<PAGE>

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

                    SECURITIES AND EXCHANGE COMMISSION
                           Washington, DC 20549

                                 FORM 10-KSB

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[ X ]       Annual report pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934 for the fiscal year ended May 31, 2001;

or

[   ]       Transition Report pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934 for the transition period from ___________ to
            ___________.


Commission File Number 0-11791



                               PURCHASESOFT, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


          DELAWARE                                            13-2897997
-------------------------------                         ---------------------
(State or Other Jurisdiction of                            (IRS Employer ID No.)
 Incorporation or Organization)

One Research Drive
Suite 100 B                                                     01581
WESTBOROUGH, MA  01581                                    ----------------
-------------------------------------------                  (Zip Code)
(Address of Principal Executive Offices)

Issuer's Telephone Number, Including Area Code:             (508) 599-1300

Securities Registered Under Section 12(b) of the Exchange Act:     None
Securities Registered Under Section 12(g) of the Exchange Act:

TITLE OF EACH CLASS
------------------------------------------
Common Stock, par value $0.01 per share


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

<PAGE>



Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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      [    ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year:   $603,880

The aggregate market value of the common stock, par value $0.01 per share, held
by non-affiliates of the Registrant (totaling 4,990,657 shares) was $3,892,712
as of August 15, 2001 (based upon the closing bid of the Registrant's common
stock on the OTC Bulletin Board on August 15, 2001 of $0.78 per share). The term
affiliates is deemed, for this purpose only, to refer only to directors,
officers, and principal stockholders of the Issuer.

State the number of shares outstanding in each of the issuer's classes of common
equity, as of August 15, 2001.

                  CLASS                                  OUTSTANDING
                  -----                                  -----------
           Common Stock, par value                    26,993,905 shares
            $0.01 per share



                       DOCUMENTS INCORPORATED BY REFERENCE

         No documents are incorporated by reference into this Annual Report on
Form 10-KSB.




<PAGE>



                               PURCHASESOFT, INC.
                          ANNUAL REPORT ON FORM 10-KSB
                                  MAY 31, 2001

                              CROSS REFERENCE SHEET

<TABLE>
<CAPTION>

                                                                                                 (CONFORM PAGE #S)

                                             PART I                                                         PAGE
                                                                                                            ----

<S>          <C>                                                                                            <C>
Item 1        Description of Business                                                                          3


Item 2        Description of Property                                                                         13

Item 3        Legal Proceedings                                                                               13

Item 4        Submission of Matters to a Vote of Security Holders                                             13


                                           PART II

Item 5        Market for Common Equity and Related Stockholder Matters                                        14

Item 6        Management's Discussion and Analysis of
              Financial Condition and Results of Operations                                                   16

Item 7        Financial Statements                                                                            21

Item 8        Changes in and Disagreements with Accountants on Accounting                                     21
              and Financial Disclosure

                                           PART III

Item 9        Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act                                               22

Item 10       Executive Compensation                                                                          25

Item 11       Security Ownership of Certain Beneficial Owners and
              Management                                                                                      29

Item 12       Certain Relationships and Related Transactions                                                  31

Item 13       Exhibits and Reports on Form 8-K                                                                32

</TABLE>


<PAGE>



                   A WARNING ABOUT FORWARD-LOOKING STATEMENTS

         Except for the historical information contained herein, this Annual
Report on Form 10-KSB contains and may incorporate by reference
"forward-looking" statements, including statements regarding our expectations,
beliefs, intentions or strategies regarding the future. These statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"believe," "intend," "expect," "anticipate," "estimate," "continue," or other
similar words. Variations on those or similar words, or the negatives of those
words, also may indicate forward-looking statements. Although we believe that
the expectations reflected in this Annual Report are reasonable, we cannot
assure you that our expectations will prove to be correct. We have included a
discussion entitled "Risk Factors" in this Annual Report, highlighting important
factors that could cause our actual results to differ materially from our
expectations. If in the future you hear or read any forward-looking statements
about us, you should refer back to the discussion in "Risk Factors." The
forward-looking statements in this Annual Report are accurate only as the date
of this Annual Report. If our expectations change, or if new events, conditions
or circumstances arise, we are not required to, and may not, update or revise
any forward-looking statement in this Annual Report.

         These forward-looking statements include expressions of interest in our
PurchaseSmart(TM) software product, as well as the potential for future orders
of our software product or new products that we may later introduce.
Forward-looking statements are inherently uncertain. Our actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to risks and uncertainties, including the
following:

         o        our history of losses, accumulated deficit, inconsistent
                  revenues and the uncertainty of future profitability;

         o        the uncertainty of our ability to raise additional capital if
                  required to fund our operations;

         o        the uncertainty of market acceptance of our
                  PurchaseSmart(TM) software product or any products introduced
                  in the future;

         o        new management and the ongoing need to recruit sales, service,
                  development and implementation personnel;

         o        the intensity of competition in the software industry;

         o        the rapid progress of technology in the industry in which we
                  compete;

         o        our dependence on a single product; and

         o        the level of protection over our intellectual property and
                  proprietary rights.

         The forward-looking statements contained in this Annual Report on Form
10-KSB represent our judgment as of the date of this Annual Report, and you
should not unduly rely on these statements.



                                      -2-
<PAGE>




PART I:

ITEM 1:   DESCRIPTION OF BUSINESS


OVERVIEW

         We provide strategic e-procurement software solutions to medium and
large organizations in the United States and in the United Kingdom. Our
objective is to provide our customers with the ability to reduce their costs and
take control of corporate expenditures through the use of our software products.
Our flagship e-procurement product, PurchaseSmart(TM), enables organizations to
automate their procurement processes thereby reducing costs and improving
productivity, while providing real-time decision support information to
management. Our principal goal is to be a leader in the e-procurement
solutions marketplace addressing organizational procurement needs. We expect to
achieve this objective by continuing to offer the most functional and easy to
use leading edge, end-to-end software solutions and unparalleled customer
service.


OUR HISTORY

         Our expertise in procurement comes from our extensive experience in
this area. We began operations as a management consulting firm specializing in
"best practices" for purchasing and materials management in 1977. In 1985, we
sensed the market need for an automated purchasing software package and, under
the name of Greentree Software, Inc., introduced our first software product for
purchasing materials management for use on IBM compatible PCs. Since that time,
we have continued to offer leading edge software solutions by adapting the
latest technology and incorporating procurement best practices and knowledge
gained from successful customer implementations. In October 1999, we released
our newest solution, PurchaseSmart(TM), a Web-based software solution, written
in JAVA and HTML, which provides operational support for an organization's
strategic procurement and e-commerce needs.

         Most organizations still buy operating resources through a traditional
paper-based manual or semi-automated process. These processes are inefficient,
costly, difficult to maintain and often error prone. They also require a
significant time investment from key financial and administrative personnel. The
inefficiencies in these processes are felt throughout the organization in many
ways. Delays caused by inefficient and time consuming processes ultimately
result in a significant loss of productivity. Dependence upon a manual or
semi-automated process does not allow the organization to fully leverage the
economies of scale presented by their own operations. Manual or semi-automated
processes simply do not afford the user the ability to meaningfully monitor the
users of the system to ensure that the users are following established
procedures or pre-negotiated buying opportunities. This inability to capture and
manipulate data in "real-time," means that the organization is not using its
resources in the most efficient way possible increasing the cost of doing
business. We have designed our software solutions to help our customers take
control of these processes. We believe that our solution offers our customers a
way to take control of the inefficient manual or semi-automated process and
replace them with current technology designed to allow our customers to do
business more efficiently.


THE PURCHASESOFT SOLUTION

         The PurchaseSoft software solution consists of three key components -
PurchaseSmart(TM), the core software product designed for the purchasing
professional, SourceSmart(TM), the easy-to-use front-end interface product that
provides basic procurement functionality, and WebQuote(TM), which enables
supplier participation in the procurement process. The PurchaseSoft solution
offers functionality in the areas of Web-based procurement, transaction
management, supply chain management and planning and forecasting. This solution
is designed to address all procurement needs from requisitioning and purchasing
through auctioning and advanced analysis.

                                      -3-
<PAGE>

         PURCHASESMART(TM): PurchaseSmart(TM) is a software program that
provides Web-based, end-to-end operational support for strategic procurement and
e-commerce. It enables organizations to reduce processing costs and improve
productivity, by automating the procurement cycle, linking end-users throughout
the organization with approvers and financial systems. PurchaseSmart(TM) is
designed to connect large numbers of end users, approvers, and administrative
personnel through Web-based applications that automate procurement and financial
processes. The functionality of PurchaseSmart(TM) is directed at the purchasing
professionals in an organization. It provides all the tools that are needed by
buyers and purchasing managers to effectively manage the procurement process and
supplier performance. PurchaseSmart(TM) features the following functionality:

      o  Requisitioning                       o  Electronic Cataloging
      o  Purchase Order Management            o  Receiving
      o  Request for Quotations (RFQs)        o  User Self Registration
      o  Auctioning                           o  Advanced Analysis and Reporting
      o  Quotations and Bid Analysis          o  Data Integration and Migration

         SOURCESMART(TM): SourceSmart(TM) is an easy-to-use front-end interface
that gives users basic purchasing functionality. Written in HTML,
SourceSmart(TM) is accessed using a Web browser. With SourceSmart(TM), users can
scan catalogs, select items, create requisitions and with proper authorization,
approve requisitions created by others. The requisitions, depending on business
rules, can be converted to purchase orders to be sent directly to suppliers or
sent to an approval workflow process as defined by the organization. Information
from SourceSmart(TM) is immediately available in PurchaseSmart(TM) for analysis,
so that total corporate spending can easily be controlled and managed.

         WEBQUOTE(TM): WebQuote(TM) provides buyers with the ability to issue
pricing requests and/or initiate auctioning events over the Internet. Suppliers
can be specifically invited to participate by an email message directing them to
the organization's auction Web site through a hyperlink. Using the Bid Analysis
feature, the competing suppliers' bids can be analyzed and purchase orders
placed with selected suppliers. The auctioning feature and the ability to
analyze supplier bids allows for dynamic pricing and reduction in cost of goods
purchased.

         Several additional powerful modules can be added to PurchaseSmart(TM)
allowing the customer to customize the system to match the needs of the
organization. These modules are Inventory, Asset Tracking and Invoice Matching.

         The PurchaseSmart solution was designed to meet the needs of
procurement professionals and the larger organizations within which they work.
The system meets these sometime competing needs by incorporating and
consistently employing the following key features:

         o        Easy-to-use Interfaces: All features of the PurchaseSmart
                  solution are accessed through a browser-based interface. The
                  user interface is designed to be intuitive and requires
                  minimal training.

         o        Email Enabled Workflow: The system uses an organization's
                  email infrastructure to implement a flexible workflow process
                  linking requisitioners, buyers, managers and approvers.

         o        Powerful Analytics: The system actively tracks the procurement
                  activity in an organization. The data collected can be
                  analyzed with the built-in tools that include
                  Buyer/Requisitioner Analysis, Supplier Performance Analysis
                  and Item/Commodity Analysis. These real-time analyses help the
                  key decision-makers make strategic sourcing decisions that
                  result in better control of procurement, improved supplier
                  performance, reduction of "maverick" buying and overall
                  improvements to the full procurement cycle.

                                      -4-
<PAGE>

         o        Integration Capability: The system can be integrated into
                  existing ERP and legacy systems using the built-in integration
                  functionality.

         o        Multi-platform Architecture: Based on the SilverStream(TM)
                  development platform, the system can be hosted on multiple
                  hardware and software configurations such as Microsoft Windows
                  NT, Sun Solaris, AIX and Linux on the Intel and Sun
                  architectures. The system supports robust industry standard
                  databases including Microsoft SQL Server and Oracle.

         PurchaseSoft has always endeavored to incorporate the latest
technologies into our solution to keep our software on the cutting edge of
software design. We believe our solutions have historically featured the most
breadth and functionality available through the continual development of new
features for our customers. In keeping with these traditions, we are currently
working on improving our solution's workflow and including both multi-lingual
and multi-currency capabilities.


MARKETING

         The primary functions of our marketing efforts are to create market
awareness of our e-commerce solutions, create new sales opportunities for sales
initiatives and to educate the marketplace regarding the capabilities of our
products. We expect to reach targeted markets through an integrated marketing
campaign consisting of direct mail, trade shows, public relations, advertising
and seminars and through Web site programs. Our marketing programs are targeted
at the decision-makers within the enterprise.

         On February 21, 2001, we entered into an agreement with VIA Design and
Marketing, Inc., or VIA, to provide strategic marketing consulting services in
the areas of marketing strategy, messaging and brand positioning. VIA will
operate as an integral part of our marketing efforts including preparing our
annual marketing communications plan. This plan will address the strategy and
messaging by which we differentiate our brand from our competitors as well as
the suggested mix of marketing and advertising activities necessary to achieve
our goals.

         VIA will also create an interactive and intelligent Web site that we
expect to be a critical part of our marketing and sales efforts. Our new Web
site will present an interactive experience for visitors that will be more
informative than our current static site. When completed, this site will allow
us to communicate with our customers through secure sites on the Web, distribute
upgrades to our products, conduct demonstrations with prospective customers and
efficiently track sales and marketing activities.


SALES AND IMPLEMENTATION

         We intend to distribute our software solutions primarily using highly
motivated direct sales representatives. We plan to increase our direct sales
force while simultaneously stepping up our efforts to secure alliances with
systems integrators and other critical strategic relationships. Both our direct
and indirect sales efforts will feature our fully featured solution that may be
installed directly at the customer site or available as a hosted application.

         In our sales efforts we approach the senior management teams of our
potential customers calling on the Chief Financial Officer, Chief Information
Officer and Chief Executive Officer. We will also call upon, when appropriate,
the head of the prospective customer's purchasing department. We use sales teams
that consist of both sales professionals and technical professionals who work in
conjunction to provide business-specific presentations, demonstrations and
proposals that focus on the needs of the particular customer.


                                      -5-
<PAGE>


         Our professional services personnel are deployed to the customer site
early in the sales process. These professionals assist the sales executives and
the customers throughout the entire sales process from the proposal to the final
implementation of the product. We believe that early exposure to our technology,
strategy and methodology of implementation ensures customer satisfaction at the
end of the process.

         We believe that considerable opportunity exists for the sale of our
products outside of the United States. We are pursuing these worldwide
initiatives through critical relationships with strategic partners. We
believe that these strategic partnerships will assist us in the international
distribution of our software and will provide a critical component of our
international efforts. The competition for successful sales personnel as well
as strong technology partnerships is intense, however, and there can be no
guarantee that we will be successful in recruiting personnel or in developing
a strong alliance network. We intend to incur significant sales and
distribution expenses in future periods.

COMPETITION

         The market for our solution is intensely competitive, constantly
evolving and subject to rapid change brought on by changes in technology and/or
offerings of other participants in the industry. The intensity of the
competition increases each quarter and is likely to continue at its current pace
as new participants enter the industry and current players expand their product
offerings. We believe that our principal source of competition is from
independent software vendors with whom we compete directly. Our current
competitors include Ariba, Commerce One, Clarus, Concur Technologies, iPlanet,
Oracle, Rightworks, Elcom and I2. Some of our potential competitors are
developing Web-based solutions designed to allow their customers to buy more
effectively from suppliers while other competitors are attempting to add
procurement applications to their existing suite of products. Chief among this
last group are the significant ERP vendors such as SAP, PeopleSoft, J.D. Edwards
and Oracle. These ERP vendors have a substantial installed customer base into
which to offer these products. In addition, there are relatively low barriers to
entry into this marketplace and we expect additional competition to come from
new and/or emerging companies.

         We believe that the principal competitive factors affecting our market
include the breadth and depth of the solution, the functionality of the solution
and its ability to integrate easily with legacy technology, customer
satisfaction, the relative ease of use of the solution, the ability to
successfully implement the solution and the total cost of the solution.
PurchaseSoft believes that we compete favorably with our competition in these
areas. This market is new and constantly evolving, however, and we may not be
able to maintain our competitive position against both our current and potential
competitors, especially those with greater resources.

         Many of our competitors have larger customer bases, greater financial
and technical resources and better name recognition than we do. There is a
significant potential that some of our competitors may establish strategic or
other commercial relationships or alliances that may enable them to compete more
effectively against us. It is therefore possible that these partnerships and
alliances could gain significant market share. Competitive pressures brought
about by new technologies and consolidations within the industry will continue
to escalate. We cannot assure you that we will be able to compete successfully
against our current and future competitors.


                                      -6-
<PAGE>


RESEARCH AND DEVELOPMENT

         We have made substantial investments in research and development.
Research and development expenses were $3,090,457 and $860,012 in fiscal 2001
and fiscal 2000, respectively. In October 1999, we released our newest solution,
consisting of PurchaseSmart(TM), SourceSmart(TM) and WebQuote(TM).
PurchaseSmart(TM) is a Web-based, e-procurement software solution, written in
JAVA, which provides operational support for strategic procurement and
e-commerce. SourceSmart(TM) is an easy-to-use requisitioning system, written in
HTML and accessed using a Web browser. WebQuote(TM) provides buyers with the
ability to issue pricing requests and/or initiate auctioning events over the
Internet. We intend to make continual and substantial investments in our
research and development activities to keep our software solutions at the
leading edge of e-procurement and e-commerce offerings. The research and
development group is currently working on enhancing the PurchaseSmart(TM)
product workflow capabilities as well as adding multi-lingual and multi-currency
capabilities.

          PurchaseSoft expects to develop enhancements to our PurchaseSmart(TM)
products primarily through internal resources. We also intend to license
third-party technology to integrate with our software to take advantage of the
ever-increasing availability of new e-commerce offerings, which can shorten
research to market time and provide functionality beyond our core competencies.
We maintain a formal quality assurance program to create versions of our
software that are reliable and documented before they are released for general
distribution. We believe in continuous product enhancement based on feedback
from key customers, prospects, analysts and other sources.

         On March 15, 2001, we entered into an agreement with Tata Infotech
Limited, or Tata, to provide computer consultancy, programming and testing
services. We have retained Tata to allow accelerated development along two
parallel paths. While our internal development resources will be dedicated to
the maintenance and enhancement of our existing PurchaseSmart(TM) product, built
on the SilverStream(TM) development platform, Tata will create our next
generation, core product offering to be developed pursuant to our
specifications.

         Our development and quality assurance teams are highly trained software
professionals specializing in Internet technologies including Java, HTML and
XML. We expect to continue to recruit the highest caliber software professionals
to ensure our products provide customers with state-of-the-art features and
intuitive ease of use.


SOFTWARE MAINTENANCE

         Maintenance revenue for fiscal 2001 was $158,323 compared to $159,826
for fiscal 2000, a decrease of $1,503 or 0.9%. During fiscal 2001, we were
supporting three versions of our software, as shown in the following table:

<TABLE>
<CAPTION>

                                          GTPP            PURCHASESOFT          PURCHASESMART           TOTAL
<S>                                    <C>                  <C>                   <C>                 <C>
FY 2001                                 $15,314             $ 95,703              $47,306             $158,323
FY 2000                                 $87,573             $ 72,253              $     0             $159,826

Dollar change                          ($72,259)             $23,450              $47,306             ($ 1,503)
Percentage change                        (82.5%)               32.5%                   --                (0.9%)

</TABLE>

GTPP(TM)           -    GT PurchasePro, two-tier, 16-bit client server based
                        system (Supported generally through May 31, 2000,
                        except for several specific customers who were
                        supported until their one-year agreements expired).

PURCHASESOFT(TM)   -    Two-tier, 32-bit client server based system.

PURCHASESMART(TM)  -    Java/HTML, Internet-enabled, enterprise-wide
                        e-procurement system.


                                      -7-
<PAGE>


         In fiscal 2001, maintenance revenue associated with the GTPP product
was down $72,259, or 82.5% over the prior period. In contrast, our maintenance
revenue on PurchaseSoft(TM) and PurchaseSmart(TM) product increased by $70,756,
or 97.9%, over the prior period.

         Maintenance contracts for the GTPP(TM) and PurchaseSoft(TM) products
have been generally sold to customers for 15% of the software product list price
for a one-year renewable term. Maintenance contracts for the PurchaseSmart(TM)
products have been generally sold to customers for 18% of the software product
list price for a one-year renewable term. We record payment of these maintenance
contracts as deferred maintenance revenue and recognize revenue ratably over the
term of the contract. These contracts entitle the customer to telephone support
and unspecified upgrades, as they become available. We believe that maintenance
and support services are a very important component of the overall solution we
are providing and we intend to continue investing in the personnel and technical
resources necessary to provide customers with state-of-the-art maintenance and
support services.


WARRANTIES

         Our standard license agreement for our PurchaseSmart(TM) software
solution warrants that the software will be free from defects in materials and
workmanship for a period of 90 days following delivery of the software to a
customer. Our customers have the option and are encouraged to purchase annual
maintenance contracts for the software. Our standard maintenance agreement for
PurchaseSmart(TM) software provides that we will furnish those services that are
necessary to correct any malfunction in the software. Under the terms of these
agreements, if we are unable to correct a malfunction by means of telephone or
telecommunication assistance, repairs may, at the customer's option, be
performed on the premises where the software is located. For maintenance
services rendered, the customer is obligated to pay us fees at prescribed rates
as set forth in the agreement and to provide reimbursement for travel and other
expenses. These services were not significant during fiscal 2001 or 2000.


COPYRIGHTS, TRADEMARKS AND PATENTS

         We have registered with the United States Patent and Trademark Office
the trademark "PurchaseSoft(R)" for our purchasing and materials management
software product. We have applied for registration for the marks
"PurchaseSmart(TM)" and "SourceSmart(TM)" as well. PurchaseSoft has sought, and
will continue to seek, the protection of all of our software and documentation
through a combination of contract, copyright, trademark and trade secret laws,
as appropriate. We will continue to aggressively protect our trademark,
copyright and proprietary rights against any attempt by a competitor or any
other person or entity to infringe or interfere with intellectual property
rights. Litigation in this area is expensive, however, and we may not wish to
commit funds to commence or pursue litigation, especially because the high costs
could adversely affect our operational results. Even if we commence litigation,
there is no assurance that we would prevail or have adequate resources to fully
pursue any claims we may have or vigorously defend our position.


EMPLOYEES

         As of August 15, 2001, we had 46 full-time employees consisting of: 10
sales and marketing personnel; 21 development personnel; 8 customer support
personnel and 7 administrative personnel. None of our employees is subject
to a collective bargaining agreement. We believe relations with our employees
are good.


                                      -8-
<PAGE>

RISK FACTORS

         Stockholders and prospective purchasers of our common stock should
carefully consider the following risk factors in addition to the other
information appearing in this Annual Report on Form 10-KSB.

WE NEED  ADDITIONAL  CAPITAL TO OPERATE OUR BUSINESS AND A FAILURE TO RAISE THIS
CAPITAL MAY RESULT IN OUR INABILITY TO CONTINUE OUR OPERATIONS.

         We estimate  that our current  cash  balance will permit us to fund our
operations at our projected  rate of spending  through  January 31, 2002,  which
includes  $5.2  million  of  irrevocable  subscriptions  we  had  received  from
stockholders  exercising  their  rights in the rights  offering as of August 29,
2001,  of  which  $5,000,800  was  subscribed  to by L-R  Global,  our  majority
stockholder..  As a result, the Report of Independent  Accountants found on page
F-2 contains a going concern qualification. We have extended the rights offering
through  September 7, 2001.  We further  believe that if we raise an  additional
$1.8 million in the rights offering that we will be able to continue to fund our
operations  through May 31, 2002,  the end fiscal 2002.  In the event that we do
not raise an additional  $1.8 million in this  offering,  we expect that we will
need  to seek  additional  financing  to  continue  funding  our  operations  as
projected by our business plan. Of course, even if this rights offering is fully
subscribed,  we still  may need to raise  additional  funds  through  public  or
private debt or equity financings to be competitive, to accelerate our sales and
marketing  programs,  to establish a stronger financial position and to fund our
operations  beyond fiscal 2002.  Additional  financings  may not be available on
terms  that are  favorable  to us,  or at all.  A failure  to obtain  additional
funding  could impair our ability to implement  our business plan and may result
in an inability to fund our operations.

WE HAVE A HISTORY OF LOSSES, WILL PROBABLY CONTINUE TO INCUR NET LOSSES AND MAY
NEVER BE PROFITABLE.

         We had a net loss of approximately $8,440,000 for the fiscal year ended
May 31, 2001 and had an accumulated deficit of approximately $36,942,000. We
have experienced ongoing losses from operations and expect that these losses
will continue for at least some period until product sales may be generated in
sufficient volume to offset expenses. For the fiscal year ended May 31, 2001, we
had revenues of $603,880. For the fiscal year ended May 31, 2000, we had
revenues of $337,898. We will need to generate significant revenues from sales
of our software products and services to achieve and maintain profitability.

WE WILL NOT BE SUCCESSFUL UNLESS THE PRODUCTS WE DEVELOP ARE ACCEPTED BY THE
MARKET.

         We have heavily invested in research for, and development of, our core
purchasing and materials management software system - PurchaseSmart (TM). We
cannot offer any assurance that our PurchaseSmart(TM) solution will achieve
market acceptance. We believe that our history of poor financial performance has
negatively affected our image in the marketplace and that we may have forfeited
business from potential customers who expressed concerns about our financial
status and ability to remain solvent. Our largest challenge is to gain
widespread market acceptance of our PurchaseSmart(TM) solution. If our solutions
fail to obtain market acceptance, our ability to generate revenue will be
impaired.

OUR MANAGEMENT TEAM HAS LIMITED EXPERIENCE WITH US AND MAY NOT BE SUCCESSFUL.

         As a team, our management has a very limited history in operating
PurchaseSoft and we cannot be assured that our management team will be
successful in meeting planned objectives, which would impact our future growth.
If we are unable to meet these objectives it will reduce our ability to compete
successfully and grow revenue.


                                      -9-

<Page>

OUR REVENUES DEPEND ON A SINGLE PRODUCT-LINE AND OUR FUTURE REVENUES DEPEND UPON
ITS COMMERCIAL SUCCESS.

         We expect to derive substantially all of our revenues from the sale of
our PurchaseSmart(TM) software solution and related support services. If this
solution and service offerings are not accepted by our customers or if sales of
our products are negatively affected by any competition from other products,
significant flaws in the products, incompatibility with third-party hardware or
software products, negative publicity or evaluation, or obsolescence of the
hardware platforms or software environments in which PurchaseSmart(TM) runs, our
revenues will not grow.

IF WE ARE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL THAT WE NEED, THE
IMPLEMENTATION OF OUR BUSINESS PLAN AND ANY FUTURE GROWTH COULD SLOW OR HALT.

         Our ability to generate revenues and our future success depends
substantially upon our ability to attract on a timely basis and retain skilled
technical, managerial, marketing and professional services personnel.
Competition for qualified personnel, in particular for product development,
business development and sales and marketing personnel, can be intense, and we
compete in the marketplace against numerous companies, including larger, more
established companies with significantly greater financial resources than we
possess. Any failure to attract, assimilate or retain qualified personnel to
fulfill our current and future needs could impair our growth and reduce our
ability to develop, market and sell our products.

IF WE FAIL TO COMPETE SUCCESSFULLY, OUR ABILITY TO INCREASE OUR REVENUES OR
ACHIEVE PROFITABILITY WILL BE IMPAIRED.

         The software products industry is intensely competitive. We face
competition from many sources, including independent software vendors such as
Ariba, Commerce One, Clarus, Concur Technologies, iPlanet, Oracle, Rightworks,
Elcom and I2. These competitors all offer software products performing functions
similar to our products. We also could face indirect competition from our
prospective customer base if these organizations initiate internal efforts to
expand the capacity and functionality of their legacy systems. In addition,
suppliers of relational database management systems and companies that develop
management information software applications for large multinational
manufacturers have begun to target our potential customers and offer
applications that compete in our markets. Because the market space in which we
compete is experiencing significant growth, new competitors may enter these
markets and increase competition.

         Many of our competitors have larger customer bases, greater financial
and technical resources and better name recognition than we do. There is a
significant possibility that some of our competitors may establish strategic or
other commercial relationships or alliances that may enable them to compete more
effectively against us. If we are unable to compete successfully against our
current and future competitors, we could experience price reductions, order
cancellations and loss of revenues.


                                    -10-

<Page>

IF WE ARE NOT BE ABLE TO RESPOND TO TECHNOLOGICAL CHANGES OR TO CHANGES IN
INDUSTRY STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.

         The market for our software products is characterized by rapid
technological advances, constantly evolving industry standards, changing
end-user requirements, and frequent new product introductions and/or
enhancements. We may fail to anticipate or respond adequately to technological
developments. We may experience significant delays in product development or
introduction of new products and enhancements. The introduction of new products
by our competitors, the market acceptance of products embodying new technologies
and the emergence of new industry standards could render our existing products,
and products currently under development, obsolete and unmarketable. We may be
unable to enhance our current products or to develop and introduce new products
that keep pace with technological developments and achieve market acceptance. If
our products become technologically obsolete, we may be unable to sell our
products in the marketplace and generate revenues. The failure of new products
to gain market acceptance or our inability to introduce products compatible with
ever-changing technology on a timely basis may damage our ability to compete and
may negatively impact our business and operations.

THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT THE
TRADING PRICE OF OUR COMMON STOCK.

         Our revenues and operating results can vary substantially from quarter
to quarter due to a number of factors. Our ability to increase revenue is
dependent on our ability to grow sales activity, which provides opportunities
for consulting, training and subsequent maintenance revenues, all of which may
be recognized in future quarters. In addition, our sales and marketing efforts
may only eventually lead to revenue in the future, while generating current
costs and expenses. As a result, our operating results for one or more future
quarters may not meet the expectations of public securities market analysts
and/or our stockholders, which could decrease the price of our common stock.

OUR ABILITY TO COMPETE AND OUR BUSINESS COULD BE JEOPARDIZED IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY OR BECOME SUBJECT TO INTELLECTUAL PROPERTY
RIGHTS LITIGATION, WHICH COULD REQUIRE US TO INCUR SIGNIFICANT COSTS.

         We rely on a combination of copyright, trademark and trade secret laws,
employee and third-party nondisclosure agreements and other industry standard
methods for protecting ownership of our proprietary software and business
practices. In spite of these precautions, the possibility exists that an
unauthorized third party will copy or reverse-engineer portions of our products
or obtain and use information that we regard as proprietary. The mechanisms we
use to protect our software and other proprietary information may not be
adequate, particularly in foreign countries where the laws may not protect our
proprietary rights to the same extent as the laws of the United States. If
competitors are able to use our technology, our ability to compete could be
harmed. As the number of competitors providing software products in the industry
increases and the functionality of these products further overlaps, we expect
that software products will increasingly be subject to claims of infringement on
third-party proprietary rights. Any of these types of claims, even if without
merit, could result in costly litigation and may require us to redesign or stop
selling, incorporating or using our products that use any challenged
intellectual property or enter into royalty or licensing arrangements with third
parties, which may not be available to us on acceptable terms, or at all. Any
lawsuits regarding intellectual property rights could impair our ability to
become profitable.

                                     -11-

<Page>

THERE MAY BE FUTURE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK THAT COULD
CAUSE OUR STOCK PRICE TO FALL.

         Our common stock is traded on the National Association of Securities
Dealers OTC Bulletin Board(R). Our common stock has historically been highly
illiquid. L-R Global and two principals of L-R Global who serve on our Board of
Directors, one of whom is our Chief Executive Officer, in the aggregate owned
approximately 81% of our common stock as of August 15, 2001. If L-R Global or
any of its partners were to sell even a small portion of its total shares in a
short time, the market price of our common stock would likely decline
dramatically. Further, sales of a substantial number of shares of our common
stock by any holder in a short time would likely cause the market price of our
common stock to decrease significantly. In addition, the sale of any of these
shares may impair our future ability to raise capital through the sale of
additional stock.

OUR STOCK PRICE MAY BE VOLATILE.

         Based on the trading history of our common stock, we believe that some
factors cause the market price of our stock to fluctuate significantly. These
factors include:

         o        quarterly fluctuations in our financial results;

         o        sales or purchases of a substantial number of shares of our
                  common stock in a short time;

         o        announcements of technological innovations or new products by
                  us or our competitors;

         o        market conditions in the software industry, and in the
                  industries that purchase our products; and

         o        changes in relationships with our customers.


YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS IS LIMITED BECAUSE WE
ARE CONTROLLED BY A MAJOR STOCKHOLDER.

         L-R Global and two principals of L-R Global who serve on our Board of
Directors, one of whom is our Chief Executive Officer, in the aggregate owned
approximately 81% of our common stock as of August 15, 2001. L-R Global and our
Chief Executive Officer, a principal of L-R Global who serves on our Board of
Directors, also hold warrants and options presently exercisable for an aggregate
of approximately 595,000 shares of common stock that if exercised would increase
its ownership of our voting stock to approximately 82%. L-R Global has enough
voting power to approve or disapprove any matters that are determined by a
majority vote of our stockholders, which severely limits your ability to
influence PurchaseSoft through voting your shares.

IF A PUBLIC TRADING MARKET FOR SHARES OF OUR COMMON STOCK IS NOT MAINTAINED,
YOU MAY NOT BE ABLE TO SELL SHARES OF OUR COMMON STOCK.

        Although shares of our common stock are presently quoted on the OTC
Bulletin Board, we cannot assure you that they will continue to be quoted in
the future.  Furthermore, in contrast to stock that is quoted on the Nasdaq
National Market or trade on a national securities exchange, as a result of our
stock being quoted on the OTC Bulletin Board, stockholders may:

    -      find it more difficult to obtain accurate and timely quotations
           regarding the bid and asked prices for our common stock;

    -      experience greater spreads between bid and asked prices;

    -      be charged relatively higher transactional costs when buying or
           selling our common stock; and

    -       encounter more difficulty in effecting sales or purchase of common
            stock


                                      -12-

<Page>

BECAUSE SHARES OF OUR COMMON STOCK ARE NOT LISTED ON A NATIONAL SECURITIES
EXCHANGE OR QUOTED ON THE NASDAQ NATIONAL MARKET, WE FACE INCREASED COSTS IN
COMPLYING WITH SECURITIES LAWS.

     While securities listed on the Nasdaq National Market System or
national securities exchanges are in many cases exempt from the registration
requirements of state securities laws, securities traded on the OTC Bulletin
Board must comply with the registration requirements of state securities
laws, which increases the time and costs associated with complying with
state securities laws when raising capital.  We cannot assure that this cost
of compliance will not have a material adverse effect on our results of
operations.

OUR STOCK MAY BE SUBJECT TO PENNY STOCK REGULATIONS THAT MAKE IT MORE
DIFFICULT FOR BROKER-DEALERS TO EASILY TRADE OUR STOCK AND MAY CONSEQUENTLY
LIMIT THE ABILITY OF HOLDERS OF OUR COMMON STOCK TO SELL IT.

     The Securities and Exchange Commission has adopted regulations imposing
limitations upon the manner in which certain low priced securities,
referred to as a "penny stock," are publicly traded.  Under these
regulations, a penny stock is defined as any equity security that has a
market price of less than $5.00 per share, subject to specified exceptions.
Unless an exception is available, the regulations require the delivery, prior
to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated with it.  Also,
under these regulations, some broker-dealers who recommend these types of
securities to persons other than established customers and "accredited
investors" must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale.  Trading activities for penny stocks are more difficult for
broker-dealers than in the case of securities not defined as penny stocks.
Because our common stock may be a penny stock this may have the result of
depressing the market for our securities, and a stockholder may find it
difficult to sell shares of our common stock.

ITEM 2:   DESCRIPTION OF PROPERTY

         Our corporate headquarters is located at One Research Drive in
Westborough, Massachusetts, where we occupy approximately 10,320 square feet of
office space under a lease that expires in May 2007. We also occupy
approximately 1,930 square feet of office space at 101 Eisenhower Parkway in
Roseland, New Jersey, under a lease that expires in July 2005. We also lease
short-term office space in Bloomington, Minnesota and Reading, England.


ITEM 3:   LEGAL PROCEEDINGS

         We have been named as a defendant in a lawsuit in the State of Florida.
This lawsuit was filed on June 8, 2001 and is presently venue in the Circuit
Court for the Twelfth Judicial Circuit in Sarasota County, Florida. John J.
Medico, a former employee of ours, is the only plaintiff. We are the sole
defendant. Mr. Medico alleges a breach of his separation agreement with us,
claiming that we refused to allow him to exercise certain stock options between
December 1999 and April 2000. He seeks an award of damages and costs. We intend
to rigorously defend our position.


ITEM 4:   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended May 31, 2001.


                                      -13-
<PAGE>


PART II:

ITEM 5:   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Our common stock is listed for quotation under the symbol "PURC" on the
National Association of Securities Dealers OTC Bulletin Board(R). The following
table sets forth the range of high and low bid quotations of the common stock
during the two fiscal years ended May 31, 2001 and May 31, 2000 as reported by
OTC Bulletin Board(R).

<TABLE>
<CAPTION>

                                                                          BID
                                                              --------------------------
         PERIOD                                                HIGH                LOW
         ------                                               ------             -------
<S>                                                           <C>                 <C>
FISCAL YEAR ENDING MAY 31, 2001
         First Quarter                                        $3.062              $1.812
         Second Quarter                                       $4.625              $1.906
         Third Quarter                                        $2.750              $1.437
         Fourth Quarter                                       $1.750              $0.593

FISCAL YEAR ENDED MAY 31, 2000
         First Quarter                                        $0.937              $0.437
         Second Quarter                                       $0.593              $0.320
         Third Quarter                                        $9.750              $0.410
         Fourth Quarter                                       $8.000              $2.062

</TABLE>

         The closing bid price of the common stock on August 15, 2001 on the
OTC Bulletin Board-Registered Trademark- was $0.78 per share.


HOLDERS

         As of August 15, 2001, there were approximately 400 holders of record
of PurchaseSoft's common stock. We believe that, as of August 15, 2001, there
were approximately 2,200 beneficial owners of PurchaseSoft's common stock.


DIVIDENDS

         We have never paid cash dividends on our common stock nor does our
Board of Directors anticipate that we will pay cash dividends in the foreseeable
future because of the financial requirements necessary to develop operations.


                                      -14-
<PAGE>


RECENT SALES OF UNREGISTERED SECURITIES

         On April 30, 2001, we issued an aggregate of 66,787 shares of our
common stock in payment for a total of $90,000 in services performed by a vendor
of PurchaseSoft:

         o        13,846 shares of common stock for $45,000 in services were
                  issued (based on the closing price that day of $3.25 per
                  share); and

         o        52,941 shares of common stock for $45,000 of services were
                  issued (based on the closing price that day of $0.85 per
                  share).

These issuances of common stock were made in reliance upon Regulation D,
promulgated under the Securities Act of 1933, as amended, and upon Section 4(2)
of the Securities Act as transactions not involving a public offering.

         On May 31, 2001,we converted the L-R Global demand promissory notes and
accrued interest, totaling $10,457,808 into 11,883,873 shares of our common
stock with a par value of $0.01. This conversion was done pursuant to the
conversion agreement we entered into with L-R Global on April 12, 2001. We
agreed to convert this debt and accrued interest into common shares using the
last reported sale price of our common stock on April 12, 2001, which was $0.88
per share. This issuance of common stock was made in reliance upon Regulation D,
promulgated under the Securities Act of 1933, as amended, and upon Section 4(2)
of the Securities Act as a transaction not involving a public offering.


                                      -15-
<PAGE>


ITEM 6:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

         The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
attached notes and the other financial information included elsewhere in this
Annual Report on Form 10-KSB. This Management's Discussion and Analysis of
Financial Condition and Results of Operations section contains descriptions of
our expectations regarding future trends affecting our business. These
forward-looking statements and other forward-looking statements made elsewhere
in this document are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The discussion below and under
the heading "Risk Factors" sets forth numerous factors we believe could cause
actual results to differ materially from those contemplated by the
forward-looking statements. We are not under any obligation to update the
information contained in this section.

FISCAL YEAR ENDED MAY 31, 2001 VS. 2000

OVERVIEW

         We reported a net loss for the year of $8,439,564 on revenues of
$603,880 as compared to a net loss for the prior year of $3,899,987 on revenues
of $337,898.

         On August 14, 2000, we announced the appointment of existing board
member, Donald S. LaGuardia, as interim CEO and President. Mr. LaGuardia is a
member of L-R Managers LLC, the general partner of L-R Global Partners, LP,
our majority stockholder and a related party. He has served as one of our
directors since June 1998 and chairs our audit committee.  Mr.  LaGuardia
joined L-R Global in 1997 as an equity analyst.  At this same time, Jeffrey
B. Pinkerton was appointed our Vice Chairman and Chief Product Strategist.
Mr. Pinkerton's focus will be on product strategy as well as playing an active
role in the promotion of our products and solutions.  Mr. Pinkerton has held
various positions with us since 1987, when we first began marketing our
computer-based purchasing system.

         On October 31, 2000, we announced our first major UK customer win for
our enterprise e-procurement solution. We signed a contract to implement our
software at the RHM Partnership Division group of companies, part of the Rank
Hovis McDougall, Ltd. organization, or RHM as we refer to them. RHM is a milling
and prepared foods conglomerate with annual sales of L1.7 billion. We
worked jointly with IBM Global Services (United Kingdom) Limited to deliver our
solution to RHM. IBM principals and senior systems professionals assisted our
project team in this implementation and managed the strategic sourcing, business
process improvement, supplier adoption, technology management and training
phases of the project. We provided overall project management, installation and
implementation assistance and ongoing maintenance and support.

         On November 7, 2000, we announced the signing of an agreement with
Origin Consulting Services, Inc., an e-business consulting firm, headquartered
in South Korea. The agreement made OCS the official distribution partner in
South Korea for our e-procurement solutions. Under the terms of the agreement,
OCS will exclusively market our e-procurement solutions and provide support and
services to the South Korean market.

         On January 24, 2001, we announced an agreement with IBM United Kingdom
Limited whereby IBM Global Services will market, sell and supply our
e-procurement suite, associated modules and services to IBM mid-market customers
in the UK. In addition, this agreement is structured to have global application
so that any IBM worldwide affiliate can take advantage of the terms of this
agreement and offer our solution to customers anywhere in the world.

                                      -16-
<PAGE>

         On January 30, 2001, we borrowed $5 million from L-R Global and signed
a demand promissory note in return, which increased our total indebtedness to
L-R Global to $10 million. Both notes provide for interest at 6% per annum. On
May 31, 2001, pursuant to a conversion agreement we entered into with L-R Global
on April 12, 2001, L-R Global converted these demand promissory notes and
accrued interest into 11,883,873 restricted shares of our common stock.

         On February 21, 2001, we entered into an agreement with VIA Design and
Marketing, Inc. to provide marketing consulting services in the areas of
marketing strategy, brand awareness, logo and tag line development. In addition,
VIA will create an interactive and intelligent Web site that we expect will be a
fruitful source of new customer leads.

         On March 15, 2001, we entered into an agreement with Tata Infotech
Limited to provide computer consultancy, programming and testing services. We
have retained Tata to allow accelerated development along two parallel paths.
While our internal development resources will be dedicated to the maintenance
and enhancement of our existing PurchaseSmart(TM) product, built on the
SilverStream(TM) development platform, Tata will create our next generation,
core product offering. We project that the fees to complete this project will be
in the range of $1,600,000 to $1,800,000 and will be paid over a ten-month
period.

         On March 28, 2001, we engaged  Devonshire  Holdings,  LLC to act as our
financial  advisor.   Devonshire  is  assisting  us  in  analyzing  our  capital
requirements and the execution of our financing strategy,  including the current
rights offering,  which expires at 5:00 p.m., New York City time on September 7,
2001. If this  offering is fully  subscribed  we will raise  approximately  $9.7
million in new capital.  As of August 29, 2001,  we had received $5.2 million of
irrevocable  subscriptions  from  stockholders  exercising  their  rights in the
offering,  of which  $5,000,800  was  subscribed to by L-R Global,  our majority
stockholder.

         On July 18, 2001,  subsequent to the end of fiscal 2001, we issued a $2
million  demand  promissory  note to L-R Global.  On August 28, 2001, L-R Global
cancelled this note as partial payment  towards its irrevocable  exercise of its
subscriptions rights in the rights offering.

REVENUES

TOTAL REVENUE

         Total revenue, which includes product and service revenue, for fiscal
2001, was $603,880 compared to $337,898 for fiscal 2000, an increase of
$265,982, or 78.7%.

PRODUCT REVENUE

         Product revenue for fiscal 2001 was $220,359 compared to $116,155 for
fiscal 2000, an increase of $104,204, or 89.7%. During fiscal 2001, we added two
new customers and delivered one PurchaseSmart(TM) software system and one
PurchaseSoft(TM) software system. In fiscal 2000, we added three new customers
and delivered three PurchaseSoft(TM) software systems.

SERVICE REVENUE

         Professional service revenue for fiscal 2001 was $225,198 compared to
$61,917 for fiscal 2000, an increase of $163,281, or 263.7%. This increase is a
combination of two factors. The first factor is the relationship of service
revenue generated by product revenue, both in terms of absolute dollars and
percentages. In fiscal 2001, service revenues associated with product revenues
were $219,798, or 99.7%, of product revenues compared to $20,967 in service
revenues, or 18.1%, for fiscal 2000, an increase of $198,831. The second factor
is the service revenue generated from existing customers. In fiscal 2001, we
generated $5,400 in service revenues from existing customers compared to $40,950
in service revenues from existing customers for fiscal 2000, a decrease of
$35,550.


                                      -17-
<PAGE>

         Maintenance revenue for fiscal 2001 was $158,323 compared to $159,826
for fiscal 2000, a decrease of $1,503 or 0.9%. During fiscal 2001, we were
supporting three versions of our software, as shown in the following table:

<TABLE>
<CAPTION>

                                        GTPP                 PURCHASESOFT                PURCHASESMART              TOTAL
                                      -------                ------------                -------------              -----
<S>                                  <C>                       <C>                          <C>                   <C>
         FY 2001                      $15,314                  $  95,703                    $47,306                $158,323
         FY 2000                      $87,573                  $  72,253                    $     0                $159,826

         Dollar change               ($72,259)                 $  23,450                    $47,306               ($  1,503)
         Percentage change             (82.5%)                     32.5%                         --                   (0.9%)

</TABLE>

GTPP(TM)               -    GT PurchasePro, Two-tier, 16-bit client server
                            based system (Supported generally through May 31,
                            2000, except for several specific customers who were
                            supported until their one-year agreements expired).

PURCHASESOFT(TM)       -    Two-tier, 32-bit client server based system.

PURCHASESMART(TM)      -   Java/HTML, Internet enabled enterprise-wide
                           eProcurement system.

         In fiscal 2001, maintenance revenue associated with the GTPP product
was down $72,259, or 82.5% over the prior period. In contrast, our maintenance
revenue on our PurchaseSoft(TM) and PurchaseSmart(TM) products increased by
$70,756, or 97.9%, over the prior period.

         Maintenance contracts for the GTPP(TM) and PurchaseSoft(TM) products
have been generally sold to customers for 15% of the software product list price
for a one-year renewable term. Maintenance contracts for the PurchaseSmart(TM)
products have been generally sold to customers for 18% of the software product
list price for a one-year renewable term. We record payment of these maintenance
contracts as deferred maintenance revenue and recognize revenue ratably over the
term of the contract. These contracts entitle the customer to telephone support
and unspecified upgrades, as they become available. We believe that maintenance
and support services are a very important component of the overall solution we
are providing and we intend to continue investing in the personnel and technical
resources necessary to provide customers with state of the art maintenance and
support services.


COSTS AND EXPENSES

COST OF PRODUCT REVENUES

         Cost of product revenues for fiscal 2001 was $14,000 compared to $465
in fiscal 2000, an increase of $13,535. The $14,000 incurred during fiscal 2001
are royalty payments due for third-party software. Cost of product revenues has
generally been insignificant in relation to product revenues. In the event that
we rely on third-party software as an increasing component of our total software
solution, royalties and other costs associated with the licensing of this
third-party software may become significant. There were no third party royalties
incurred during fiscal 2000.


                                      -18-
<PAGE>


COST OF SERVICE REVENUES

         Cost of service revenue for fiscal 2001 was $917,626 compared to
$343,112 in fiscal 2000, an increase of $574,514, or 167.4%. Compensation and
benefits increased $260,826 reflecting increased headcount as we continue to
build our customer support infrastructure. In addition, technical consulting and
contracting fees increased $161,282 related to outside technical expertise we
used to augment our own internal resources. Travel expenses increased $91,119
relating to non-billable trips to customer sites. We expect that cost of service
revenues will continue to increase in absolute dollars, and that they are likely
to grow in proportional terms, at a faster rate than the related service
revenue, until such time as revenues grow and reach full utilization of the
costs used to produce them. We are committed to building a world-class customer
support organization and expect to continue to make substantial investments in
this area in the future.

SALES AND MARKETING

         Sales and marketing expenses for fiscal 2001 were $1,814,521 compared
to $1,255,424 in fiscal 2000, an increase of $559,097, or 44.5%.

         Sales expenses increased from $574,079 in fiscal 2000 to $672,864 in
fiscal 2001, an increase of $98,785, or 17.2%. During fiscal 2001, hosting fees
that we paid to provide product demonstrations to prospects increased $130,776
and recruiting fees increased $54,126. Offsetting these increases in part were
decreases in compensation and benefits of $53,025 and decreases in independent
contractor fees of $61,756. In December 1999, we restructured our primary method
of distribution from a direct sales force to an indirect sales force utilizing
resellers and partners. This indirect distribution strategy enjoyed limited
success. In light of this, we decided it was necessary to rebuild a direct sales
force, which we began to do in the third quarter of fiscal 2001. The reductions
in compensation and contractor fees reflect savings resulting from the
repositioning of our distribution strategy from primarily indirect to direct
sales. We expect to incur significant sales expenses in future periods.

           Marketing expenses for fiscal 2001 were $1,141,657 compared to
$681,345 in fiscal 2000, an increase of $460,312, or 67.6%. During fiscal 2001,
compensation and benefits increased $83,920 reflecting increased headcount,
marketing consulting fees increased $236,693 relating to our agreement with VIA
Design and Marketing, Inc. who we contracted with to provide marketing guidance
and the development of our marketing strategies, outbound lead generation
services increased $88,864 and Web site design and development provided by VIA
increased $46,851. We expect to incur significant marketing expenses in future
periods.

GENERAL AND ADMINISTRATIVE

         General and administrative expenses for fiscal 2001 were $2,983,376
compared to $1,849,116 in fiscal 2000, an increase of $1,134,260, or 61.3%.
During fiscal 2001, travel expenses increased $222,863, reflecting trips made
by our executives in developing our indirect distribution network of
resellers, alliance partners and key prospects. During fiscal 2001, our
depreciation expense increased $52,595. We incurred relocation expenses of
$51,987 to move several employees from remote offices to our new corporate
headquarters in Westborough, Massachusetts and incurred expenses relating to
the relocation of equipment from our old offices to our new corporate
headquarters. Also contributing to the increased general and administrative
expenses were general overhead expenses, which increased $29,353, legal and
accounting expenses, which increased $98,730, consulting fees, which
increased $403,694, primarily relating to consulting fees and non-statutory
stock options we granted to Donald S. LaGuardia as our CEO, occupancy costs,
which increased $177,897 resulting from increased rents associated with our
new corporate headquarters in Westborough, Massachusetts, our new facility in
Roseland, New Jersey and our short-term office rental in Reading, England.
Offsetting these increases in part were compensation and benefit expenses,
which decreased $179,407, primarily due to non-recurring severance payments
recorded in fiscal 2000.

                                      -19-
<PAGE>

RESEARCH AND DEVELOPMENT

         Research and development expenses for fiscal 2001 were $3,090,457
compared to $860,012 in fiscal 2000, an increase of $2,230,445, or 259.4%.
During fiscal 2001, compensation and benefit expenses increased $506,737
resulting from increases in headcount. Hosting fees of $44,580 were incurred
during fiscal 2001 to test our software in an Internet environment. We also
increased our use of specialized and highly skilled technical consultants during
fiscal 2001 by $1,555,611 to perform maintenance and specialized enhancements to
our PurchaseSmart(TM) product as well as to begin development of our next
generation software product in collaboration with Tata Infotech Limited, who we
refer to as Tata. Tata has been retained to provide computer consultancy,
programming and testing services. We have retained Tata to allow accelerated
development along two parallel paths. While our internal development resources
will be dedicated to the maintenance and enhancement of our existing
PurchaseSmart(TM) product, built on the SilverStream(TM) development platform,
Tata will create our next generation, core product offering. We project the fees
to complete this project will be in the range of $1,600,000 to $1,800,000 to be
paid over a ten-month period. We intend to make continual and substantial
investments in our research and development activities to keep our software
solutions at the leading edge of e-procurement and e-commerce offerings.

NET INTEREST INCOME

         Net interest income for fiscal 2000 was $70,244, compared to net
interest expense of $223,464 for fiscal 2001, a decrease of $293,708. Interest
income for fiscal 2001 was $205,360 compared to $140,430 for fiscal 2000, an
increase of $64,930, or 46.2%. This additional income resulted from a higher
average cash balance. Interest expense increased $358,638, or 511%, in fiscal
2001 primarily due to interest on the L-R Global demand promissory
notes.

LIQUIDITY AND CAPITAL RESOURCES

         As of May 31, 2001, we had cash and cash equivalents totaling
$2,358,688 and working capital of $1,474,428. Cash and cash equivalents
decreased $2,633,618 during fiscal 2001. We used $7,121,126 of cash in operating
activities during fiscal 2001 of which $8,439,564 was the net loss for the
period. Non-cash expenses of $1,073,981 are included in the net loss for the
period and consist of depreciation and amortization charges of $190,002, stock
options and stock granted for services of $416,906, accrued interest converted
to equity of $457,808 and other charges of $9,265. Further increasing the cash
used in operations, was a net increase in operating liabilities over operating
assets of $244,457 primarily attributable to increases in accounts payable. We
used $592,892 of cash in investing activities during fiscal 2001 to acquire
property and equipment totaling $545,202 and to increase security deposits by
$49,490. We generated $5,080,400 of cash in financing activities during fiscal
2001 by issuing a $5 million demand promissory note to L-R Global and through
the exercise of stock options and warrants, totaling $199,253. These proceeds
were reduced in part by capital lease payments of $118,853.

         On each of March 23, 2000 and January 30, 2001, we borrowed $5 million
from L-R Global and signed demand promissory notes totaling $10 million. These
notes provided for interest to be paid at the rate of 6% per annum. In fiscal
year 2001, we accrued interest charges of $400,274 related to these two notes.
In fiscal year 2000, we accrued interest charges of $57,534 related to the March
23, 2000 note. In a conversion agreement dated April 12, 2001, L-R Global agreed
to convert its outstanding debt and accrued interest to shares of our common
stock at a price per share of $0.88, the closing price for our common
stock that day. On May 31, 2001, pursuant to the conversion agreement, L-R
Global converted these demand promissory notes and accrued interest into
11,883,873 restricted shares of our common stock.


                                      -20-
<PAGE>

         We made $795,031 in capital expenditures during fiscal 2001, including
assets acquired under capital leases, as compared with $254,854 in fiscal 2000.
The most significant asset acquired was a software license we are using in
building our catalog-content solution. The cost of this license was $267,309, of
which we paid $17,480 in cash and entered into a capital lease for the balance
of $249,829. The terms of this lease require us to pay $8,053 per month for
thirty-six months at an effective interest rate of approximately 9.9%. Other
assets acquired were primarily computer processing equipment, software and
peripheral devices. We had no significant commitments as of May 31, 2001 for
capital expenditures.

         We have incurred substantial losses, we have accumulated a deficit, and
we require additional financing. These matters raise substantial doubt about our
ability to continue  as a going  concern.  Our plans in regard to these  matters
follow. On March 28, 2001, we engaged  Devonshire  Holdings,  LLC, to act as our
financial  advisor.   Devonshire  is  assisting  us  in  analyzing  our  capital
requirements  and the execution of our financing  strategy,  which  includes the
rights offering,  which expires at 5:00 p.m., New York City time on September 7,
2001.  As of August 29,  2001,  we had  received  $5.2  million  of  irrevocable
subscriptions  from  stockholders  exercising  their rights in the offering,  of
which $5,000,800 was subscribed to by L-R Global, our majority  stockholder.  We
believe that if we are  successful in raising an additional  $1.8 million in the
rights offering,  that these  resources,  revenue from future software sales and
services and interest  income will be sufficient  to fund our planned  operating
expenses and capital  requirements through May 31, 2002, the end of fiscal 2002.
However,  there  can be no  assurance  that  such  funds  will be  available  or
sufficient to meet our operating expenses and capital  requirements  during such
period.  We cannot make  assurances  that we will be  successful in raising this
additional  $1.8 million in the rights  offering.  Even if the offering is fully
subscribed,  we still  may need to raise  additional  funds  through  public  or
private debt or equity financings to be competitive, to accelerate our sales and
marketing  programs,  to establish a stronger financial position and to fund our
operations  beyond  fiscal 2002.  Devonshire  will assist us in future public or
private debt or equity financings as necessary.

         On July 18, 2001,  subsequent to the end of fiscal 2001, we issued a $2
million  demand  promissory  note to L-R Global.  On August 28, 2001, L-R Global
cancelled this note as partial payment  towards its irrevocable  exercise of its
subscriptions  rights in the rights  offering.  In  recognition  of our need for
additional  capital,  L-R Global approached us and proposed the $2 million loan.
Our Board of Directors  reviewed the terms of the proposed loan and decided that
they were favorable to us. .

         In the event that we do not raise  another  $1.8  million in the rights
offering  that  expires  on  September  7, 2001,  our plans are to pursue  other
sources of capital with the assistance of Devonshire, which would likely include
a public or private debt or equity  financing with new investors.  If sufficient
financial  support is not provided by the rights offering,  other sources or our
majority stockholder, L-R Global, we would be forced to substantially curtail or
cease operations.

ITEM 7:   FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                                  PAGE
                                                                                                                  ----
<S>                                                                                                              <C>
Report of PricewaterhouseCoopers LLP                                                                              F-2

Balance Sheets at May 31, 2001 and 2000                                                                           F-3

Statements of Operations For the Years Ended May 31, 2001 and 2000                                                F-4

Statements of Stockholders' Equity for the Years Ended May 31, 2001
and 2000                                                                                                          F-5

Statements of Cash Flows for the Years Ended May 31, 2001 and 2000                                                F-6

Notes to Financial Statements                                                                                     F-7


</TABLE>


ITEM 8:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable


                                      -21-
<PAGE>

PART III:

ITEM 9:  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth our directors and executive officers as of August
15, 2001, their ages and the positions held by them:

<TABLE>
<CAPTION>

                                                                                                                        YEAR BECAME
                                                                                                                         OFFICER OR
            NAME                                AGE                             POSITION WITH COMPANY                     DIRECTOR
-----------------------------                 -------          ----------------------------------------------------      -----------
<S>                                           <C>              <C>                                                        <C>
Donald S. LaGuardia                              34             Chief Executive Officer,                                    1998
                                                                President and Director

Terry J. Bartz                                   41             Chief Operating Officer,                                    1999
                                                                General Counsel and Secretary

Philip D. Wolf                                   49             Chief Financial Officer, Treasurer,                         1998
                                                                and Assistant Secretary

J. Murray Logan                                  66             Chairman of the Board                                       1998

Jeffrey B. Pinkerton                             53             Vice Chairman, Chief Product                                1994
                                                                Strategist and Director

Brad I. Markowitz                                43             Director                                                    1994

Robert J. Chamine                                63             Director                                                    2001

William J. Caffery                               54             Director                                                    2001

</TABLE>

         DONALD S. LAGUARDIA has served as our President and Chief Executive
Officer since August 14, 2000 and as a member of our Board of Directors since
June 1998. Mr. LaGuardia is a member of L-R Managers LLC, the general partner
of L-R Global Partners, LP, our majority stockholder and a related party. He
has served as one of our directors since June 1998 and chairs our audit
committee. Mr. LaGuardia joined L-R Global in 1997 as an equity analyst.  From
1991 to 1997, Mr. LaGuardia worked as a financial analyst and then as the
Network Business Planning Manager for BMW of North America, Inc. From 1987 to
1991, Mr. LaGuardia was an auditor and then a consultant for
PricewaterhouseCoopers. Mr. LaGuardia is a certified Public Accountant and a
candidate for the Chartered Financial Analyst designation. Mr. LaGuardia
received his B.A. in 1989 from Pace University and his MBA in International
Finance  from New York University in 1997.

         TERRY J. BARTZ began advising PurchaseSoft as outside counsel in 1996
and joined us in May 1999 as Vice President and General Counsel. Mr. Bartz was
appointed our Chief Operating Officer in May 2001. Prior to joining us, Mr.
Bartz had a private law practice focused on serving the needs of start-up,
financially distressed and emerging businesses. Mr. Bartz's law practice
provided representation and advice on a wide variety of general business and
corporate law matters including litigation, corporate governance, employment and
executive compensation. Mr. Bartz received his B.A. degree (with major in
business) from Gustavus Adolphus College in 1982 and his J.D. degree, cum laude,
from Hamline University School of Law in 1985.


                                      -22-
<PAGE>


         PHILIP D. WOLF joined us in October 1997 and has served as Chief
Financial Officer, Treasurer and Assistant Secretary since January 1998. During
1997, Mr. Wolf served as a consultant to several start-up companies. From 1989
to 1997, Mr. Wolf was Vice President of Finance and CFO for Nice Man
Merchandising, a worldwide entertainment merchandising company. From 1987 to
1989, he was Chief Financial Officer for Benchmark Computer Systems, Inc., a
value-added reseller and software developer of integrated computer systems. From
1983 to 1987, Mr. Wolf was Vice President of Finance and Administration for
National Information Systems, Inc., which provided computer and information
services to the direct marketing industry. From 1974 to 1983, Mr. Wolf was staff
accountant and became the Controller for Patchin Appraisals, Inc., a national
valuation firm. Mr. Wolf received his BS Degree in Accounting from the
University of Minnesota in 1974.

         JEFFREY B. PINKERTON has served as our Vice Chairman and Chief Product
Strategist since August 14, 2000 and as a member of our Board of Directors since
October 1995. He formerly served as President and Chief Executive Officer from
March 2000 to August 14, 2000 and as President from August 1996 to March 2000.
From 1987 to 1991 and from 1994 to July 1996, Mr. Pinkerton served in various
positions for us, including Executive Vice President and Vice President-Product
Development. From 1991 to 1994, Mr. Pinkerton founded and operated Viewpoint
Consulting, a reseller of our software products. Prior to joining us, Mr.
Pinkerton was Director of Purchasing for American-Standard, Inc. in New York.
His industrial experience includes both materials management and systems
analysis. Mr. Pinkerton has published numerous articles on Purchasing and
Purchasing Applications, taught a course on application design for procurement
at Baruch College, NY, and published two books. Mr. Pinkerton received a BSc in
Mathematics and Statistics from Sheffield University in England in 1970.

         J. MURRAY LOGAN has served as Chairman of our Board of Directors since
September 1999 and as a member of our Board of Directors since June 1998. Since
1975, Mr. Logan has served as a vice president, portfolio manager, Chairman of
Investment Policy of Rockefeller & Co., Inc., and as a vice president of
Rockefeller Gas & Oil Inc., general partner of various Rockefeller partnerships.
Mr. Logan is the Managing Partner of L-R Global Partners, L.P. since its
inception in 1997 and along with Rockefeller & Co., Inc., is a member of L-R
Managers, LLC, which is the management company for L-R Global Partners, L.P. Mr.
Logan is a director of The World Trust Fund, an unaffiliated investment trust.
Mr. Logan served as a trustee of the Johns Hopkins University and chaired its
Committee on Investments. Mr. Logan is also a director of the Camphill
Foundation, Camphill Village USA and the Berkshire Opera Company. Mr. Logan
received his B.A. from Johns Hopkins University in 1959.

         BRAD I. MARKOWITZ has served as a member of our Board of Directors
since February 1994. From February 1994 to June 1997, Mr. Markowitz served as
Chairman of our Board of Directors. Since 1995, Mr. Markowitz has served as
President and a member of the Board of Directors of Park Avenue Health Care
Management, Inc., a physician practice management company. From 1987 to 1995,
Mr. Markowitz served as Vice President of the ADCO Group, a real estate banking
and venture capital company.

         ROBERT J. CHAMINE has served as a member of our Board of Directors
since June 2001. Mr. Chamine is Managing Director of Devonshire Holdings, a New
York-based investment-banking firm. As part of our Board, Mr. Chamine will help
provide strategic guidance for our mission of providing practical procurement
solutions that improve return-on-investment, strategic sourcing and inventory
management. Mr. Chamine was a Managing Director and member of the Board of
Directors of Schroder & Company, Inc., a British merchant bank, until it merged
into CitiGroup in early 2000. During his twenty-two years at Schroder's, he
served as a member of the executive committee of their board of directors, a
member of the risk committee as well as the capital commitment committee. Mr.
Chamine received a Bachelor of Arts degree from Fordham University and attended
New York University Graduate School of Business Administration.


                                      -23-
<PAGE>



         WILLIAM J. CAFFERY has served as a member of our Board of Directors
since August 2001. Mr. Caffery will be directly involved in helping us chart the
strategic direction of our future product development and, by extension, our
company. Mr. Caffery is a seasoned technology executive with wide-ranging
experience in the application of leading edge technologies. He most recently
served as Vice President and Chief Information Officer of America Online, Inc.
where he directed the reorganization and integration of key information
technology units. He has founded two successful high technology consultancies
and served as a Vice President of Gartner Group, Inc., one of the world's
largest and most respected high technology consultancies. Mr. Caffery holds both
a Bachelor of Science and a Master of Science degree from the Massachusetts
Institute of Technology. He received his MBA from Harvard Business School.


FAMILY RELATIONSHIPS

         There are no family relationships among any of the directors or
executive officers.


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
our directors and certain of our officers and persons holding more than ten
percent of our common stock are required to report their ownership of our common
stock and any changes in ownership to the Securities and Exchange Commission and
to us. Specific due dates have been established and we are required to report in
this Annual Report on Form 10-KSB any failure to file by these dates during the
fiscal year ended May 31, 2001. Based on our review of copies of these reports,
Jeff Pinkerton filed one untimely Form 4 and Robert Chamine filed one untimely
Form 3.


                                      -24-
<PAGE>

ITEM 10:   EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The table below sets forth information regarding executive compensation
for the fiscal years ended May 31, 2001, 2000, and 1999 of our Chief Executive
Officers and our other most highly compensated executive officers whose
compensation for fiscal 2001 exceeded $100,000.

<TABLE>
<CAPTION>

                                                                                LONG TERM
                                                                               COMPENSATION
                                                                               ------------
                                                                                  AWARDS
                                                    ANNUAL COMPENSATION           ------             ALL OTHER
   NAME AND PRINCIPAL POSITION        YEAR      SALARY ($)     BONUS ($)       OPTIONS (#)        COMPENSATION ($)
   ---------------------------        ----      ----------     ---------       -----------        ----------------
<S>                                 <C>        <C>             <C>             <C>                <C>
Donald L. LaGuardia                 2001 (1)        --            --             400,000            $ 341,048 (15)
   President and Chief              2000            --            --              80,000                --
   Executive Officer                1999            --            --              20,000                --

Terry J. Bartz                      2001       $ 128,633          --             250,000            $   3,849  (9)
   Chief Operating Officer,         2000       $ 100,150          --               --               $   1,630  (9)
   General Counsel and Secretary    1999 (13)  $   4,688          --             135,000            $  80,803 (12)

Philip D. Wolf                      2001       $ 129,593          --             200,000            $   3,830  (9)
   Chief Financial Officer,         2000       $ 100,630          --               --               $   1,644  (9)
   Treasurer and Ass't. Secretary   1999       $  88,717          --             139,000                --

P. Gopalakrishnan                   2001       $ 124,510          --              75,000            $  17,371 (16)
   Sr. Vice President               2000       $  42,550          --             125,000            $   1,771  (9)
   and CTO

Jeffrey B. Pinkerton                2001       $ 165,720          --               --               $   9,518  (6)
   President and Chief              2000 (2)   $ 160,360          --             320,113            $  10,880  (5)
   Executive Officer                1999       $ 160,000          --               --               $   7,800 (14)

Pamela Cabalka                      2001            --            --               --                   --
   Chief Executive Officer          2000 (10)  $  82,227          --               --               $  75,188 (11)

Michael G. Kerrison                 2001            --            --               --                   --
   Chairman and Chief               2000 (3)   $  42,045          --               --                   --
   Executive Officer                1999       $ 100,000          --             625,000            $  35,000  (7)

Joseph D. Mooney                    2001            --            --               --                   --
   Chairman and Chief               2000            --            --               --                   --
   Executive Officer                1999 (4)   $ 133,333          --               --               $ 445,200  (8)


</TABLE>

---------------------------

(1)      Mr. LaGuardia was appointed Chief Executive Officer by the Board of
         Directors on August 14, 2000.

(2)      See the section "Executive Officers and Directors" for information as
         to the offices held by Mr. Pinkerton in fiscal 2000 and his subsequent
         appointment as Vice Chairman and Chief Product Strategist effective
         August 14, 2000. Mr. LaGuardia succeeded Mr. Pinkerton in the offices
         of President and Chief Executive Officer effective August 14, 2000.

(3)      Mr. Kerrison was appointed Chief Executive Officer by the Board of
         Directors on January 31, 1999 and resigned on September 9, 1999.

(4)      Mr. Mooney was appointed President and Chief Executive Officer by the
         Board of Directors on June 23, 1997 and resigned on January 31, 1999.


                                      -25-
<PAGE>

(5)      Represents a $7,800 automobile allowance and a $3,080 contribution to
         employee's 401K account.

(6)      Represents a $5,200 automobile allowance and a $4,318 contribution to
         employee's 401K account.

(7)      Represents $35,000 earned as an independent contractor.

(8)      Represents a $400,000 compensation charge under Mr. Mooney's
         termination agreement, which was paid in twenty-four equal payments
         through January 31, 2001, a $40,000 contract settlement payment, and
         a $5,200 automobile allowance.

(9)      Represents contribution to employee's 401(k) account.

(10)     Ms. Cabalka was appointed interim Chief Executive Officer by the Board
         of Directors on September 10, 1999 and resigned on December 8, 1999.

(11)     Represents a $75,000 accrued severance benefit of which $71,023 was
         paid as of May 31, 2000 and the balance of $3,977 was paid in June 2000
         and a $188 contribution to employee's 401(k) account.

(12)     Represents $80,803 earned as an independent contractor.

(13)     Mr. Bartz joined PurchaseSoft in May 1999 as Vice President, General
         Counsel and Corporate Secretary and was appointed Chief Operating
         Officer in May 2001.

(14)     Represents a $7,800 automobile allowance.

(15)     Represents $51,042 in cash compensation paid to L-R Global Managers for
         the services of Mr. LaGuardia. Also includes $290,006 in non-cash
         compensation charges associated with two non-statutory stock option
         grants issued to Mr. LaGuardia.

(16)     Represents a $417 automobile allowance, $1,879 contribution to
         employee's 401(k) account and $15,075 in accrued severance and vacation
         payments.


                                      -26-
<PAGE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR

         The following table sets forth information as to options granted during
the fiscal year ended May 31, 2001 to the officers listed in the Summary
Compensation Table who held office during fiscal 2001:

<TABLE>
<CAPTION>

                                                     INDIVIDUAL GRANT
                                 NUMBER OF          ------------------        EXERCISE
                                SECURITIES          % OF TOTAL OPTIONS          PRICE           EXPIRATION
                                UNDERLYING       GRANTED TO EMPLOYEES IN     ($ / SHARE)           DATE
        NAME                 OPTIONS GRANTED         FISCAL YEAR (8)
        ----                 ---------------     -----------------------      ---------      --------------
<S>                             <C>               <C>                        <C>             <C>
 Donald S. LaGuardia            150,000 (1)                7.1%                $2.687        August 14, 2005
                                250,000 (2)               11.9%                $0.650        April 23, 2006

 Terry J. Bartz                  50,000 (3)                2.4%                $1.750        December 27, 2005
                                200,000 (4)                9.5%                $0.650        April 23, 2006

 Philip D. Wolf                  50,000 (5)                2.4%                $1.750        December 27, 2005
                                150,000 (6)                7.1%                $0.650        April 23, 2006

 P. Gopalakrishnan               75,000 (7)                3.6%                $2.125        September 14, 2005

</TABLE>
---------------------------

(1)      Mr. LaGuardia was granted a non-statutory stock option exercisable for
         an aggregate of 150,000 shares of common stock, which was fully vested
         on the date of the grant.

(2)      Mr. LaGuardia was granted a non-statutory stock option exercisable for
         an aggregate of 250,000 shares of common stock of which 83,334 shares
         vested on the date of the grant, 83,333 shares will vest on April 24,
         2002 and 83,333 shares will vest on April 24, 2003. On August 3, 2001,
         PurchaseSoft accelerated the vesting on the 166,666 unvested shares in
         order to eliminate the variable accounting treatment for this option.

(3)      Mr. Bartz was granted an incentive stock option exercisable for an
         aggregate of 50,000 shares of common stock of which 16,667 shares
         vested on the date of the grant, 16,667 will vest on December 28, 2001
         and 16,666 will vest on December 28, 2002.

(4)      Mr. Bartz was granted an incentive stock option exercisable for an
         aggregate of 200,000 shares of common stock of which 66,667 shares
         vested on the date of the grant, 66,667 shares will vest on April 24,
         2002 and 66,666 shares will vest on April 24, 2003.

(5)      Mr. Wolf was granted an incentive stock option exercisable for an
         aggregate of 50,000 shares of common stock of which 16,667 shares
         vested on the date of the grant, 16,667 will vest on December 28, 2001
         and 16,666 will vest on December 28, 2002.

(6)      Mr. Wolf was granted an incentive stock option exercisable for an
         aggregate of 150,000 shares of common stock of which 50,000 shares
         vested on the date of the grant, 50,000 shares will vest on April 24,
         2002 and 50,000 shares will vest on April 24, 2003.

(7)      Mr. Gopalakrishnan was granted an incentive stock option for an
         aggregate of 75,000 shares of common stock of which 25,000 shares
         vested on the date of the grant, 25,000 shares will vest on September
         15, 2001 and 25,000 shares will vest on September 15, 2002. Mr.
         Gopalakrishnan was released from service in early May 2001 and these
         options expired unexercised on May 19, 2001.

(8)      Percentages are based upon an aggregate of 2,107,500 options granted
         during fiscal 2001, which includes an aggregate of 400,000
         non-statutory option shares granted to Mr. LaGuardia as an independent
         contractor.


                                      -27-
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

         The following table sets forth information as to options exercised
during the fiscal year ended May 31, 2001, and unexercised options held at the
end of such fiscal year, by the officers listed in the Summary Compensation
Table who held office during fiscal 2001:


<TABLE>
<CAPTION>

                              SHARES                                                        VALUE OF UNEXERCISED
                              ACQUIRED                      NUMBERS OF UNEXERCISED          IN-THE-MONEY OPTIONS
                                 ON           VALUE           OPTIONS AT 5/31/01                 AT 5/31/01
          NAME             EXERCISE (#)   REALIZED ($)    EXERCISABLE/UNEXERCISABLE     EXERCISABLE/UNEXERCISABLE (1)
          ----             -------------  ------------    -------------------------     -----------------------------

<S>                                <C>         <C>         <C>                         <C>
 Donald S. LaGuardia               0           $ 0            333,334 / 166,666             $ 5,833 / $ 11,667

 Terry J. Bartz                    0           $ 0            213,967 / 171,199              $ 4,667 / $ 9,333

 Philip D. Wolf                    0           $ 0            205,667 / 133,333              $ 3,500 / $ 7,000

 P. Gopalakrishnan                 0           $ 0                        0 / 0                      $ 0 / $ 0

 Jeffrey B. Pinkerton              0           $ 0            524,279 / 100,000                  $ 2,084 / $ 0

</TABLE>
---------------------------


(1)   Value is based on the closing bid price supplied by the National
      Quotations Bureau in the Nasdaq System and reported by the NASD as of May
      31, 2001, the last trading date during fiscal 2001, which was $0.72 minus
      the exercise price.



EXECUTIVE EMPLOYMENT AGREEMENTS

         On August 15, 2000, we entered into a management consulting agreement
with Donald S. LaGuardia, to become our President and Chief Executive Officer.
Mr. LaGuardia is a related party due to his relationship with L-R Global, where
he is a partner. This agreement provided for an initial term of six months with
an automatic extension on a month-to-month basis. Under the initial term, Mr.
LaGuardia was granted a non-statutory stock option to purchase 150,000 shares of
our common stock. These shares have an exercise price of $2.69 per share, were
fully vested on the date of grant and have a term of five years. He also
received reimbursement for all reasonable out of pocket expenses relating to
housing and transportation. On April 24, 2001, Mr. LaGuardia was granted another
non-statutory stock option for 250,000 shares of our common stock. These shares
have an exercise price of $0.65 per share, have a term of five years, were
vested one-third on the date of the grant, will vest an additional one-third on
April 24, 2002 and will vest the final one-third on April 24, 2003. On August 3,
2001, we accelerated the vesting on the unvested two-thirds of these shares, so
that all 250,000 shares were fully vested. Since Mr. LaGuardia is employed by
L-R Global, we are required under generally accepted accounting principles to
treat his option grants as issued to a non-employee. Upon the expiration of the
initial term of the management consulting agreement, we agreed to an extension
for another six-month term, under the same terms and conditions, except that we
agreed to make monthly payments of $14,583 to L-R Managers, LLC for the services
of Mr. LaGuardia. The renewal term covers the period of February 16, 2001
through August 15, 2001.

         On January 25, 2001 we entered into a new agreement with Jeffrey
Pinkerton, our Vice Chairman and Chief Product Strategist for a term of one
year. This agreement replaced the prior agreement with Mr. Pinkerton, which was
dated April 1, 1998. Mr. Pinkerton's current annual base salary is $165,720,
subject to review and increase by our Board of Directors. If this agreement is
terminated for any reason other than cause, death or by mutual agreement, Mr.
Pinkerton will receive nine-months base salary.


                                      -28-
<PAGE>

DIRECTOR COMPENSATION

         At the current time, our directors receive no cash compensation for
their service to us as directors.


ITEM 11:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of August 15, 2001, as reported to
us, as to the beneficial ownership of our common stock by each director, each
named officer, by all directors and executive officers as a group and each
person known to us to be the beneficial owner of more than 5% of our issued and
outstanding common stock as of August 15, 2001 or other date noted below. Unless
otherwise specified, the address of each beneficial owner is c/o PurchaseSoft,
Inc., One Research Drive, Suite 100 B, Westborough, MA 01581. As of August 15,
2001, 26,993,905 shares of common stock were outstanding.

<TABLE>
<CAPTION>

                                                      AMOUNT AND NATURE OF               PERCENTAGE OF
  NAME AND ADDRESS                                    BENEFICIAL OWNERSHIP           OUTSTANDING SHARES OF
  OF BENEFICIAL OWNER                                 OF COMMON STOCK (1)            COMMON STOCK OWNED (2)
  -------------------                                 -------------------            ----------------------
<S>                                                   <C>                            <C>

  J. Murray Logan  (3)
  c/o L-R Global Partners, L.P.
  30 Rockefeller Plaza, Room 5425
  New York, New York 10112                               21,977,059                         81.13%

  Donald S. LaGuardia  (4)
  c/o L-R Global Partners, L.P.
  30 Rockefeller Plaza, Room 5425
  New York, New York 10112                               22,193,240                         80.44%

  L-R Global Partners, L.P.  (5)
  c/o Rockefeller & Co., Inc.
  30 Rockefeller Plaza, Room 5425
  New York, New York 10112                               21,676,240                         80.02%

  Terry J. Bartz  (6)                                       213,967                          0.79%

  Philip D. Wolf  (7)                                       240,667                          0.88%

  Jeffrey B. Pinkerton  (8)                                 538,281                          1.96%

  Brad I. Markowitz  (9)                                    130,820                          0.48%

  Robert J. Chamine  (10)                                    90,000                          0.33%

  William J. Caffery  (11)                                   50,000                          0.18%

  All current directors and executive                    23,757,794                         82.64%
  officers as a group (8 persons)  (12)

</TABLE>


----------
(1)      The shares owned, and the shares included in the total number of shares
         outstanding, have been adjusted, and the percentage owned has been
         computed, in accordance with Rule 13d-3(d)(1) under the Securities
         Exchange Act of 1934, as amended, and includes, options and warrants to
         the extent called for by such rule, with respect to shares of common
         stock, that can be exercised within 60 days. Except as set forth in the
         footnotes below, such shares are beneficially owned with sole
         investment and sole voting power.


                                      -29-
<PAGE>

(2)      The percent of class calculation is based on 26,993,905 shares of
         PurchaseSoft's common stock being issued and outstanding as of August
         15, 2001 and effect being given, where appropriate, pursuant to Rule
         13d-3(d)(1)(i) under the Exchange Act, to any option or warrant then
         exercisable or exercisable within 60 days thereafter.

(3)      Includes 21,581,440 shares held by L-R Global Partners, L.P. Also
         includes 94,800 shares that L-R Global Partners, L.P. has the right to
         acquire within 60 days of August 15, 2001 upon the exercise of
         warrants. Mr. Logan, together with L-R Managers, LLC, Rockefeller &
         Co., Inc., and Rockefeller Financial Services, Inc. share voting and
         investment control with respect to L-R Global Partners, L.P. Mr. Logan
         may be deemed the beneficial owner of shares held by L-R Global
         Partners, L.P. although he disclaims beneficial ownership to the extent
         of his purported ownership interest.

(4)      Includes 21,581,440 shares held by L-R Global Partners, L.P. Also
         includes 94,800 shares that L-R Global Partners, L.P. has the right to
         acquire within 60 days of August 15, 2001 upon the exercise of
         warrants. Mr. LaGuardia, together with L-R Managers, LLC, Rockefeller &
         Co., Inc., and Rockefeller Financial Services, Inc. share voting and
         investment control with respect to L-R Global Partners, L.P. Mr.
         LaGuardia may be deemed the beneficial owner of shares held by L-R
         Global Partners, L.P. although he disclaims beneficial ownership to the
         extent of his purported ownership interest. Also includes 500,000
         shares that Mr. La Guardia has the right to acquire within 60 days of
         August 15, 2001 upon the exercise of stock options.

(5)      Includes 94,800 shares that L-R Global Partners, L.P. has the right to
         acquire within 60 days of August 15, 2001 upon the exercise of
         warrants.

(6)      Includes 213,967 shares issuable within 60 days of August 15, 2001 upon
         the exercise of stock options.

(7)      Includes 205,667 shares issuable within 60 days of August 15, 2001 upon
         the exercise of stock options.

(8)      Includes 524,279 shares issuable within 60 days of August 15, 2001 upon
         the exercise of stock options and 125 shares owned by Mr. Pinkerton's
         wife. Mr. Pinkerton may be deemed the beneficial owner of shares held
         by his wife although he disclaims beneficial ownership of such shares.

(9)      Includes 115,833 shares issuable within 60 days of August 15, 2001 upon
         exercise of stock options and 10,544 shares owned by Focus Capital
         Corp. Mr. Markowitz may be deemed the beneficial owner of shares held
         by Focus Capital Corp. although he disclaims beneficial ownership of
         such shares.

(10)     Includes 50,000 shares issuable within 60 days of August 15, 2001 upon
         the exercise of stock options and 15,000 shares owned by Mr. Chamine's
         wife. Mr. Chamine may be deemed the beneficial owner of shares held by
         his wife although he disclaims beneficial ownership of such shares.

(11)     Includes 50,000 shares issuable within 60 days of August 15, 2001 upon
         the exercise of stock options.

(12)     Includes 1,659,746 shares issuable within 60 days of August 15, 2001
         upon the exercise of stock options and 94,800 shares issuable within 60
         days upon the exercise of warrants.


                                      -30-
<PAGE>

ITEM 12:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On March 23, 2000 and January 30, 2001, we borrowed a total of
$10,000,000 from L-R Global Partners, L.P. and signed demand promissory notes in
return. Under the terms of these notes, we must repay the principal and interest
due at any time upon the demand of L-R Global. These notes provided for interest
at 6% per annum. On May 31, 2001, we converted the L-R Global demand promissory
notes and accrued interest, totaling $10,457,808 into 11,883,873 shares of our
common stock. This conversion was done pursuant to the conversion agreement we
entered into with L-R Global on April 12, 2001. We agreed to convert this debt
and accrued interest into common shares using the last reported sale price of
the company's common stock on April 12, 2001.

         On July 18, 2001,  subsequent to the end of fiscal 2001, we issued a $2
million  demand  promissory  note to L-R Global.  In recognition of our need for
additional  capital,  L-R Global approached us and proposed the $2 million loan.
Our Board of Directors  reviewed the terms of the proposed loan and decided that
they were favorable to us. On August 28, 2001, L-R Global cancelled this note as
partial payment towards its irrevocable  exercise of its subscriptions rights in
the rights offering.

         On August 15, 2000, we entered into a Management Consulting Agreement
with Donald S. LaGuardia, to become our President and Chief Executive Officer.
Mr. LaGuardia is a related party due to his relationship with L-R Global, where
he is a partner. This agreement provided for an initial term of six months with
an automatic extension on a month-to-month basis. Under the initial term, Mr.
LaGuardia was granted a non-statutory stock option to purchase 150,000 shares of
our common stock. These shares have an exercise price of $2.69 per share, were
fully vested on the date of grant and have a term of five years. He also
received reimbursement for all reasonable out of pocket expenses relating to
housing and transportation. On April 24, 2001, Mr. LaGuardia was granted another
non-statutory stock option for 250,000 shares of our common stock. These shares
have an exercise price of $0.65 per share, have a term of five years, were
vested one-third on the date of the grant, will vest an additional one-third on
April 24, 2002 and will vest the final one-third on April 24, 2003. On August 3,
2001, we accelerated the vesting on the unvested two-thirds of these shares, so
that all 250,000 shares were fully vested. Since Mr. LaGuardia is employed by
L-R Global, we are required under generally accepted accounting principles to
treat his option grants as issued to a non-employee. Upon the expiration of the
initial term of the Management Consulting Agreement, we agreed to an extension
for another six-month term, under the same terms and conditions, except that we
agreed to make monthly payments of $14,583 to L-R Managers, LLC for the services
of Mr. LaGuardia. The renewal term covers the period of February 16, 2001
through August 15, 2001.

         On January 25, 2001 we entered into a new agreement with Jeffrey
Pinkerton, our Vice Chairman and Chief Product Strategist for a term of one
year. This agreement replaced the prior agreement with Mr. Pinkerton, which was
dated April 1, 1998. Mr. Pinkerton's current annual base salary is $165,720,
subject to review and increase by our Board of Directors. If this agreement is
terminated for any reason other than cause, death or by mutual agreement, Mr.
Pinkerton will receive nine-months base salary.


                                      -31-
<PAGE>

ITEM 13:   EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

         The following exhibits, which are designated with a footnote reference
are incorporated by reference to a prior registration statement declared
effective under the Securities Act or a periodic report file pursuant to Section
13 of the Exchange Act. Exhibits designated with an asterisk are filed with this
report.

NUMBER   EXHIBIT
------   -------
2.1      Agreement and Plan of Merger, dated November 10, 1998, by and between
         PurchaseSoft, Inc., a Delaware corporation, and Greentree Software,
         Inc., a New York corporation. (1)

3.1      Certificate of Incorporation of the Company. (1)

3.2      Amendment to Certificate of Incorporation of the Company.  (10)

3.3      By-laws of the Company.  (1)

4.1      Specimen Certificate for Shares of Common Stock. (6)

10.1     The Company's Stock Option Plan of 1987. (2)

10.2     The Company's Stock Option Plan of 1994. (3)

10.3     The Company's 1997 Stock Option Plan. (4)

10.4     Registration Rights Agreement dated as of December 25, 1995 among the
         Company and certain of its Shareholders. (5)

10.5     Registration Rights Agreement dated as of April 23, 199_ among the
         Company and certain of its Shareholders. (5)

10.6     Registration Rights Agreement dated October 25, 1996 between the
         Company and certain of its Shareholders. (4)

10.7     Form of Warrant issued to Wm. Smith Securities & Gilmore & Co. (A
         substantial number of these warrants have been assigned to L-R Global
         Partners, L.P.) (5)

10.8     Form of Warrant issued to TIS Acquisitions and Management Group, Inc.,
         The Travelers Indemnity Company, and Mark Cahill, dated October 25,
         1996. (4)

10.9     Form of Warrant issued to Wm. Smith Securities, Inc., dated October 25,
         1996. (A substantial number of these warrants have been assigned to L-R
         Global Partners, L.P.) (4)

10.10    Form of Warrant issued to Wm. Smith Securities, Inc., dated October 25,
         1996. (A substantial number of these warrants have been assigned to L-R
         Global Partners, L.P.) (4)

10.11    Promissory note dated March 23, 2000, of PurchaseSoft, Inc. to L-R
         Global Partners, L.P. (This note is no longer outstanding. It was
         converted into common stock at May 31, 2001 under a conversion
         agreement dated April 12, 2001 between the Company and L-R Global.) (7)

10.12    Lease agreement between the Company and Flanders Westborough Delaware,
         Inc. (8)

10.13    Lease agreement between the Company and Office Associates L.L.C. (8)


                                      -32-
<PAGE>

10.14    Management consulting agreement dated as of August 15, 2000 by and
         between the Company and Donald S. LaGuardia. (9)

10.15    Demand promissory note dated January 30, 2001, of PurchaseSoft, Inc. to
         L-R Global Partners, L.P. (This note is no longer outstanding. It was
         converted into common stock at May 31, 2001 under a conversion
         agreement dated April 12, 2001 between the Company and L-R Global.) (9)

10.16    Employment agreement dated January 25, 2001 between the Company and
         Jeffrey Pinkerton. (11)

10.17    Agreement dated February 21, 2001 between the Company and VIA Marketing
         and Design, Inc. (11)

10.18    Agreement dated March 15, 2001 between the Company and Tata Infotech
         Limited. (11)

10.19    Conversion Agreement dated April 12, 2001 between the Company and L-R
         Global Partners, L.P. (12)

10.20    Demand promissory note dated July 18, 2001, of PurchaseSoft, Inc. to
         L-R Global Partners, L.P. (This note is no longer outstanding. It was
         cancelled on August 28, 2001 as partial payment towards L-R Global's
         irrevocable exercise of its subscription rights in the rights
         offering. (13)

23.1     Consent of PricewaterhouseCoopers LLP *


FOOTNOTES:

(1)      Incorporated herein by reference to the Company's Report on Form 8-K,
         filed on November 25, 1998.

(2)      Incorporated herein by reference to the Company's Annual Report on Form
         10-K for the fiscal year ended May 31, 1991.

(3)      Incorporated herein by reference to the Company's Annual Report on Form
         10-KSB for the fiscal year ended May 31, 1994.

(4)      Incorporated herein by reference to the Company's Annual Report on Form
         10-KSB for the fiscal year ended May 31, 1997.

(5)      Incorporated herein by reference to the Company's Registration
         Statement on Form S-1, File No. 333-45475.

(6)      Incorporated herein by reference from the Company's Annual Report on
         Form 10-KSB for the fiscal year ended May 31, 1999.

(7)      Incorporated herein by reference from the Company's Quarterly Report on
         Form 10-QSB for the quarter ended February 29, 2000.

(8)      Incorporated herein by reference from the Company's Annual Report on
         Form 10-KSB/A for the fiscal year ended May 31, 2000.

(9)      Incorporated herein by reference from the Company's Quarterly Report on
         Form 10-QSB/A for the quarter ended August 31, 2000.

(10)     Incorporated herein by reference from the Company's Quarterly Report on
         Form 10-QSB for the quarter ended November 30, 2000.

(11)     Incorporated herein by reference from the Company's Quarterly Report on
         Form 10-QSB for the quarter ended February 28, 2001.

(12)     Incorporated herein by reference from the Company's Form S-3
         Registration Statement, File No.333-60890 filed on May 14, 2001.

(13)     Incorporated herein by reference to the Company's Report on Form 8-K,
         filed on July 25, 2001.


                                      -33-
<PAGE>

REPORTS ON FORM 8-K

1.       On June 26, 2001, PurchaseSoft filed a report on Form 8-K announcing
         that L-R Global converted its demand promissory notes and accrued
         interest totaling $10,457,808 into 11,883,873 shares of PurchaseSoft's
         common stock at $0.88 per share under the terms of a conversion
         agreement dated April 12, 2001. The Company also filed as an exhibit,
         its audited financial statements for the year ended May 31, 2000 and
         incorporated such statements by reference.

2.       On July 25, 2001, PurchaseSoft filed a report on Form 8-K announcing
         that it had issued a demand promissory note to L-R Global Partners,
         L.P. in the aggregate principal amount of $2 million.

3.       On August 1, 2001, PurchaseSoft filed a report on Form 8-K with its
         Management's Discussion and Analysis of Financial Condition and Results
         of Operations concerning the audited financial statements for the year
         ended May 31, 2001, which were filed as an exhibit and incorporated by
         reference.

4.       On August 28, 2001, PurchaseSoft filed a report on Form 8-K announcing
         that it had extended the expiration date of its rights offering from
         August 28, 2001 to September 7, 2001, 5:00 p.m., New York City time.


                                      -34-
<PAGE>

SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto to
be duly authorized.

                                     PurchaseSoft, Inc.
                                       (Issuer)
Date:   August 29, 2001
                                     /s/  Donald S. LaGuardia
                                     ------------------------------------
                                     Donald S. LaGuardia
                                     President, Chief Executive Officer, and
                                     Director

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Issuer and in the capacities and on
August 29, 2001.
<TABLE>
<CAPTION>

                  SIGNATURE                                               TITLE
                 ----------                                               -----

<S>                                                         <C>
/s/ Donald S. LaGuardia                                     President, Chief Executive Officer
________________________________                            and Director
Donald S. LaGuardia


/s/ Philip D. Wolf                                          Chief Financial Officer, Treasurer
_________________________________                           and Assistant Secretary
Philip D. Wolf


/s/ Terry J. Bartz                                          Chief Operating Officer,
_________________________________                           General Counsel, and Secretary
Terry J. Bartz


/s/ J. Murray Logan
_________________________________                           Chairman of the Board of Directors
J. Murray Logan


                                                            Vice Chairman, Chief Product Strategist
________________________________                            and Director
Jeffrey B. Pinkerton


/s/ Brad I. Markowitz
_________________________________                           Director
Brad I. Markowitz


/s/ Robert J. Chamine
_________________________________                           Director
Robert J. Chamine


/s/ William J. Caffery
_________________________________                           Director
William J. Caffery

</TABLE>


                                      -35-
<PAGE>

                               PURCHASESOFT, INC.
                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>


 DESCRIPTION                                                                     PAGE
-------------------------------------------------------------------------------------
<S>                                                                               <C>
 Report of PricewaterhouseCoopers LLP                                             F-2

 Balance Sheets as of May 31, 2001 and 2000                                       F-3

 Statements of Operations for the years ended May 31, 2001 and 2000               F-4

 Statements of Stockholders' Equity for the years ended May 31, 2001
 and 2000                                                                         F-5

 Statements of Cash Flows for the years ended May 31, 2001 and 2000               F-6

 Notes to Financial Statements                                                    F-7

</TABLE>

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors
   and Stockholders of
   PurchaseSoft, Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of PurchaseSoft, Inc. at May 31, 2001 and 2000,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

The accompanying  financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred substantial losses, has
accumulated a deficit, and requires additional financing. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota
July 3, 2001, except as to Note 1 and Note 10, which are as of August 29, 2001


                                      F-2
<PAGE>

                               PURCHASESOFT, INC.
                                 Balance Sheets
                             May 31, 2001 and 2000

<TABLE>
<CAPTION>

                                                                      2001                          2000
                                                                 --------------                --------------
<S>                                                            <C>                           <C>
Assets

Current Assets
   Cash and cash equivalents                                   $     2,358,688               $     4,992,306
   Accounts receivable, net                                            119,827                        12,709
   Prepaid expenses and other current assets                           152,668                       149,940
                                                               ---------------               ---------------
Total Current Assets                                                 2,631,183                     5,154,955
                                                               ---------------               ---------------
Property and equipment, net                                          1,062,360                       460,408
                                                               ---------------               ---------------
Security deposits                                                      339,131                       297,269
                                                               ---------------               ---------------
Total Assets                                                   $     4,032,674               $     5,912,632
                                                               ===============               ===============

Liabilities and Stockholders' Equity

Current Liabilities
   Accounts payable                                            $       532,594               $       126,893
   Current obligations under capital leases                            112,825                        50,002
   Accrued expenses                                                    476,524                       509,493
   Deferred revenues                                                    34,812                        52,881
                                                               ---------------               ---------------
Total Current Liabilities                                            1,156,755                       739,269
                                                               ---------------               ---------------

Long-Term Liabilities
   Note payable with a related party                                     --                        5,000,000
   Noncurrent obligations under capital leases                         110,613                        42,460
                                                               ---------------               ---------------
Total Long-Term Liabilities                                            110,613                     5,042,460
                                                               ---------------               ---------------

Commitments and Contingencies (Note 5)

Stockholders' Equity
Common stock, $0.01 par value, 50,000,000
   shares authorized, 26,988,905 and 14,730,549
   issued and outstanding, respectively                                269,889                       147,305
Additional paid-in-capital                                          39,686,388                    28,575,283
Deferred stock-based compensation                                     (159,722)                         --
Accumulated deficit                                                (36,942,217)                  (28,502,653)
                                                               ---------------               ---------------
                                                                     2,854,338                       219,935
Less treasury stock (4,780 shares) at cost                             (89,032)                      (89,032)
                                                               ---------------               ---------------
Total Stockholders' Equity                                           2,765,306                       130,903
                                                                 --------------                --------------
Total Liabilities and Stockholders' Equity                     $     4,032,674               $     5,912,632
                                                               ===============               ===============

</TABLE>


                 See accompanying notes to financial statements


                                       F-3
<PAGE>

                               PURCHASESOFT, INC.
                            Statements of Operations
                        Years Ended May 31, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                               2001                          2000
                                                                                         ------------                  -------------
<S>                                                                                      <C>                           <C>
Revenues:
     Product                                                                             $    220,359                  $    116,155
     Services                                                                                 383,521                       221,743
                                                                                         ------------                  ------------
Total revenues                                                                                603,880                       337,898
                                                                                         ------------                  ------------
Costs and expenses:
     Cost of product revenues                                                                  14,000                           465
     Cost of service revenues                                                                 917,626                       343,112
     Sales and marketing                                                                    1,814,521                     1,255,424
     General and administrative                                                             2,983,376                     1,849,116
     Research and development                                                               3,090,457                       860,012
                                                                                         ------------                  ------------
Total costs and expenses                                                                    8,819,980                     4,308,129
                                                                                         ------------                  ------------
Operating loss                                                                             (8,216,100)                   (3,970,231)

Interest income/(expense), net                                                               (223,464)                       70,244
                                                                                         ------------                  ------------
Net loss                                                                                 $ (8,439,564)                 $ (3,899,987)
                                                                                         ============                  ============

Net loss per common share
   (Basic and diluted)                                                                   $      (0.57)                 $      (0.28)
                                                                                         ============                  ============

Weighted average shares outstanding                                                        14,895,810                    14,088,270
                                                                                         ============                  ============

</TABLE>


                 See accompanying notes to financial statements


                                       F-4
<PAGE>

                               PURCHASESOFT, INC.
                       Statements of Stockholders' Equity
                        Years Ended May 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                               Deferred                                   Total
                                            Common Stock         Additional   Stock-based  Accumulated     Treasury   Stockholders'
                                        Shares       Amount   Paid-in-Capital    Comp.       Deficit        Stock         Equity
                                      ----------- ----------- --------------- ----------- ------------- ------------  -------------
<S>                                   <C>         <C>            <C>          <C>         <C>           <C>           <C>
Balance, May 31, 1999                 13,807,015  $   138,070    $27,643,167  $        0  $(24,602,666) $    (89,032) $  3,089,539

Common stock issued upon exercise of
  stock options                          907,868        9,078        913,534         --           --            --         922,612
Common stock issued upon exercise of
  a warrant                               15,666          157         18,582         --           --            --          18,739
Net loss                                    --           --             --           --     (3,899,987)         --      (3,899,987)
                                      ----------  -----------    -----------  ----------  ------------  ------------  ------------
Balance, May 31, 2000                 14,730,549  $   147,305    $28,575,283  $        0  $(28,502,653) $    (89,032) $    130,903
                                      ==========  ===========    ===========  ==========  ============  ============  ============
Stock-based compensation                    --           --          486,628    (166,667)         --            --         319,961
Amortization of deferred stock-based
  compensation                              --           --                0       6,945          --            --           6,945
Common stock issued upon conversion
  of debt with a related party        11,883,873      118,839     10,338,969         --           --            --      10,457,808
Common stock issued for services          66,787          668         89,332         --           --            --          90,000
Common stock issued upon exercise of
  stock options                          181,308        1,813        116,224         --           --            --         118,037
Common stock issued upon exercise of
  warrants                               126,388        1,264         79,952         --           --            --          81,216
Net loss                                    --           --             --           --     (8,439,564)         --      (8,439,564)
                                      ----------  -----------    -----------  ----------- ------------  ------------  ------------
Balance, May 31, 2001                 26,988,905  $   269,889    $39,686,388  $ (159,722) $(36,942,217) $    (89,032) $  2,765,306
                                      ==========  ===========    ===========  =========== ============  ============  ============
</TABLE>


                 See accompanying notes to financial statements


                                       F-5
<PAGE>

                               PURCHASESOFT, INC.
                            Statements of Cash Flows
                        Years Ended May 31, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                                      2001                  2000
                                                                                                 -------------         -------------
<S>                                                                                             <C>                    <C>
Cash flows from operating activities:
      Net loss                                                                                   $ (8,439,564)         $ (3,899,987)
      Adjustments to reconcile net loss to net cash
      used in operating activities:
            Depreciation and amortization                                                             190,002                99,060
            Loss on sale of assets                                                                      1,277                  --
            Provision for bad debts                                                                     7,988                 2,279
            Accrued interest converted to equity                                                      457,808                  --
            Stock  issued for services                                                                 90,000                30,000
            Options granted for services                                                              326,906                  --
      Changes in operating assets and liabilities:
            Accounts receivable                                                                      (115,106)              100,939
            Prepaid expenses and other assets                                                          (2,728)              (58,480)
            Accounts payable and accrued expenses                                                     380,360              (437,350)
            Deferred revenue                                                                          (18,069)             (110,923)
                                                                                                 ------------          ------------
Net cash used in operating activities                                                              (7,121,126)           (4,274,462)
                                                                                                 ------------          ------------
Cash flows from investing activities:
      Additions to property and equipment                                                            (545,202)             (177,908)
      Proceeds from sale of assets                                                                      1,800                  --
      Additions to security deposits                                                                  (49,490)             (258,390)
                                                                                                 ------------          ------------
Net cash used in investing activities                                                                (592,892)             (436,298)
                                                                                                 ------------          ------------

Cash flows from financing activities:
      Proceeds from exercise of options/warrants                                                      199,253               941,351
      Proceeds from issuance of note payable with a related party                                   5,000,000             5,000,000
      Payment of capital leases                                                                      (118,853)              (62,790)
                                                                                                 ------------          ------------
Net cash provided by financing activities                                                           5,080,400             5,878,561
                                                                                                 ------------          ------------

Net increase (decrease) in cash and cash equivalents                                               (2,633,618)            1,167,801
Cash and cash equivalents, beginning of year                                                        4,992,306             3,824,505
                                                                                                 ------------          ------------
Cash and cash equivalents, end of period                                                         $  2,358,688          $  4,992,306
                                                                                                 ============          ============
Supplemental disclosure of cash flow information:
      Cash paid for interest                                                                     $     28,550          $     12,651
                                                                                                 ============          ============
Supplemental disclosure of non-cash transaction:
      Conversion of notes payable to common stock by a related party                               10,000,000                  --
      Capital lease obligation incurred                                                          $    249,829          $     76,946
                                                                                                 ============          ============
</TABLE>


                 See accompanying notes to financial statements


                                       F-6
<PAGE>

                               PURCHASESOFT, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              MAY 31, 2001 AND 2000


NOTE 1-ORGANIZATION AND MANAGEMENT'S PLANS

         PurchaseSoft, Inc. (the "Company") is an emerging provider of strategic
e-procurement and B2B solutions to medium and large organizations worldwide.
PurchaseSmart(TM), the Company's flagship e-procurement product enables
organizations to automate their procurement processes thereby reducing costs and
improving productivity, while providing real-time decision support information
to management. The Company is marketing its solutions throughout North America,
Europe and Asia. The Company's principal goal is to be the leader in the
e-procurement solutions marketplace addressing organizational procurement needs.
The Company expects to achieve its objective by continuing to offer the most
functional and easy to use leading edge, end-to-end software solutions and
unparalleled customer service.

         The Company's expertise in procurement comes from its extensive
experience in this area. The Company began operations as a management consulting
firm specializing in "best practices" for purchasing and materials management in
1977. In 1985, the Company, then called Greentree Software, Inc. recognized the
market need for an automated purchasing software package and introduced its
first software product for purchasing materials management for use on IBM
compatible PCs. Since that time, the Company has continued to offer leading edge
software solutions by adapting the latest technology and incorporating
procurement best practices and knowledge gained from successful customer
implementations. In October 1999, the Company released its newest Solution,
PurchaseSmart(TM), SourceSmart(TM) and WebQuote(TM) a Web-based, end-to-end
software solution, written in JAVA and HTML, which provides operational support
for strategic procurement and e-commerce.

         The Company has incurred substantial losses, has accumulated a deficit,
and requires additional  financing.  These matters raise substantial doubt about
the  Company's  ability to continue as a going  concern.  Management's  plans in
regard  to these  matters  follow.  On  March  28,  2001,  the  Company  engaged
Devonshire  Holdings,  LLC,  to act  as its  financial  advisor.  Devonshire  is
assisting the Company in analyzing its capital requirements and the execution of
its financing  strategy,  which includes the rights  offering,  which expires at
5:00 p.m.,  New York City time on September 7, 2001. As of August 29, 2001,  the
Company had received $5.2 million of irrevocable subscriptions from stockholders
exercising  their rights in the offering,  of which $5,000,800 was subscribed to
by L-R Global, the Company's majority stockholder.  The Company believes that if
it is successful in raising an additional  $1.8 million in the rights  offering,
that these  resources,  revenue  from future  software  sales and  services  and
interest  income will be sufficient to fund its planned  operating  expenses and
capital  requirements  through May 31, 2002,  the end of fiscal  2002.  However,
there can be no assurance  that such funds will be available  or  sufficient  to
meet the  Company's  operating  expenses  and capital  requirements  during such
period. The Company cannot make assurances that it will be successful in raising
this  additional  $1.8 million in the rights  offering.  Even if the offering is
fully  subscribed,  the Company still may need to raise additional funds through
public or private debt or equity financings to be competitive, to accelerate its
sales and marketing programs,  to establish a stronger financial position and to
fund its operations  beyond fiscal 2002.  Devonshire  will assist the Company in
future public or private debt or equity financings as necessary.

         On July 18, 2001,  subsequent  to the end of fiscal  2001,  the Company
issued a $2 million demand  promissory note to L-R Global. In recognition of the
Company's need for  additional  capital,  L-R Global  approached the Company and
proposed the $2 million loan.  Our Board of Directors  reviewed the terms of the
proposed loan and decided that they were favorable to the Company. On August 28,
2001, L-R Global  cancelled this note as partial payment towards its irrevocable
exercise of its subscriptions rights in the rights offering.

         In the event the Company  does not raise  another  $1.8  million in the
rights offering,  management's plans are to pursue other sources of capital with
the  assistance of  Devonshire,  which would likely  include a public or private
debt or equity financing with new investors.  If sufficient financial support is
not provided by the rights  offering,  other sources or the  Company's  majority
stockholder, L-R Global, the Company would be forced to substantially curtail or
cease operations.

                                      F-7
<PAGE>

NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          (a)      Use of Estimates

          Management is required to make estimates and assumptions during the
preparation of financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. They also affect reported
amounts of net income (loss) during the period. Actual results could differ
materially from these estimates and assumptions.

         (b)      Revenue Recognition and Accounts Receivable

         The Company recognizes revenue in accordance with the provisions of
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition," as amended
by SOP 98-4 and SOP 98-9. The Company recognizes software license revenue at the
point when evidence of an arrangement exists, the software product has been
shipped, there are no uncertainties surrounding product acceptance, the fees are
fixed or determinable and collection of the related receivable is considered
probable. In multiple-element software arrangements that include rights to
multiple software products, maintenance or services, the Company allocates the
total arrangement fee using the residual method. Under the residual method, the
fair value of the undelivered maintenance and services elements, as determined
based on vendor-specific objective evidence, is deferred and the remaining
(residual) arrangement fee is recognized as software product revenue. Service
revenues are comprised of revenues derived from software maintenance agreements
and professional services. Maintenance fees are recorded as deferred revenue and
recognized ratably over the maintenance period, which is usually twelve months.
Professional service revenue is recognized as the services are performed.

         Accounts receivable is presented net of an allowance for uncollectible
accounts of $9,000 and $35,890 at May 31, 2001 and 2000, respectively. Bad debt
expense is recorded in general and administrative expenses.

         (c)      Research and Development

         The Company is engaged in research and development activities in the
area of computer software. In accordance with generally accepted accounting
principles, costs incurred prior to determination of technological feasibility
are considered research and development and expensed as incurred. Technological
feasibility is determined after a working model has been completed. During
fiscal 2001, the Company's research and development costs primarily relate to
software development during the period prior to technological feasibility and
have been charged to expense as incurred. Costs otherwise capitalizable after
technological feasibility is achieved have also been expensed because they have
been insignificant.

         (d)      Cash and Cash Equivalents

         The Company considers all highly liquid instruments with original
maturities of 90 days or less to be cash equivalents for financial statement
purposes.

         (e)      Property and Equipment

         Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is charged to operations over the estimated useful
lives of the related assets, generally 5 to 7 years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the asset life
or the life of the lease. Depreciation and amortization expense was $190,002 and
$99,060 for the years ended May 31, 2001 and 2000, respectively.


                                      F-8
<PAGE>

         (f)      Income Taxes

         The Company accounts for income taxes using the liability method in
accordance with the provisions of the Statement of Financial Accounting Standard
(SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires that
deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts.

         (g)      Loss Per Common Share

         The Company accounts for income (loss) per share in accordance with
SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of
basic and diluted earnings per share for entities with complex capital
structures. Basic earnings per share includes no dilution and is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common stock outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity. Diluted net loss per common share does not differ from
basic net loss per common share since potential shares of common stock from the
exercise of stock options and warrants are anti-dilutive for all periods
presented. Shares excluded from diluted earnings per share totaled 3,915,465 and
3,064,038 on May 31, 2001 and 2000, respectively.

         (h)      Stock-Based Compensation

         The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."

         (i)      Recently Issued Accounting Standards

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which is effective for all fiscal quarters of fiscal years beginning after June
15, 1999 and establishes a new model for accounting for derivatives and hedging
activities. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133," which defers the effective date to all fiscal quarters
of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement of Accounting Standards No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities an Amendment of FASB Statement No.
133" which amends certain aspects of SFAS No. 133. The adoption of SFAS No. 133,
SFAS No, 137 and SFAS No. 138, which are effective for the Company on June 1,
2001, is not expected to have a significant impact on the Company's financial
position or results of operations.

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" which are effective for fiscal years beginning after December
15, 2001. Early adoption of SFAS No. 142 will be permitted for companies with a
fiscal year beginning after March 15, 2001. The adoption of SFAS No 141 and SFAS
No. 142, which are effective for the Company on June 1, 2001, are being
evaluated by management and are not expected to have a significant impact on the
Company's financial position or results of operations.


                                      F-9
<PAGE>

NOTE 3 - PROPERTY, EQUIPMENT AND LEASHOLD IMPROVEMENTS

At May 31, 2001 and 2000, property, equipment and leasehold improvement balances
consisted of the following:

<TABLE>
<CAPTION>

                                                          2001              2000
                                                          ----              ----
<S>                                                   <C>                 <C>
Property and equipment, at cost                       $1,789,615          $1,071,701
Leasehold improvements, at cost                           89,312              17,492
Less accumulated depreciation and amortization          (816,567)           (628,785)
                                                      ----------          ----------
Net property, equipment and leasehold improvements    $1,062,360          $  460,408
                                                      ==========          ==========
</TABLE>


At May 31, 2001 and 2000, property and equipment balances included assets
acquired under capital leases. These balances consisted of the following:

<TABLE>
<CAPTION>

                                                          2001              2000
                                                          ----              ----
<S>                                                  <C>                   <C>
Property and equipment, at cost                      $   369,191           $ 131,676
Less accumulated depreciation and amortization           (74,200)            (50,448)
                                                     -----------           ---------
Net property and equipment                           $   294,991           $  81,228
                                                     ===========           =========

</TABLE>


NOTE 4 - INCOME TAXES

         The Company has available net operating loss carry forwards (NOLs) for
Federal income tax purposes of approximately $18,000,000 at May 31, 2001. The
NOLs expire at various times from 2002 through 2021. Future utilization of the
available net operating loss carry forwards may be limited under Internal
Revenue Code Section No. 382 as a result of future changes in ownership.

         No future tax benefit for the Company's NOLs and other cumulative
temporary differences have been recognized since utilization of the benefit is
not presently likely based on the weight of available information. The tax
effects of NOLs and other cumulative temporary differences that give rise to the
Company's deferred tax asset are presented below as of May 31, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                     2001                         2000
                                                                     ----                         ----
<S>                                                               <C>                         <C>
Deferred tax assets:
Net operating loss carryforwards                                  $ 7,020,000                 $ 4,940,000
Other, net                                                            115,000                     130,000
                                                                  -----------                 ------------
Total gross deferred tax assets                                     7,135,000                    5,070,000
Less valuation allowance                                           (7,135,000)                  (5,070,000)
                                                                  -----------                 ------------
Net deferred tax asset                                            $         0                 $          0
                                                                  ===========                 ============

</TABLE>


                                      F-10
<PAGE>

NOTE 5 - COMMITMENTS AND CONTINGENCIES

         Operating Leases

         The Company leases office space and equipment in several locations
under non-cancelable operating leases, which expire on various dates through May
31, 2007. Office and equipment rent expense amounted to $410,144 and $209,608
for the fiscal years ended May 31, 2001 and 2000, respectively. Future minimum
lease payments under the non-cancelable operating leases as of May 31, 2001 are
as follows:

<TABLE>
<CAPTION>

          YEARS
         ENDING
         MAY 31                COMMITMENT
         ------                ----------
<S>                            <C>
           2002                  390,692
           2003                  315,550
           2004                  308,811
           2005                  308,904
           2006                  281,106
           2007                  268,320
                                 -------
           Total              $1,873,383
                              ==========

</TABLE>

         Capital Leases

         The Company leases certain computer and communication equipment under
non-cancelable capital leases, which expire on various dates through October 31,
2002. Future minimum lease payments under the non-cancelable financing leases as
of May 31, 2001 are as follows:

<TABLE>
<CAPTION>

           YEARS
          ENDING
          MAY 31                                                COMMITMENT
          ------                                                ----------
        <S>                                                     <C>
           2002                                                  129,618
           2003                                                  108,896
           2004                                                    7,785
                                                                --------
           Total minimum lease payments                         $246,299
           Less amount representing interest                     (22,861)
                                                                --------
           Present value of net minimum lease payments           223,438
           Less current portion                                 (112,825)
                                                                --------
           Non-current portion                                  $110,613
                                                                ========

</TABLE>


                                      F-11
<PAGE>

         Long Term Note Payable

         In March 2000, the Company borrowed $5,000,000 from L-R Global
Partners, LP and signed a demand promissory note in return. Under the terms of
this note, the Company must repay the principal and interest due at any time
upon the demand of L-R Global. Subsequent to May 31, 2000, L-R Global issued to
the Company a letter, which stated that it would not demand repayment prior to
June 15, 2001. Accordingly, the Company has classified this note payable as a
Long Term Liability in its balance sheet dated May 31, 2000. On May 31, 2001,
this note was converted to shares of the Company's common stock under a
conversion agreement the Company entered into with L-R Global on April 12, 2001.
See Note 9.


         Commitments

         The Company has an agreement with USinternetworking whereby USi will
provide hosting services consisting of equipment and services to the Company.
Future payments under this non-cancelable agreement as of May 31, 2001 is as
follows:

<TABLE>
<CAPTION>

           YEARS
           ENDING
           MAY 31               COMMITMENT
          -------               ----------
<S>                             <C>

           2002                  172,272
           2003                  132,680
           2004                    8,916
                                --------
           Total                $313,868
                                ========

</TABLE>

         Contingencies

         The Company is named as a defendant in a lawsuit by John Medico, a
former employee. The suit alleges a breach of his separation agreement with the
Company, claiming that the Company refused to allow him to exercise certain
stock options between December 1999 and April 2000. The lawsuit seeks an award
of damages and costs. The Company intends to rigorously defend its position.

         The Company is involved in various contingent matters in the normal
course of business. Management is of the opinion that the outcome of such
matters will not have a significant adverse effect on the Company's financial
position or results of operations. The Company has entered into various
employment agreements with certain executives of the Company, which provide for
severance payments ranging from six to nine months subject to certain
conditions.


                                      F-12
<PAGE>

NOTE 6 - STOCKHOLDERS' EQUITY

During the fiscal years ended May 31, 2001 and 2000, the following equity
placements occurred:

         FISCAL YEAR ENDED MAY 31, 2001

                  On November 3, 2000 and November 27, 2000, the Company issued
         a total of 11,000 shares of its common stock under a net exercise issue
         provision of a warrant held by a non-reporting person at an exercise
         price of $1.03 per share. These shares were paid for by surrendering a
         total of 5,582 additional shares of stock covered by this warrant and
         the subsequent cancellation of these shares in exchange for the
         issuance of the 11,000 shares acquired.

                  On December 5, 2000, the Company issued 70,014 shares of the
         Company's common stock to L-R Global Partners, L.P. upon the exercise
         of a warrant, which raised an aggregate sum of $81,216 and had an
         exercise price of $1.16 per share.

                  On January 26, 2001, the Company issued a total of 45,374
         shares of the Company's common stock under net exercise issue
         provisions of two warrants held by non-reporting individuals at an
         exercise price of $1.03 per share. These shares were paid for by
         surrendering a total of 41,710 additional shares of stock covered by
         these warrants and the subsequent cancellation of these shares in
         exchange for the issuance of the 45,374 shares acquired.

                  On April 30, 2001, the Company issued 66,787 shares of its
         common stock in payment of $90,000 in services performed by a vendor of
         the company. $45,000 in services was completed on October 27, 2000 and
         was paid for with 13,846 shares of common stock that closed on that day
         of $3.25 per share. $45,000 in services was completed on April 27, 2001
         and was paid for with 52,941 shares of common stock that closed on that
         day of $0.85 per share.

                  On May 31, 2001, the Company converted the L-R Global demand
         promissory notes and accrued interest, totaling $10,457,808 into
         11,883,873 shares of the Company's common stock with a par value of
         $0.01. This conversion was done pursuant to the conversion agreement
         the Company entered into with L-R Global on April 12, 2001. The Company
         agreed to convert this debt and accrued interest into common shares
         using the last reported sale price of the company's common stock on
         April 12, 2001, which was $0.88 per share.


         FISCAL YEAR ENDED MAY 31, 2000

                  On February 9, 2000, the Company issued 8,333 shares of its
         common stock upon the exercise of a warrant, which raised an aggregate
         sum of $9,500 and had an exercise price of $1.14 per share.

                  On February 9, 2000, the Company issued 4,000 shares of its
         common stock upon the exercise of a warrant, which raised an aggregate
         sum of $5,040 and had an exercise price of $1.26 per share.

                  On February 11, 2000, the Company issued a warrant to purchase
         25,000 shares of common stock at an exercise price of $5.50 per share.
         This warrant has a five-year life and will expire on February 10, 2005.

                  On May 1, 2000, the Company issued 3,333 shares of its common
         stock upon the exercise of a warrant, which raised an aggregate sum of
         $4,199 and had an exercise price of $1.26 per share.


                                      F-13
<PAGE>

Stock Options

         The Company maintains three Stock Option Plans, the 1997 Stock Option
Plan, the 1994 Stock Option Plan and the 1987 Stock Option Plan, under which
stock options can be granted to consultants, key employees, directors and
officers of the Company. Generally, options granted vest over a period of
between two to three years and expire five to ten years from the date of grant
and are issued with an exercise price equal to the market value of the Company's
common stock on the date of grant. Options cancelled under the 1997 plan can be
re-granted. At the 2001 Annual Meeting of Stockholders held on November 17,
2000, stockholders approved an increase in the number of shares available to
grant under the 1997 Plan from 4,500,000 shares to 6,000,000 shares. As of May
31, 2001, there were 1,403,492 option shares under the 1997 Stock Option Plan,
which are available for future grants.


 The following summary of outstanding options and shares reserved under the plan
is as follows:

<TABLE>
<CAPTION>
                                                                                                                    WEIGHTED
                                                                                                                     AVERAGE
                                          1987 PLAN          1994 PLAN         1997 PLAN           TOTAL         EXERCISE PRICE
                                          ----------         ---------         ---------       ------------      --------------

<S>                                          <C>               <C>             <C>                <C>               <C>
Outstanding at May 31, 1999                   8,333             45,883          3,019,265          3,073,431         $   1.14
         Granted                                  0                  0          1,986,279          1,986,279             2.25
         Exercised                                0                  0           (907,868)          (907,868)           (1.02)
         Cancelled                           (8,333)           (12,500)        (1,685,212)        (1,706,045)           (1.20)
                                             ------            -------         ----------         ----------            -----

Outstanding at May 31, 2000                       0             33,333          2,412,464          2,445,797             2.04
         Granted                                  0                  0          2,127,500          2,127,500             1.67
         Exercised                                0                  0           (181,308)          (181,308)           (0.65)
         Cancelled                                0                  0           (851,324)          (851,324)           (3.18)
                                             ------            -------         ----------         ----------            -----
Outstanding at May 31, 2001                       0             33,333          3,507,332          3,540,665         $   1.62
                                             ======            =======         ==========         ==========            =====

</TABLE>


As of May 31, 2001 fixed-price stock options were outstanding as follows:

<TABLE>
<CAPTION>

                                                                OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                                                  ---------------------------------------------       ------------------------------
                                                                      WEIGHTED
                                                                       AVERAGE         WEIGHTED                            WEIGHTED
          RANGE OF                                                    REMAINING         AVERAGE                            AVERAGE
         EXERCISE                                    NUMBER          CONTRACTUAL        EXERCISE          NUMBER           EXERCISE
          PRICES                                  OUTSTANDING            LIFE            PRICE         EXERCISABLE          PRICE
         ---------                                -----------        ------------     -----------      -----------         ---------
<S>                                               <C>                   <C>          <C>              <C>                  <C>
$0.01 - $1.50                                      2,226,043             3.8          $   0.81         1,421,200            $   0.88
$1.51 - $3.00                                        787,057             4.3          $   2.26           306,975            $   2.42
$3.01 - $5.00                                        362,565             4.0          $   3.25           109,029            $   3.29
$5.01 - $7.13                                        165,000             3.7          $   5.89           140,000            $   5.96
                                                   ---------            -----         --------         ---------            --------
                                                   3,540,665             3.9          $   1.62         1,977,204            $   1.61
                                                   =========            =====         ========         =========            ========
</TABLE>


                                      F-14
<PAGE>

Stock Options Issued to Non-Employees

         On August 15, 2000, the Company issued a stock option to purchase
150,000 shares of the Company's common stock at $2.75 per share to a
non-employee in conjunction with a consulting agreement. The stock option was
fully vested on the date of grant. The Company accounted for the option in
accordance with the Emerging Issue Task Force ("EITF") Issue No. 96-18. The
total fair value of the option using the Black-Sholes valuation model was
$283,061 and the entire amount was recognized as management consulting
compensation expense in the fiscal year ended May 31, 2001. The following
assumptions were used to value the stock option: dividend yield of 0%, risk-free
interest rate of 6.5%, expected life equal to the contractual life of five years
and volatility of 80%.

         On January 30, 2001, the Company issued stock options to purchase a
total of 20,000 shares of the Company's common stock at $1.94 per share to two
non-employees in conjunction with a consulting agreement. The stock options were
fully vested on the date of grant. The Company accounted for these options in
accordance with the Emerging Issue Task Force ("EITF") Issue No. 96-18. The
total fair value of these options using the Black-Sholes valuation model was
$36,900 and the entire amount was recognized as management consulting
compensation expense in the fiscal year ended May 31, 2001. The following
assumptions were used to value these stock options: dividend yield of 0%,
risk-free interest rate of 6%, expected life equal to the contractual life of
five years and volatility of 171%.

         On April 24, 2001, the Company issued a stock option to purchase a
total of 250,000 shares of the Company's common stock at $0.65 per share to a
non-employee in conjunction with a consulting agreement. The stock option vests
33.4% on April 24, 2001, the date of the grant, 33.3% on April 24, 2002 and
33.3% on April 24, 2003. The Company accounted for these options in accordance
with the Emerging Issue Task Force ("EITF") Issue No. 96-18. The total fair
value of this option using the Black-Sholes valuation model was $166,667 at May
31, 2001, of which $6,945 was recognized as management consulting compensation
expense. The unearned balance as of May 31, 2001 was $159,722 and is classified
as "Deferred stock-based compensation" in the Stockholders' Equity section of
the balance sheet. The following assumptions were used to value this stock
option: dividend yield of 0%, risk-free interest rate of 6%, expected life equal
to the contractual life of five years and volatility of 171%. On August 3, 2001,
subsequent to the end of the fiscal year, the Company accelerated the vesting on
the unvested two-thirds of these option shares, so that all 250,000 option
shares were fully vested.


Pro forma Disclosure of Compensation Cost of Stock Options

         The Company has adopted the disclosure-only provisions of SFAS No. 123.
For purposes of the pro forma disclosures below, the estimated fair value of
options has been calculated and is expensed over the options' vesting period.
Had compensation cost for the Company's stock options issued to employees been
recognized based on the fair value at the date of grant consistent with the
provisions of SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                 2001               2000
                                                                 ----               ----
<S>                                                       <C>                 <C>
Net loss - as reported                                    $  (8,439,564)      $  (3,899,987)
Net loss - pro forma                                      $  (9,337,514)      $  (4,269,155)

Net loss per share - basic and diluted, as reported       $       (0.57)      $       (0.28)
Net loss per share - basic and diluted, pro forma         $       (0.63)      $       (0.30)


</TABLE>


                                      F-15
<PAGE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>

                                                                            2001            2000
                                                                            ----            ----
<S>                                                                       <C>            <C>
Dividend yield                                                                0%             0%
Risk-free interest rate                                                     6.0%           6.5%
Expected volatility                                                         171%            80%
Expected lives                                                                4              4

Weighted-average fair value of options granted
using the Black-Scholes option pricing model                              $1.51          $1.58

</TABLE>

Warrants to Purchase Common Stock

         At May 31, 2001, the Company had a total of 374,800 outstanding
warrants for the purchase of the Company's common stock. Exercise prices ranged
from $0.96 to $3.47 per share, with the price of certain warrants subject to
adjustment for anti-dilution provisions. Warrants expire at various times from
October 2001 through February 2005. These warrants have a weighted-average
exercise price of $1.18. There were no warrants issued in fiscal 2001. In fiscal
2000, the Company issued a warrant for 25,000 shares of common stock to an
employee at $5.50, which was the fair market value on the date of grant.
Proceeds to the Company should all warrants be exercised is approximately
$442,000. At May 31, 2001, all warrants are "out of the money".


NOTE 7 - SIGNIFICANT CUSTOMERS

         During the fiscal year ended May 31, 2001, one customer accounted for
$455,963 or 75.5% of total revenues.

         During the fiscal year ended May 31, 2000, three customers accounted
for $162,735 or 48.2% of total revenues.

                  Customer A 18.6%
                  Customer B 18.6%
                  Customer C 11.0%


NOTE 8 - EXPORT SALES

         During the fiscal year ended May 31, 2001, export sales accounted for
$488,412 or 80.9% of total revenues, consisting of the following territories:

                  United Kingdom   75.5%
                  Canada            5.4%

         During the fiscal year ended May 31, 2000, export sales to Canada
accounted for $87,063 or 25.8% of total revenues.


                                      F-16
<PAGE>

NOTE 9 - RELATED PARTY

         On each of March 23, 2000 and January 30, 2001, the Company borrowed $5
million from L-R Global , a related party and the Company's majority stockholder
and signed demand promissory notes totaling $10 million. These notes provided
for interest to be paid at the rate of 6% per annum. In fiscal year 2001, the
Company accrued interest charges of $400,274 related to these two notes. In
fiscal year 2000, the Company accrued interest charges of $57,534 related to the
March 23, 2000 note. In a Conversion Agreement dated April 12, 2001, L-R Global
agreed to convert its outstanding debt and accrued interest to shares of common
stock at a price per share of $0.88, the closing price for the Company's common
stock that day. On May 31, 2001, pursuant to the conversion agreement, L-R
Global converted these demand promissory notes and accrued interest into
11,883,873 restricted shares of PurchaseSoft, Inc. common stock.

         On August 15, 2000, the Company entered into a Management Consulting
Agreement with Donald S. LaGuardia, to become the President and Chief Executive
Officer of the Company. Mr. LaGuardia is a related party due to his relationship
with L-R Global, where he is a partner. This agreement provided for an initial
term of six months with an automatic extension on a month-to-month basis. Under
the initial term, Mr. LaGuardia was granted a non-statutory stock option to
purchase 150,000 shares of the Company's common stock. These shares have an
exercise price of $2.69 per share, were fully vested on the date of grant and
have a term of five years. Mr. LaGuardia also received reimbursement for all
reasonable out of pocket expenses relating to housing and transportation. On
April 24, 2001, Mr. LaGuardia was granted another non-statutory stock option for
250,000 shares of the Company's common stock. These shares have an exercise
price of $0.65 per share, have a term of five years, were vested one-third on
the date of the grant, will vest an additional one-third on April 24, 2002 and
will vest the final one-third on April 24, 2003. On August 3, 2001, the Company
accelerated the vesting on the unvested two-thirds of the option shares, so that
all 250,000 option shares were fully vested as of August 3, 2001. Upon the
expiration of the initial term of the Management Consulting Agreement, the
Company agreed to extend the agreement for another six-month term, under the
same terms and conditions, except that the Company agreed to make monthly
payments of $14,583 to L-R Managers, LLC for the services of Mr. LaGuardia. The
renewal term covers the period of February 16, 2001 through August 15, 2001.

NOTE 10 - SUBSEQUENT EVENT

         The Company  commenced a rights  offering on August 8, 2001 to raise up
to $9.7 million of additional  capital. On August 28, 2001, the Company extended
the rights  offering  through  September  7, 2001.  As of August 29,  2001,  the
Company had received $5.2 million of irrevocable subscriptions from stockholders
exercising  their rights in the offering,  of which $5,000,800 was subscribed to
by L-R Global Partners,  L.P., the Company's  majority  stockholder.  L-R Global
paid a portion of its  subscription  price by canceling the Company's $2 million
demand promissory note. This $2 million demand promissory note was issued to L-R
Global on July 18, 2001, subsequent to the end of fiscal 2001.

                                      F-17