent Form 10-K/A filed on
March 24, 2004.



Note 2.    Letter of Credit



The Company obtained a letter of credit totaling $1.2
million as of December 31, 2002 in lieu of security deposits to secure facility lease obligations. As of March 31, 2004, the remaining balance on the letter of credit was $847,000, and the Company pledged $940,000 of cash equivalents as security for
the letter of credit.



Note 3.    Restructuring Charges



In 2003 and 2002, the Company implemented various
restructuring plans that resulted in reductions in force. The following table summarizes the activities related to accrued restructuring charges (in thousands) for the three months ended March 31, 2004:



|                    |  |                            |       |         |   |              |  |   |                         |   |  |   |      
|------------------- |  | -------------------------- | ----- | ------- | - | ------------ |  | - | ----------------------- | - |  | - | -----
|                    |  | Accrued atDecember 31,2003 |       | Expense |   | CashPayments |  |   | Accrued atMarch 31,2004
|Lease cancellations |  | $                          | 2,431 |         | $ |             |  | $ | (245                    | ) |  | $ | 2,186
|                    |  |                            |       |         |   |              |  |   |                         |   |  |   |      
|                    |  | $                          | 2,431 |         | $ |             |  | $ | (245                    | ) |  | $ | 2,186
|                    |  |                            |       |         |   |              |  |   |                         |   |  |   |      



The remaining lease
obligation will be paid over the remaining term of the underlying leases through April 2006.



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BLUE MARTINI SOFTWARE, INC.



Notes To Condensed Consolidated Financial Statements(Continued)

(Unaudited)



Note 4.    Comprehensive Net Loss



Accumulated other comprehensive net loss refers to revenues, expenses, gains
and losses that, under generally accepted accounting principles, are recorded in stockholders equity, but are excluded from net loss and consist primarily of unrealized gains or losses on available-for-sale investments and foreign currency
translation adjustments. The components of comprehensive net loss are as follows (in thousands):



|                                                                        |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                        |  | Three Months EndedMarch 31, |       
|                                                                        |  | 2004                        |        |   | 2003 |  
|Net loss                                                                |  | $                           | (3,311 | ) |      | $ | (5,431 | )
|Unrealized gains (losses) on available-for-sale investments, net of tax |  |                             | 1      |   |      |   | (96    | )
|Change in accumulated translation adjustment                            |  |                             | (138   | ) |      |   | (252   | )
|                                                                        |  |                             |        |   |      |   |        |  
|Comprehensive net loss                                                  |  | $                           | (3,448 | ) |      | $ | (5,779 | )
|                                                                        |  |                             |        |   |      |   |        |  



Note 6.    Net
Loss Per Common Share



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):



|                                                                                                      |  |                              |       |      |   |      
|----------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                                                                                      |  | Three Months Ended March 31,
|                                                                                                      |  | 2004                         |       | 2003
|Shares issuable under stock options                                                                   |  |                              | 3,585 |      |   | 3,370
|Shares of restricted stock subject to repurchase                                                      |  |                              | 19    |      |   | 46   
|Shares issuable pursuant to warrants                                                                  |  |                              | 477   |      |   | 477  
|Weighted average exercise price of stock options, restricted stock subject to repurchase and warrants |  | $                            | 6.02  |      | $ | 5.54 



Note
7.    Legal Actions



The Company is
subject to legal proceedings and claims, asserted or unasserted, that are in the ordinary course of business and has not booked a loss accrual. The Company cannot predict the outcome of these proceedings and claims or the possible impact on the
Company. Please refer to Part II, Item 1, Legal Proceedings, for further discussion of these proceedings and claims.



Note 8.    Stock Option Plans and Accounting for Stock-Based Compensation



Stock Option Plans



Description of Plans. The Companys stock option program consists of two plans: the 2000 Equity Incentive Plan and the 2000 Non-Employee
Directors Stock Option Plan. Stock options granted under these plans expire no later than ten years from the grant date and generally vest over two to four years. The Incentive Plan is administered by our board of directors, which has the
authority to designate participants and to determine the number and type of options to be granted, the time when options become exercisable, the method of payment and any other terms or conditions of the options. The Directors Plan designates
participants and specifies the number, type, term and pricing of options granted, the exercisability and vesting schedule of such options, the method of payment and other terms and conditions. The Directors Plan is administered by our board of
directors, which has the authority to determine provisions of options only to the extent not specified in the



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BLUE MARTINI SOFTWARE, INC.



Notes To Condensed Consolidated Financial Statements(Continued)

(Unaudited)



Directors Plan. Please refer to Note 10, Stockholders Equity, of the Companys Annual Report on Form 10-K for the year ended December 31,
2003 for further information regarding the Companys Stock Plans.



The following table summarizes plan activity for the three months ended March 31, 2004 (in thousands, except per share amounts):



|                                                                                                         |  |                          |   |  |                  |   |  |                                  |     
|-------------------------------------------------------------------------------------------------------- |  | ------------------------ | - |  | ---------------- | - |  | -------------------------------- | ----
|                                                                                                         |  | SharesAvailable forGrant |   |  | Number ofOptions |   |  | Wtd. Avg.Exercise Priceper Share
|Balances, December 31, 2003                                                                              |  | 5,427                    |   |  | 3,310            |   |  | $                                | 5.14
|Additional shares authorized                                                                             |  | 1,594                    |   |  |                 |   |  |                                  |    
|Granted                                                                                                  |  | (967                     | ) |  | 967              |   |  |                                  | 5.53
|Exercised                                                                                                |  |                         |   |  | (228             | ) |  |                                  | 2.50
|Repurchases                                                                                              |  |                         |   |  |                 |   |  |                                  |    
|Cancelled                                                                                                |  | 464                      |   |  | (464             | ) |  |                                  | 3.37
|                                                                                                         |  |                          |   |  |                  |   |  |                                  |     
|Balances, March 31, 2004                                                                                 |  | 6,518                    |   |  | 3,585            |   |  | $                                | 5.64
|                                                                                                         |  |                          |   |  |                  |   |  |                                  |     
|Exercisable, March 31, 2004                                                                              |  | 1,560                    |   |  |                  |   |  |                                  |     
|                                                                                                         |  |                          |   |  |                  |   |  |                                  |     
|Weighted-average fair value of options granted with exercise prices equal to fair value at date of grant |  |                         |   |  | 967              |   |  | $                                | 5.53



The following table
summarizes information about stock options as of March 31, 2004 (option amounts in thousands):



|                    |  |                     |  |                                                 |  |                              |       |                  |       |                               |   |      
|------------------- |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ---------------- | ----- | ----------------------------- | - | -----
|Options Outstanding |  | Options Exercisable
|Exercise Prices     |  | Number ofOptions    |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | Number ofOptions |       | WeightedAverageExercise Price
|$0.07 - $1.75       |  | 37                  |  | 7.59                                            |  | $                            | 0.42  |                  | 37    |                               | $ | 0.42 
|$2.52               |  | 928                 |  | 3.55                                            |  |                              | 2.52  |                  | 631   |                               |   | 2.52 
|$2.56 - $3.87       |  | 821                 |  | 8.98                                            |  |                              | 3.46  |                  | 197   |                               |   | 3.51 
|$3.94 - $5.31       |  | 340                 |  | 9.52                                            |  |                              | 4.80  |                  | 71    |                               |   | 5.27 
|$5.59               |  | 729                 |  | 9.92                                            |  |                              | 5.59  |                  |      |                               |   |     
|$5.75 - $7.70       |  | 516                 |  | 8.48                                            |  |                              | 6.35  |                  | 414   |                               |   | 6.45 
|$10.50 - $140.00    |  | 214                 |  | 6.15                                            |  |                              | 28.26 |                  | 210   |                               |   | 28.53
|                    |  |                     |  |                                                 |  |                              |       |                  |       |                               |   |      
|                    |  | 3,585               |  | 7.56                                            |  | $                            | 5.64  |                  | 1,560 |                               | $ | 7.28 
|                    |  |                     |  |                                                 |  |                              |       |                  |       |                               |   |      



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BLUE MARTINI SOFTWARE, INC.



Notes To Condensed Consolidated Financial Statements(Continued)

(Unaudited)



Accounting for Stock-Based Compensation



The Company adopted Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, which amended SFAS 123, Accounting for Stock-Based Compensation, as of December 31, 2002. As permitted under SFAS 148, the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share data):



|                                                                                                          |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                          |  | Three Months Ended March 31, |       
|                                                                                                          |  | 2004                         |        |   | 2003 |  
|Net loss, as reported                                                                                     |  | $                            | (3,311 | ) |      | $ | (5,431 | )
|Add: Stock-based employee compensation included in reported loss                                          |  |                              | 96     |   |      |   | 468    |  
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards |  |                              | (434   | ) |      |   | (3,619 | )
|                                                                                                          |  |                              |        |   |      |   |        |  
|Pro forma net loss                                                                                        |  | $                            | (3,649 | ) |      | $ | (8,582 | )
|                                                                                                          |  |                              |        |   |      |   |        |  
|Net loss per share:                                                                                       |  |                              |        |   |      |   |        |  
|Basic and dilutedas reported                                                                             |  | $                            | (0.28  | ) |      | $ | (0.51  | )
|                                                                                                          |  |                              |        |   |      |   |        |  
|Basic and dilutedpro forma                                                                               |  | $                            | (0.31  | ) |      | $ | (0.81  | )
|                                                                                                          |  |                              |        |   |      |   |        |  
|Shares                                                                                                    |  |                              | 11,780 |   |      |   | 10,550 |  
|                                                                                                          |  |                              |        |   |      |   |        |  



For the above
calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with no expected dividends. The risk-free interest rate used is the U.S. Treasury bill rates for the relevant expected
useful lives. The Company estimated the expected useful lives based on vesting and purchase periods and terms of the options. The expected volatility was based on the historical volatility of the Companys stock equal to the expected lives of
the options. The following table shows the weighted average assumptions for stock options:



|                         |  |                              |   |  |      |  
|------------------------ |  | ---------------------------- | - |  | ---- | -
|                         |  | Three Months Ended March 31, |  
|                         |  | 2004                         |   |  | 2003 |  
|Risk-free interest rate  |  | 2.0                          | % |  | 3.2  | %
|Expected life (in years) |  | 3.05                         |   |  | 3.50 |  
|Expected volatility      |  | 47                           | % |  | 76   | %



Stock options granted
for the three months ended March 31, 2004 and 2003 had estimated fair values of $1.86 and $1.46, respectively, as calculated using the Black-Scholes option valuation model.



9



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BLUE MARTINI SOFTWARE, INC.



Notes To Condensed Consolidated Financial Statements(Continued)

(Unaudited)



The weighted average fair values of common stock purchase rights (per-share) granted under the 2000
Employee Stock Purchase Plan were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for purchases:



|                         |  |                              |   |  |      |  
|------------------------ |  | ---------------------------- | - |  | ---- | -
|                         |  | Three Months Ended March 31, |  
|                         |  | 2004                         |   |  | 2003 |  
|Risk-free interest rate  |  | 1.9                          | % |  | 2.3  | %
|Expected life (in years) |  | 0.51                         |   |  | 0.86 |  
|Expected volatility      |  | 49                           | % |  | 50   | %



The weighted average
estimated fair values of the common stock purchase rights granted under the 2000 Employee Stock Purchase Plan were $1.33 and $1.40 for the three months ended March 31, 2004 and 2003, respectively.



Note 9.    Significant Customer Information



For the three months ended March 31, 2004, one customer, Masco Corporation,
accounted for more than 10% of total revenues. Three customers namely, Computacenter Ltd., Federated Systems Group and Royal Doulton each accounted for more than 10% of net accounts receivable; combined, they accounted for 39% of net accounts
receivable.



|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 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 our Annual Report on Form 10-K for the year ended December 31, 2003. 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, and Section 21E of the Securities Exchange Act of 1934, 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. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and
assumptions, including those under Item 2 in the section entitled Risk Factors and elsewhere in this quarterly report and the risk factors fully described under Item 7 in our Annual Report on Form 10-K for the year ended December 31,
2003. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk
factors, unless we are required to do so by law.



Overview



We provide sales optimization systems designed to enable companies to
increase revenues by guiding salespeople, channel partners, and customers through sales interactions. Our revenues are derived from the licensing of our software and the sale of related services. The license agreement for our software typically
provides for an initial fee to use the software in perpetuity, with use limited by the number of servers (CPUs), business unit, geographic area, brand or other similar limitations. Service revenues are principally derived from consulting services,
maintenance and training. Our maintenance agreements are typically payable in advance,



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entitle customers to receive software updates, maintenance releases and technical support, and typically have a one-year term. Consulting services and
training are generally sold on a time-and-materials basis.



We
market our application suite primarily through a direct sales force. We also engage in alliances with systems integrators and technology vendors to assist us in marketing and selling our software and related services. Some of our customers use
systems integrators to implement our product, and systems integrators are a significant influence in our customers purchasing decisions. We primarily target our products to customers competing in the commercial and consumer markets.



While our revenues to date have been derived principally from
customers in the United States, international revenues accounted for 34% of our revenues for the three months ended March 31, 2004. We believe that international revenues may represent a significant portion of our total revenues in the future but
may continue to fluctuate as a percentage of revenues in the near term due to variability in the number and size of our license deals and related service engagements. Our quarterly operating results have experienced seasonal fluctuations in the past
and may continue to fluctuate based on several factors, including our customers 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. The loss of a major customer or the delay or cancellation of anticipated significant license contracts would adversely affect our revenues and operating results in a particular quarterly period. Failure to obtain a significant
number of new customers or additional orders from existing customers in any period would adversely affect our business and operating results. For the three months ended March 31, 2004, one customer, Masco Corporation, accounted for more than 10% of
total revenues. Three customers namely, Computacenter Ltd., Federated Systems Group and Royal Doulton each accounted for more than 10% of net accounts receivable; combined, they accounted for 39% of net accounts receivable. See Note 9, Significant
Customer Information, above.



Our operating expenses are based
in part on our expectations of future revenues over the long term, and are largely 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 lower-than-expected revenues in a given quarter, resulting in greater-than-expected net losses for that quarter.



We believe that our greatest challenges as a company are to increase our
sales pipeline, close sales transactions more expeditiously and maintain relationships with existing customers. During 2003, our ability to sell was harmed by turnover in the leadership and staffing of our sales force. In 2004, we need to
communicate better to our potential customers the immediate value we believe our solutions offer, we need to provide potential customers with a clear path to achieve that potential value, and we must grow our relationships with consulting and system
integrator partners. We also need to increase our sales force productivity and ensure that new members of our sales team become productive within a reasonable period. We also strive to improve our overall performance by strengthening our competitive
position, controlling costs, effectively managing our cash flow and better aligning our management and organizational structure to support our sales efforts.



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Results of Operations for the Three Months Ended March 31, 2004 and 2003



Revenues



License



|                                |  |      |       |   |                       |    |   |      |   |       |  
|------------------------------- |  | ---- | ----- | - | --------------------- | -- | - | ---- | - | ----- | -
|                                |  | 2004 |       |   | % Change 2004 to 2003 |    |   | 2003 |  
|License revenues (in thousands) |  | $    | 3,350 |   |                       | 91 | % |      | $ | 1,756 |  
|Percentage of total revenues    |  |      | 38    | % |                       |    |   |      |   | 23    | %



The increase in
license revenues for the three months ended March 31, 2004 as compared to the same period in 2003 was due to an increase in the number of transactions and the average selling price of our software licenses. Geographically, 34% of our revenues in the
three months ended March 31, 2004 were derived from international sources, as compared to 18% in the same period in 2003. We expect the number of international customers will continue to fluctuate due to variability in the number and size of our
license deals and related service engagements.



Service



|                                |  |      |       |   |                       |     |    |      |   |       |  
|------------------------------- |  | ---- | ----- | - | --------------------- | --- | -- | ---- | - | ----- | -
|                                |  | 2004 |       |   | % Change 2004 to 2003 |     |    | 2003 |  
|Service revenues (in thousands) |  | $    | 5,544 |   |                       | (6  | )% |      | $ | 5,901 |  
|Percentage of total revenues    |  |      | 62    | % |                       |     |    |      |   | 77    | %
|Maintenance revenues            |  | $    | 2,270 |   |                       | 19  | %  |      | $ | 1,900 |  
|Professional services revenues  |  | $    | 3,274 |   |                       | (18 | )% |      | $ | 4,001 |  



Service revenues
include maintenance and professional services revenues. The increase in maintenance revenues for the three months ended March 31, 2004 as compared to the corresponding quarter in the prior year was due to the increase over time of the customer base
under maintenance arrangements. The decrease in professional services revenues for the three months ended March 31, 2004 as compared to the corresponding quarter in the prior year was due to our continued transitioning of professional services to
our system integrator partners. This decrease in professional services revenues was partially offset by a non-recurring milestone payment in the three months ended March 31, 2003.



Cost of Revenues



Cost of License Revenues



|                                        |  |      |     |   |                       |     |    |      |   |     |  
|--------------------------------------- |  | ---- | --- | - | --------------------- | --- | -- | ---- | - | --- | -
|                                        |  | 2004 |     |   | % Change 2004 to 2003 |     |    | 2003 |  
|Cost of license revenues (in thousands) |  | $    | 263 |   |                       | (17 | )% |      | $ | 318 |  
|Percentage of total revenues            |  |      | 3   | % |                       |     |    |      |   | 4   | %



Cost of license
revenues consists primarily of royalties payable to third parties and amortization of purchased intangible assets for software that are either embedded in or bundled with our products. Cost of license revenues were 8% and 18% of license revenues for
the three months ended March 31, 2004 and 2003, respectively. The decline in costs as a percentage of license revenue is primarily due to the purchased intangibles being fully amortized at the end of 2003 and due to the impact of this fixed
component of cost of license on a higher license revenue base. Since these purchased intangibles were fully amortized in December 2003, cost of license revenue, when expressed in dollar terms, decreased for the first quarter of 2004 as compared to
the corresponding period in the prior year. In the near term, our cost of license revenues, when expressed in dollar terms, will fluctuate with license revenues.



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Cost of Service Revenues



|                                        |  |      |       |   |                       |     |    |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | --------------------- | --- | -- | ---- | - | ----- | -
|                                        |  | 2004 |       |   | % Change 2004 to 2003 |     |    | 2003 |  
|Cost of service revenues (in thousands) |  | $    | 3,093 |   |                       | (25 | )% |      | $ | 4,117 |  
|Percentage of total revenues            |  |      | 35    | % |                       |     |    |      |   | 54    | %



Cost of service
revenues consists primarily of salaries and other personnel-related expenses, reimbursable expenses, costs of services provided by third party consultants engaged by the Company, allocated overhead costs, and depreciation of equipment used to
provide consulting services, technical support and training. Allocated overhead costs for costs of services and other expense categories include facilities and information systems. Cost of service revenues were 56% and 70% of service revenues for
the three months ended March 31, 2004 and 2003, respectively. The decrease in dollar terms was primarily due to approximately 15% reduction in force from the corresponding quarter in the prior year arising from cost-saving actions we implemented in
the second quarter of 2003. Our cost of service revenues is relatively fixed; however, our cost of service revenues, when expressed as a percentage of related service revenues, may fluctuate in the near term, based primarily on fluctuations in
related service revenues.



Operating Expenses



Sales and Marketing



|                                   |  |      |       |   |                       |    |   |      |   |       |  
|---------------------------------- |  | ---- | ----- | - | --------------------- | -- | - | ---- | - | ----- | -
|                                   |  | 2004 |       |   | % Change 2004 to 2003 |    |   | 2003 |  
|Sales and Marketing (in thousands) |  | $    | 4,942 |   |                       | 16 | % |      | $ | 4,253 |  
|Percentage of total revenues       |  |      | 56    | % |                       |    |   |      |   | 56    | %



Sales and marketing
expenses consist primarily of salaries, commissions, and other personnel-related expenses associated with our direct sales and marketing personnel, allocated overhead expenses, and costs of marketing programs including trade shows, advertisements,
promotional activities and media events. The increase in sales and marketing expenses was primarily due to increased commissions due to the higher license revenues and severance expenses in the first quarter of 2004. We expect that sales and
marketing expenses will increase in the near term reflecting related additional personnel and variable costs as we commit to improve our sales operations and continue to increase our license revenues.



Research and Development



|                                        |  |      |       |   |                       |    |    |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | --------------------- | -- | -- | ---- | - | ----- | -
|                                        |  | 2004 |       |   | % Change 2004 to 2003 |    |    | 2003 |  
|Research and Development (in thousands) |  | $    | 2,459 |   |                       | (1 | )% |      | $ | 2,484 |  
|Percentage of total revenues            |  |      | 28    | % |                       |    |    |      |   | 32    | %



Research and
development expenses consist primarily of salaries and other personnel-related expenses for engineering personnel, allocated overhead costs, costs of contractors, and depreciation of equipment used in the development of our software products. To
date, all costs related to the development of our software have been expensed as incurred. Our research and development operations in the three months ended March 31, 2004 remained at relatively the same level as the corresponding quarter in the
prior year.



In the near term, we expect research and
development expenses to remain at a similar level as the first quarter of 2004.



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General and Administrative



|                                          |  |      |       |   |                       |     |    |      |   |       |  
|----------------------------------------- |  | ---- | ----- | - | --------------------- | --- | -- | ---- | - | ----- | -
|                                          |  | 2004 |       |   | % Change 2004 to 2003 |     |    | 2003 |  
|General and Administrative (in thousands) |  | $    | 1,581 |   |                       | (12 | )% |      | $ | 1,804 |  
|Percentage of total revenues              |  |      | 18    | % |                       |     |    |      |   | 24    | %



General and
administrative expenses include costs associated with our finance, human resources, legal, and other administrative functions. These costs consist primarily of salaries and other personnel-related expenses, professional fees, insurance premiums,
provision for doubtful accounts, equipment depreciation, and allocated overhead costs. The decrease in general and administrative in the three months ended March 31, 2004 from the corresponding quarter in the prior year was primarily due to
reductions in force in the second quarter of 2003 and the first quarter of 2004 resulting in a headcount decrease of approximately 13%.



Amortization of Deferred Stock Compensation



|                                        |  |      |    |                       |     |    |      |   |    
|--------------------------------------- |  | ---- | -- | --------------------- | --- | -- | ---- | - | ---
|                                        |  | 2004 |    | % Change 2004 to 2003 |     |    | 2003
|Stock-based compensation (in thousands) |  | $    | 96 |                       | (79 | )% |      | $ | 468



Net amortization of
deferred stock compensation consists of the amortization of deferred stock compensation using the accelerated method, net of an adjustment for unvested options of terminated employees during the quarter that reverses previously recognized expenses.



In 2003, all deferred stock compensation remaining at the time
was fully amortized. Deferred stock compensation expenses for the three months ended March 31, 2004 consists of a charge of $96,000 due to the accelerated vesting of options in connection with a termination agreement with a former Company executive.



Interest Income and Other, Net



Interest income and other, net consists primarily of interest income from
cash, cash equivalents and short-term investments. Interest income and other were $229,000 and $356,000 for the three months ended March 31, 2004 and 2003, respectively. The decrease was primarily due to the decline in balances of cash, cash
equivalents and short-term investments over time. We expect interest income to decrease as the amount of cash and cash equivalents available for investment decreases as cash is used in operations and as interest rates remain at the current low
level.



Liquidity and Capital Resources



|                                                     |  |                |        |                   |   |       
|---------------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|(in thousands)                                       |  | March 31, 2004 |        | December 31, 2003
|Cash and cash equivalents and short term investments |  | $              | 41,787 |                   | $ | 46,188
|Working capital                                      |  |                | 35,101 |                   |   | 37,585
|Stockholders equity                                 |  |                | 34,408 |                   |   | 36,719



Our cash and cash
equivalents consist primarily of money market funds, commercial paper and U.S. treasury and government agency securities. All of our investments are classified as available-for-sale and carried at fair value based on quoted market prices
in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.



Net cash used in operating activities increased to $5.3 million for the three months ended March 31, 2004 from $4.6 million for the three months ended
March 31, 2003, primarily due to an increase in accounts receivable and other changes in operating assets and liabilities. The increase in accounts receivable was due to the increase in



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##### Table of Contents

license revenues in the first quarter of 2004 relative to the first quarter of 2003, partially offset by improvement in days sales outstanding from 66 days
in the first quarter of 2003 to 49 days in the first quarter of 2004.



Net cash used in investing activities was $1.2 million in the three months ended March 31, 2004 as compared to net cash provided by investing activities of $11.5 million in the three months ended March 31, 2003. The difference was due
primarily to a decrease in the sales and maturities of short-term investments in 2004 from the timing of maturities of our investment securities. We do not expect any significant capital expenditures in the near future.



Net cash provided by financing activities increased to $1.0 million for the
three months ended March 31, 2004 from $238,000 for the three months ended March 31, 2003 due primarily to increased proceeds from employee stock option exercises.



At March 31, 2004, we had aggregate operating lease commitments of approximately $7.5 million, payable through 2006, of
which, $2.2 million have been accrued and reflected on the balance sheet as part of the accrued restructuring charges.



Our liquidity, capital resources and results of operations in any period could be affected by the exercise of outstanding stock options and warrants and
issuance of common stock under our employee stock purchase plan. The resulting increase in the number of outstanding shares could also affect, our per share results of operations. However, we cannot predict the timing or amount of proceeds from the
exercise of these securities, or whether they will be exercised at all.



We expect that for the foreseeable future, our operating expenses will continue to 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 operating requirements for at least the next 12 months. Either within this time
period or at some future date, if our current financial performance continues, we may need to raise additional funds in the future through public or private debt or equity financing. There can be no assurance that this additional financing will be
available, or if available, will be on reasonable terms. If adequate funds are not available on acceptable terms, we may have to accept financing on terms we view as unreasonable or that are dilutive to our stockholders, or to cease operations. If
we were to seek additional financing today, we do not believe it would be available on reasonable terms.



The existence or even the anticipation of an uncertain economic and political environment by potential customers in the markets we operate in has affected
the demand for our applications, caused pricing pressures for our products and increased customer requests for extended payment terms. We expect current conditions to continue in future periods, which could in turn materially reduce our liquidity.



Contingent Matters



Refer to Note 7 to Condensed Consolidated Financial Statements for a
discussion of legal contingencies.



Critical Accounting Policies



Please refer to our discussion of critical accounting
policies in our Annual Report on Form 10-K for the year ended December 31, 2003 under Managements Discussion and Analysis of Financial Condition and Results of Operations.



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Factors That May Impact Future Operating Results



Set forth below and elsewhere in this quarterly report and in the other
documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this quarterly report. Prospective and existing investors
are strongly urged to carefully consider the various cautionary statements and risks set forth in this quarterly report and our other public filings, including our annual report on Form 10-K. Some of these factors are as
follows:



Risks Related To Our Financial
Condition



| |  |  | We have incurred losses throughout our operating history. These losses may continue for the foreseeable future, and we may not achieve profitability.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our declining cash balance and volatile stock price have affected our potential and current customers and partners perception of our viability, which in turn could
affect our ability to close sales and partnership transactions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cost reduction efforts may harm our productivity and service levels.
| | - |  | --------------------------------------------------------------------



Risks Related To Our Products



| |  |  | If we fail to keep pace with technological innovation, improve our existing products, or develop new products, our application suite could become obsolete and our revenues would
decline.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we fail to release new versions and upgrades of our application suite in a timely manner, customers may license competing products and our revenues may decline.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 applications may be implemented in a way that does not capture our customers business processes or address their needs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Loss or unavailability of key technologies licensed to us by third parties could affect our ability to license our product.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | If our product does not operate with the wide variety of hardware, software and operating systems used by our current and potential customers, our revenues would be harmed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Risks Related to Our Market and Our Ability to
Sell



| |  |  | The economic downturn significantly affected demand for our products and services and may continue to adversely affect future revenues.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not be able to maintain our competitive position against current and potential competitors.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | The sales cycle for our products is long, and variable, which makes it difficult to predict our future revenues and may cause our operating results to vary significantly.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have recently changed several aspects of our sales strategy and process with the intention of improving our sales pipeline and results, including changes in the way we generate
leads, hiring of additional salespeople and changes in the way we target and approach accounts. We expect that it may take up to twelve months to see positive results from these changes; although these changes may not show positive results during
that period or at all. As a result of these changes, our ability to market and license our software may be limited accordingly.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A small number of customers have accounted for a substantial portion of our revenues. In the three months ended March 31, 2004, one customer, Masco, accounted for more than 10% of
total revenues. This pattern is likely to continue for the foreseeable future; as a result, our revenues could decline due to the loss or delay of a single customer order, the delay in recognizing revenue associated with a single customer order, or
the failure to collect revenue associated with a single customer.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not successfully establish ourselves in international markets or generate significant revenues abroad, which could result in slower revenue growth and harm our business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 licensing of our application suite and harm our business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Risks Related To System Integrators



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Other Risks



| |  |  | Changes in accounting policies created and interpreted by authoritative agencies can have a significant effect on our reported results and may even affect the reporting of
transactions completed before a change is announced.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may enter into mergers or acquisitions in the future; our business could be affected by the distraction and challenges by such transaction.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although the purported shareholders derivative complaint against us relating to our IPO has been favorably resolved, and we have agreed in principle to a tentative global
settlement, which remains subject to a number of procedural conditions and formal approval by the court, of the securities class action claims against us and other companies relating to our collective IPOs, as a technology company with a volatile
stock price, we may be at risk of other litigation, which could result in substantial costs and divert management attention and resources.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may have difficulty retaining or recruiting qualified personnel, which could impact the development and licensing of our application suite.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Chairman and CEO maintains significant control over Blue Martini, which may lead to conflicts with other stockholders over corporate strategy and other issues.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have implemented anti-takeover provisions that could discourage or prevent a takeover.
| | - |  | -----------------------------------------------------------------------------------------



Due to these and other factors, we may not meet the expectations of our shareholders with respect to our revenues and other
operating results, which could adversely affect our stock price. Please refer to Risk Factors under Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2003, for further discussion of risk factors.



|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



Foreign Currency Exchange



Through March 31, 2004, most 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 not been material. We expect that a portion of future license and service revenues will continue to be derived from international markets and may be denominated in the currency of
the applicable market. We have



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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. In the future, we expect to engage in international sales denominated in both the United States dollar and in foreign currencies. 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 can make no assurances that exchange rate fluctuations will not adversely affect our financial results in the future. Through March 31, 2004, we have not engaged in foreign
currency hedging activities.



Fixed Income Securities



At March 31, 2004, we had an investment portfolio of
fixed income securities, including those classified as cash equivalents, of $41.8 million compared to $46.2 million at December 31, 2003. Our exposure to financial market risk, including changes in interest rates, relates primarily to our investment
portfolio. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. This exposure is limited by the establishment and strict monitoring of compliance with our investment
policy which provides for investments in fixed income securities with maturities not exceeding 18 months. This policy also establishes credit quality standards and limits investment exposure to any one issuer. We do not invest in any derivative
instruments. Due mainly to the relatively short-term nature of our available-for-sale investment portfolio, the fair value of our investment portfolio or related income would not be significantly impacted by a 100 basis point increase or decrease in
interest rates.



|ITEM 4. |  | EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
|------- |  | ------------------------------------------------



Quarterly Evaluation of Our Disclosure Controls and Internal Controls:    As of March 31, 2004 (the Evaluation
Date), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (the Disclosure Controls), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended, and our internal controls and procedures for financial reporting (the Internal Controls). This evaluation (the Controls Evaluation) was done under the supervision and with the participation of management,
including our CEO and CFO. Rules adopted by the SEC require that we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.



Certifications:    Attached
as Exhibits 31.1, 31.2 and 32.1 are two separate forms of certifications of the CEO and the CFO. The certifications attached as Exhibits 31.1 and 31.2 are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section
302 Certifications). The information contained in this Item 4 relates to the Controls Evaluation referred to in the Section 302 Certifications, and should be read with the Section 302 Certifications for a more complete understanding of the
topics presented.



Disclosure Controls and Internal
Controls over Financial Reporting:    Our management, including the CEO and the CFO, is responsible for establishing and maintaining adequate disclosure and internal controls over our financial reporting. Disclosure
Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and
the CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures that are designed with the objective of providing reasonable assurance regarding the reliability of financial reporting and include
those policies and procedures that provide reasonable assurances that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use, and our transactions and dispositions of assets are properly recorded
and reported, all to permit the preparation of our financial statements in conformity with GAAP.



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Limitations on the Effectiveness of Controls:    Our management,
including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Scope of the Controls Evaluation:    The CEO and CFO evaluation of our Disclosure Controls and our Internal Controls
included a review of the controls objectives and design, our controls implementation and the effect of the controls on the information generated for use in this Quarterly Report on Form 10-Q. In the course of the Controls Evaluation, we
sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective actions, including process improvements, were being undertaken. We will perform this type of evaluation on a quarterly basis so that the
conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal
Controls and to make modifications as necessary. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions
warrant.



Among other matters, we sought in our evaluation to
determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, or whether we have identified any acts of fraud involving personnel who have a significant role in our Internal
Controls. This information was important both for the Controls Evaluation generally and because item 5 in the Section 302 Certifications require that the CEO and CFO disclose such information to the Audit Committee of our Board of Directors and to
our independent auditors and to report on related matters in this section of the Quarterly Report on Form 10-Q. In the professional auditing literature, significant deficiencies are referred to as reportable conditions, which
are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A material weakness is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements
and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we
considered what revision, improvement or correction to make in accordance with our on-going procedures.



Conclusions:    Based upon the Controls Evaluation, our CEO and our CFO have concluded that, subject to the limitations
noted above, our Disclosure Controls and Internal Controls and procedures are effective in alerting them on a timely basis to material information related to us (including our consolidated subsidiaries) that is required to be included in our reports
filed or submitted under the Securities and Exchange Act of 1934, as amended.



Changes in Internal Controls over Financial Reporting:    In accordance with SEC requirements, our CEO and CFO note that, during the the quarter ended March 31, 2004, there have been
no changes in Internal Controls or in other factors that could materially affect or are reasonably likely to materially affect such controls, including any corrective actions with regard to significant deficiencies and material weaknesses.



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PART II.    OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



Beginning in July 2001, Blue Martini, Monte Zweben, William Zuendt, Andrew Verhalen, certain of our former officers and directors and Goldman Sachs and
the other underwriters of our initial public offering, or IPO, were named as defendants in several class action shareholder complaints filed in the United States District Court for the Southern District of New York, consolidated under the title
In re Blue Martini Initial Public Offering Securities Litigation. Plaintiffs claim that the defendants violated the federal securities laws because our IPO registration statement and prospectus allegedly contained untrue statements of
material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in
the same Court against hundreds of other public companies that conducted IPOs of their common stock since the mid-1990s. On August 8, 2001, all IPO-related lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin
of the Southern District of New York. In accordance with Judge Scheindlins orders, we did not answer the complaint, and no discovery was served. Also in accordance with Judge Scheindlins orders, plaintiffs filed amended consolidated
complaints on April 19, 2002. We joined in a global motion to dismiss the IPO Lawsuits on July 15, 2002. On or about October 9, 2002, our directors and officers were dismissed without prejudice pursuant to a stipulated dismissal and tolling
agreement between the plaintiffs and certain individual defendants. On November 1, Judge Scheindlin presided over an all-day hearing on the global motions to dismiss. On February 19, 2003, Judge Scheindlin issued a ruling on the global motion to
dismiss; with respect to us, the motion was granted in part and denied in part. In June 2003, we joined in a tentative global settlement that would, among other things, result in the dismissal with prejudice of all claims against all issuers and
their officers and directors in the IPO-related lawsuits, and the assignment to plaintiffs of certain potential claims that the issuers may have against their IPO underwriters. The tentative settlement provides that, in the event that the plaintiffs
ultimately recover less than $1 billion in settlement or judgment against the underwriter defendants in the IPO-related lawsuits, the plaintiffs would be entitled to payment by each participating Issuers insurer of a pro rata share of any
shortfall in the plaintiffs guaranteed recovery. The tentative settlement does not involve any payment or admission of wrongdoing by us. In July 2003, pursuant to the authorization of a special litigation committee of the our Board of
Directors, we entered into a non-binding memorandum of understanding reflecting the settlement terms described above. In September 2003, in connection with the possible settlement, our officers and directors described above who had entered tolling
agreements with plaintiffs agreed to extend those agreements so that they would not expire prior to any settlement being finalized. Although Blue Martini has approved this settlement proposal in principle, it remains subject to a number of
procedural conditions, as well as formal approval by the court.



On or about July 24, 2002, a complaint was filed against Blue Martini in the Supreme Court of the State of New York, County of Queens. The complaint, captioned Fresh Direct, Inc. v. Blue Martini Software, Inc., was filed by a
customer that had licensed our products and engaged us to perform related services. The complaint was amended on or about August 26, 2002, to change the plaintiff to Fresh Direct, LLC as successor to Fresh Direct, Inc. The amended complaint asserts
claims for breach of contract, breach of warranty, negligent misrepresentation, fraud, and unjust enrichment. On or about September 18, 2002, we filed a motion to dismiss the amended complaint. On or about October 23, 2002, Fresh Direct opposed the
motion to dismiss and filed a cross-motion for leave to file a second amended complaint, which we subsequently opposed. On or about March 24, 2003, the Court issued an order which granted in part and denied in part our motion to dismiss and granted
Fresh Directs motion for leave to file the second amended complaint. In April 2003, we appealed the denial of the motion to dismiss, and in May 2003, we filed its answer to the second amended complaint and counterclaims for breach of contract
and fraud. In May 2004, the appellate court affirmed the lower courts decision respecting the motion to dismiss. We believe that we have meritorious defenses and counterclaims against this lawsuit and intend to pursue them vigorously. We
believe that the ultimate outcome of this action will not have a material adverse effect on our financial position and results of operations.



In addition, we may be subject to additional legal proceedings and claims, asserted or unasserted, that are in the ordinary course of business. We cannot
predict the outcome of these proceedings and claims or their possible impact Blue Martini.



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|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



(a) Exhibits



|        |  |                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------
|Exhibit |  | Description of Document                                                                               
|        | 
|3.1     |  | Amended and Restated Certificate of Incorporation of the Registrant. (1)                              
|        | 
|3.2     |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant (2)   
|        | 
|3.3     |  | Amended and Restated Bylaws of the Registrant. (3)                                                    
|        | 
|4.1     |  | Reference is made to Exhibits 3.1, 3.2 and 3.3.                                                       
|        | 
|4.2     |  | Specimen Stock Certificate. (2)                                                                       
|        | 
|10.29   |  | Agreement by and between the Registrant and Robert E. Cell dated March 19, 2004. (4)                  
|        | 
|10.30   |  | Agreement by and between the Registrant and Mary Hamershock dated March 23, 2004. (4)                 
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(4)
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(4)
|        | 
|32.1    |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(4)                           

---

|(1) |  | Incorporated by reference to the Registrants Form 10-Q for the period ended June 30, 2000 filed on August 11, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the Registrants Form 10-K for the period ended December 31, 2002, filed on March 28, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Registrants Registration Statement on Form S-8 (No. 333-55374) filed on February 9, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(4) |  | Filed herewith.
|--- |  | ---------------



|* |  | The Certificate attached as Exhibit 32.1 accompanies the Periodic Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not
to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after that date of the Periodic Report), irrespective of any
general incorporation language contained in such filing.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K



On April 20, 2004, the
Registrant filed a Current Report on Form 8-K relating to a press release announcing financial results for the first quarter of 2004.



On January 20, 2004, the Registrant filed a Current Report on Form 8-K relating to the appointment of a new member to the Board of Directors and press
release announcing financial results for the fourth quarter of 2003 and fiscal year 2003.



On March 15, 2004, the Registrant filed a Current Report on Form 8-K relating to the appointment of a new member to the Board of Directors.



Availability of this Report



The Company intends to make this Quarterly Report on Form 10-Q publicly available on its Web site (www.bluemartini.com) without charge immediately
following its filing with the Securities and Exchange Commission. The Company assumes no obligation to update or revise any forward-looking statements in this Quarterly Report on Form 10-Q, whether as a result of new information, future events or
otherwise, unless it is required to do so by law.



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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: May 10, 2004



BLUE MARTINI SOFTWARE, INC.(Registrant)/s/    MONTE
ZWEBENMonte ZwebenChairman and Chief Executive Officer/s/    ERAN
PILOVSKYEran PilovskyChief Financial Officer




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