<PAGE>   1

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                   FORM 10-K

<Table>
<C>          <S>
 (Mark One)
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE FISCAL YEAR ENDED JUNE 30, 2001



                                   OR




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



             FOR THE TRANSITION PERIOD FROM           TO
</Table>

                        COMMISSION FILE NUMBER: 0-19024
                             ---------------------
                                FRONTSTEP, INC.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                     OHIO                                        31-1083175
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                     Identification Number)
</Table>

                         2800 CORPORATE EXCHANGE DRIVE
                              COLUMBUS, OHIO 43231
             (Address of principal executive offices and zip code)
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (614) 523-7000
                             ---------------------
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR
                                     VALUE

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

     The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing price for the
registrant's common stock in the Nasdaq National Market on September 25, 2001,
was approximately $17,408,013. This calculation does not reflect a determination
that certain persons are affiliates of the registrant for any other purpose. As
of September 24, 2001, 7,568,218 shares of the issuer's common stock, without
par value, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Items 10,11,12 and 13 of Part III incorporate information by reference from
the definitive proxy for the registrant's Annual Meeting of Stockholders to be
held on November 7, 2001.
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<PAGE>   2

                        FRONTSTEP, INC. AND SUBSIDIARIES
                  FISCAL YEAR 2001 FORM 10-K AND ANNUAL REPORT

                                     INDEX

<Table>
<Caption>
                                                                         PAGE
                                                                         ----
<S>       <C>                                                            <C>
                                     PART I
Item 1.   Business....................................................     2
Item 2.   Properties..................................................    11
Item 3.   Legal Proceedings...........................................    11
Item 4.   Submission of Matters to a Vote of Securities Holders.......    11

                                    PART II
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................    11
Item 6.   Selected Financial Data.....................................    12
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................    12
Item 7A.  Quantitative and Qualitative Disclosures about Market
          Risk........................................................    22
Item 8.   Financial Statements and Supplementary Data.................    23
Item 9.   Changes and Disagreements with Accountants on Accounting and
          Financial Disclosure........................................    43

                                    PART III
Item 10.  Directors and Officers of the Registrant....................    43
Item 11.  Executive Compensation......................................    43
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................    43
Item 13.  Certain Relationships and Related Transactions..............    43

                                    PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................    44
</Table>

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

                           FORWARD-LOOKING STATEMENTS

     In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current beliefs, plans, objectives and
expectations of the Company's management. The words "expect," "anticipate,"
"intend," "plan," "believe," "estimate," "would" and similar expressions
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Factors That May Affect Future Results and Market Price of Stock". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinions only as of the date hereof. We undertake no
obligation to revise or update or publicly release the results of any revision
or update to these forward-looking statements. Readers should carefully review
the risk factors described in other documents we file from time to time with the
Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q
to be filed in the coming year.
                                        1
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     Frontstep, Inc. is a leading global provider of integrated enterprise
software solutions for mid-sized manufacturing and distribution companies and
business units of larger companies. Until November 2000, the Company was known
as Symix Systems, Inc. The name was changed to reflect an increasingly more
diverse product offering than historically offered that redefines the business
system needs of mid-market companies as they seek to be more efficient and to
collaborate more effectively with their customers and suppliers in an
increasingly more competitive and global environment. Throughout this document,
we may refer to our company as "Frontstep" or as the "Company".

     Since the second quarter of fiscal 2000, Frontstep, and the enterprise
applications software industry in general, have experienced changing market
conditions resulting from a recession in many manufacturing industries and a
lessening of demand for traditional enterprise software. Well before these
market changes began to affect our results of operations, we began to enhance
our products and services to meet the new business systems challenges that our
customers are facing.

     The software solutions we provide to our customers include a comprehensive
suite of integrated software and services that (1) support the traditional back
office management and resources of an enterprise ("ERP"), (2) support customer
relationship management ("CRM") and other front office business activities and
(3) support an enterprise's supply chain management activities. The software
products associated with each of these solutions typically provide a customer
with a comprehensive business system that is typically their primary system.
Over the last two years, we have advanced the architecture of these products to
include the use of the Internet as a backbone that provides an enterprise the
ability to collaborate effectively with their customers and suppliers in a
global economy. More specifically, we develop, market and support the following
products:

          Extended Enterprise Resource Planning.  Traditional ERP applications
     for discrete manufacturing and industrial distribution with an add-on suite
     of products that allows for collaborative operations and financial business
     processes across an entire enterprise with analytical capabilities that
     turn data into information that support the business management of an
     enterprise.

          Front office.  A suite of products that foster customer loyalty and
     retention by combining customer relationship management with order
     management capabilities such as configuration, advanced pricing and rapid
     order entry.

          Supply chain.  A suite of products that provide a solution for order
     management with inventory and capacity visibility and production scheduling
     based on actual material and capacity constraints. These products allow for
     dynamic adjustments for unplanned events, exceptions and disruptions.

          Enterprise Application Integration.  Open applications architecture
     that allows for the continued use of legacy systems in a shared, integrated
     environment with newer, network-centric processes and systems.

     Our reputation for successful installations and implementations of our
software products is a function of our discipline and product capabilities and
sets the Company apart from its competition. Our solutions are intended to be
rapidly deployable, scalable, flexible and reliable, resulting in a comparative
low total cost of ownership and a rapid return on investment. We believe that
our approach to solving customer business systems issues in this manner results
in enhanced customer relationships, increased productivity, improved operating
efficiency, including maximizing supply chain performance and comparative lower
total cost of ownership. More specifically:

          Improved customer relationships.  The Company's enterprise, front
     office and supply chain solutions integrate customer requirements with
     sales, marketing, engineering, manufacturing and customer service
     information, in order to achieve more accurate planning and scheduling
     decisions, rapid

                                        2
<PAGE>   4

     response times, better on-time deliveries, improved order fulfillment,
     improved field service delivery and overall customer satisfaction.

          Improved supply chain performance.  The Company's digital supply chain
     approach utilizes Internet technology in a distributed environment to
     provide real-time collaborative multi-site order planning and visibility
     for an enterprise with its important suppliers and customers. An improved
     supply chain results in enhanced customer service, improved asset
     management such as lower inventories and receivables and lower transaction
     costs.

          Reduced total cost of ownership.  The Company's solutions are designed
     to minimize the total cost of implementing, operating and maintaining
     enterprise systems and to maximize operating efficiency, thereby providing
     tangible return on investments made by the customer. Our software runs on
     standard hardware platforms, providing users with the flexibility to
     leverage existing technology systems and to optimize system configurations.
     The modular design of the Company's software allows manufacturers and
     distributors to implement systems quickly and easily and provides the
     flexibility to add additional functionality or change business process
     models as customer needs and business requirements change.

          Reduced time to benefit.  We believe our ability to implement software
     solutions rapidly and to reduce our customer's time to benefit is a key
     competitive advantage. The Company attempts to reduce implementation time
     in three ways. First, we employ a structured implementation methodology
     that separates the solution implementation process into distinct and
     manageable phases, in order to ensure coordination throughout the
     implementation process. Second, our proprietary business process modeling
     tool enables customers to map the appropriate systems and procedures
     necessary to increase the speed of the deployment process. Third, we
     maintain strategic relationships with numerous business partners, which
     enable the Company to provide a solution that addresses enterprise system
     needs in an integrated fashion with minimal customer disruption.

     As a result of these factors, which we believe sets us apart from our
competition, Frontstep has been one of the mid-market leaders in the enterprise
software industry for more than 20 years, particularly with manufacturing
companies and more recently with distribution companies. We provide our
customers with the software products we have developed, professional consulting
services associated with the installation of our products and related training
for customer personnel. We have more than 4,400 customer sites and a worldwide
network of 28 offices in 16 countries. Our offices are equipped to provide our
services, support our products and, in several countries around the world,
translate our products into other languages. The Company's principal executive
offices are located at 2800 Corporate Exchange Drive, Columbus, Ohio 43231, and
its telephone number is (614) 523-7000.

THE ENTERPRISE APPLICATIONS SOFTWARE INDUSTRY

     We are in the enterprise applications software industry. This industry is
large and has many companies that provide various types of software to meet
general or specific business needs. We develop and market products that solve
business system needs for the manufacturing and distribution industries,
specifically for mid-sized companies or divisions of larger companies. This
portion of the enterprise applications market has been characterized
historically as enterprise resource planning. Enterprise resource planning has
generally been available since the early 1990's when corporate reengineering
began and primarily supports the control and management of operations of a
manufacturing enterprise. It has its roots with material requirements planning
software and inventory control software that were utilized in the 1980's as a
means of managing inventories production schedules. More recently, our industry
has been described as Collaborative Commerce by industry analysts, to more
accurately reflect a changing business systems model for manufacturing and
distribution companies.

     Our customers do business in an extremely competitive manufacturing
environment. Changing technologies and the prospects for growth of
business-to-business commerce on the Internet are dramatically altering the
manner in which these customers will do business in the coming years. These
changes are also impacting business systems requirements to support these new
ways of doing business. We believe that maximizing manufacturing efficiency and
productivity, managing customer relationships, managing
                                        3
<PAGE>   5

distribution channels, improving procurement and supplier relationships and
improving performance of supply chains are essential requirements for the
economy of the 21st century as companies seek to increase global reach,
innovation, productivity and profitability.

     We believe that mid-market companies will rethink their business models and
change the way they do business to remain competitive. As they change, business
systems requirements will include an enterprise management software solution
that integrates front office capabilities such as e-business, customer
relationship management and supply change management, with more traditional ERP
applications. We also believe that, in the mid-market, the solution must be
rapidly deployable, scalable and flexible, resulting in a comparative low total
cost of ownership and rapid return on investment. Since 1998, the Company has
been investing in the development of such software products and capabilities and
the open architecture required to meet these new challenges for our customers.

     According to AMR Research, a software market analysis firm, the worldwide
marketplace for each of the major product markets and projected annual growth
rates are estimated to be approximately as follows:

<Table>
<Caption>
                                                   WORLDWIDE       WORLDWIDE
                SOFTWARE MARKET                  REVENUES 2000   REVENUES 2004   GROWTH RATE
                ---------------                  -------------   -------------   -----------
                                                         (IN BILLIONS)
<S>                                              <C>             <C>             <C>
e-commerce.....................................      $ 2.0           $17.0           53%
Supply chain management........................        4.0            23.0           41%
Customer relationship management...............        5.0            23.0           36%
Enterprise resource planning...................       16.0            24.0            8%
</Table>

STRATEGY

     Our objective is to become the leading provider of collaborative software
solutions for mid-sized manufacturing and distribution companies and
subsidiaries and divisions of larger companies. Our customer focus includes both
single location and multi-location manufacturers and distributors, including
those with facilities around the world. Our product focus includes our
traditional ERP solution now extended to incorporate front office and
supply-chain solutions that will meet all of an enterprise's primary business
system requirements. The key components of our strategy include:

          Deliver a comprehensive integrated enterprise solution.  We believe
     that we have one of the broadest product footprints available to mid-market
     manufacturing and distribution companies. While we are well known for our
     ERP software solution, we have invested heavily over the last several years
     in product acquisition and new product development of this comprehensive
     product suite. Our efforts have also included the integration of these
     products to facilitate ease of use. Our belief is that mid-market companies
     typically have limited resources and prefer a single vendor to provide them
     with their primary business system. As a result, we believe that we can
     compete with larger, better capitalized competitors on both price and
     functionality of our offerings.

          Embrace a simple technology platform for ease of use.  We are
     committed to delivering a simple, but powerful technology solution to
     better manage and leverage our costs of development and maintenance and to
     simplify our customers' information technology environment. We have chosen
     Microsoft as our primary technology platform for all of our newer
     network-based products. This standard technology, used by many of the
     Company's customers in other aspects of their business, allows customers to
     leverage their technology investments and capabilities by using our
     software. Our ERP software uses the Progress Software Corporation database
     and tools and we have standardized and simplified the integration of these
     two technologies for our customers. We intend to continue leveraging our
     product technology and costs from the advancements of each of our
     technology platform providers.

          Provide superior installation and support services.  We are committed
     to serving our customers beyond the sale of our products with excellence in
     professional services and support. The Company's worldwide professional
     services organization, which employs approximately 200 consultants and
     managers, uses a structured implementation methodology. Services include
     project management,

                                        4
<PAGE>   6

     implementation, product education, technical consulting, programming and
     system integration services and ongoing maintenance and support. Our
     methodology and capabilities allow customers to rapidly and efficiently
     install and maximize the benefits of the Company's software products. The
     Company considers its ability to implement its software solution rapidly a
     key competitive factor.

          Leverage our leadership position in the mid-market.  We believe that
     we are a leading provider of enterprise system solutions to mid-market
     manufacturers. We have been serving the mid-market for 22 years and have
     more than 300,000 users at 4,400 customer sites around the world. We
     service and support these customers from our worldwide network of 28
     offices in 16 countries. We intend to leverage our experience and customer
     base to enhance our leadership position in the mid-sized manufacturing and
     distribution market.

          Build a global alliance of partners.  Over the last few years, we have
     developed alliances with strategic partners for technology to expand the
     breadth of our product capabilities, to expand our ability to market and
     sell our products and to support our customers after the product sale.
     Microsoft, Progress, Cognos Incorporated and PricewaterhouseCoopers are two
     notable alliances we have undertaken to date. We also have an exceptional
     network of preferred business partners around the world that provide
     consulting and installation services to expand our ability to serve our
     customers. We believe these alliances bring the best of many disciplines to
     our customers while allowing us to maintain control over our costs of doing
     business. We intend to continue to pursue additional important alliances
     with industry leading companies that will further enhance the Company's
     offerings and capabilities.

          Advance our products rapidly.  We have rapidly advanced our products
     and capabilities as technologies and business systems requirements have
     dramatically changed over the last few years. Since fiscal 1998, we have
     heavily invested in both the acquisition and development of our products
     and product capabilities. We believe that over $50 million has been
     invested in acquired and developed software along with research and
     development expenditures. We are committed to ensuring that the Company's
     products are technologically advanced and best-of-class in the mid-market.

PRODUCTS

     The software solutions we provide to our customers include a comprehensive
suite of integrated software and services that (1) support the traditional back
office management and resources of an enterprise through ERP, (2) support
customer relationship management and other front office business activities and
(3) support an enterprise's supply chain management activities. The software
products associated with each of these solutions are comprised of the following:

          Syteline ERP.  SyteLine is the Company's hallmark Enterprise Resource
     Planning product for mid-sized discrete manufacturing companies that
     provides a comprehensive operations and financial business process solution
     to an enterprise. SyteLine's functionality includes support for customer
     service, order processing, inventory control and purchasing, manufacturing
     production management, production planning & scheduling, cost management,
     project control, accounting functions and financial administration.

          SyteLine ERP has been configured to operate with add-on capabilities
     that include:

          - Configuration -- product configuration for sales order and
            manufacturing

          - Advanced Planning and Scheduling (APS) -- real-time inventory and
            capacity planning

          - Business Intelligence -- data analysis and charting

          - Workflow Automation -- business process definition and execution

          - Advanced Forms -- design and deployment of custom laser printed
            forms

          - Business Process Management -- process documentation tool for
            implementation and ISO compliance

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<PAGE>   7

          SyteLine is designed to operate with all of our other products to
     create a collaborative and integrated business management solution to meet
     all of the front office and back office needs of an enterprise.

          SyteDistribution is the Company's ERP product designed for mid-sized
     distributors to meet their unique operational process demands to better
     control inventories, shipments and orders among enterprises.

          Frontstep Front Office Solutions.  Frontstep's Front Office solution
     is a single interface point for customers, employees, sales representatives
     and channel partners to view and execute marketing and sales activity
     pertaining to prospects and customer orders. Front Office Solutions improve
     customer service, lower costs and increases revenues. Front Office
     Solutions are integrated with SyteLine and are architected for integration
     with other ERP systems.

          Front Office products include:

          - Customer Relationship Management ("CRM") -- sales force automation
            (SFA), contact & customer management, marketing, customer service
            and order management tools

          - Active Link -- application integration, business process automation
            and collaboration platform

          - Customer Center -- B2B storefront

          - Intelligence -- business intelligence tools and data marts for data
            mining

          - Web Configuration -- product and sales order configuration

          - Advanced Pricing -- web based pricing application

          Frontstep Supply Chain Solutions.  Frontstep's Supply Chain Solutions
     provide the fastest way for companies to align supply with demand and
     deliver on time. Our solution provides the capability to improve customer
     service by synchronizing customer orders with inventory and capacity. This
     solution lowers operational costs and improves on-time deliveries by
     automating inventory sourcing and manufacturing planning activities through
     real-time synchronization of demand and supply across multi-site operations
     and suppliers.

          Supply Chain products include:

          - Supply Chain Center -- starting point when accessing sourcing and
            promising engines to balance supply and demand between multiple
            sites and suppliers

          - Intelligent Sourcer -- sourcing engine between multiple sites or
            suppliers based on rules to balance demand and supply

          - Point Promiser -- promising engine for Available-to-Promise (ATP)
            collaboration that balances inventory availability

          - Capacity Promiser -- promising engine for Capacity Promise (CP)
            collaboration that balances selected materials and rate based
            capacity

          - Advanced Planning and Scheduling (APS) -- promising engine for
            Capable-to-Promise (CTP) collaboration that balances materials and
            capacity in real-time, connects to other promising engines for
            cascading supply chain synchronization

          Frontstep Knowledge Zone.  Frontstep Knowledge Zone is our
     subscription-based, on-line education service. Users can access education
     for Frontstep solutions anytime and anywhere they have Internet access. It
     is a convenient, low cost alternative to hardcopy training manuals and
     classroom education.

SERVICES AND SUPPORT

     We maintain a worldwide professional services organization of over 200
employees and a network of more than 50 business partners and strategic
alliances which offer to our customers a full range of services to support
                                        6
<PAGE>   8

installation, ongoing operations and to maximize the benefits of our software
products. These services include, but are not limited to, project management,
implementation support, product education, technical consulting, programming and
system integration services and ongoing maintenance and product support. We
employ our own structured services methodology to manage and support customer
implementation.

     Our services are priced separately and fees for our services are not
included in the price for our software products. These services are billed as
incurred. Although we attempt to minimize customization of our software
products, we do provide professional programming services to modify our software
products to address specific customer requirements. These modifications may
include designing and programming complete applications or integrating our
software products with legacy systems.

     Maintenance and support services include product enhancements and updates,
upgrades to new versions, telephone support during extended business hours,
full-time emergency support and access to our customer support service center on
our Internet home page. Fees for maintenance and support services generally are
billed annually in advance and revenue is deferred and recognized ratably over
the term of the maintenance and support agreement.

SALES AND DISTRIBUTION

     We currently license our software to customers primarily based on a license
fee for each concurrent session or concurrent execution of its software
products. We receive additional license fees whenever a customer increases the
number of concurrent sessions, usually as a result of the growth of the
customer's business or expansion to other sites. Sales opportunities are
generated through a combination of in-house telemarketing, leads from consulting
partners, advertising, trade shows and direct contacts by sales representatives.
Our product offerings are sold to customers through two primary channels:

          Direct sales.  This sales channel is comprised of direct sales
     representatives selling to manufacturers and distributors and focuses on
     selling the total business system under the Frontstep brand name. This
     channel targets the Company's traditional mid-sized manufacturing and
     distribution markets. We presently have over 50 direct sales
     representatives located around the world.

          Business partners.  This sales channel is comprised of more than 50
     third-party business partner firms that resell the Company's entire suite
     of products. These partners include consulting firms and application
     service providers that specialize in the Company's products.

     We derive our revenues and service our customers in 16 countries around the
world. We derived approximately 22%, 20% and 22% of our fiscal 2001, 2000 and
1999 revenues, respectively, from sales outside of North America. The
distribution of total revenue, operating income and identifiable assets
attributable to each of our geographic market areas for fiscal years 2001, 2000
and 1999 were as follows (in thousands):

<Table>
<Caption>
                                                                                 ASIA/
                                                      NORTH AMERICA   EUROPE    PACIFIC
                                                      -------------   -------   -------
<S>                                                   <C>             <C>       <C>
FISCAL 2001
Total revenue.......................................    $ 92,718      $14,736   $10,832
Operating income (loss).............................     (23,980)        (189)   (2,238)
Long-lived assets...................................       6,822          312       512
FISCAL 2000
Total revenue.......................................    $103,065      $13,941   $11,902
Operating income (loss).............................      (5,737)      (3,904)   (1,155)
Long-lived assets...................................       7,135          383       468
FISCAL 1999
Total revenue.......................................    $100,950      $16,400   $11,722
Operating income (loss).............................       7,728       (1,383)      709
Long-lived assets...................................       7,330          392       475
</Table>

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<PAGE>   9

PRODUCT DEVELOPMENT

     We devote a significant percentage of our resources to identifying the
needs of our customers in developing new features and enhancements to existing
products and designing and developing new products. We perform all of our
development activities with our own professional development and product support
organization of more than 250 professionals located at the Company's facility in
Columbus, Ohio and in other development centers around the world.

     Our practice is to release updates and major enhancements on a regular
basis since the market for our products is characterized by rapid technological
change, evolving industry standards in computer hardware and software
technology, changes in customer requirements and frequent new product
introductions and enhancements.

     We are committed to product and technological excellence and to meeting the
changing needs of mid-sized customers. As a result, we commit a substantial
portion of our revenues to research and development and to building new
products, which are typically capitalized as developed. Total research and
product development costs, including amounts capitalized, were $18.4 million,
$22.7 million and $15.1 million for the fiscal years ended June 30, 2001, 2000
and 1999, respectively. Additions to capitalized software were $5.1 million,
$7.0 million and $4.9 million for the same respective periods and were
capitalized in accordance with applicable accounting standards.

COMPETITION

     The market for enterprise solutions is intensely competitive, rapidly
changing and highly fragmented, which has become even more fragmented with
technology changes and the perceived opportunities for e-business applications.
This market is also significantly affected by new product offerings and other
market activities. We have a large number of competitors that vary in size,
computing environments and overall product scope. Within our market, the primary
competition comes from independent software vendors in three distinct groups: 1)
traditional enterprise software developers, including J.D. Edwards & Co., QAD,
Inc., Oracle Corporation, IFS and Epicor Software Corporation; (2) large
software developers focusing on more specialized point solutions such as CRM
software or supply chain management; and (3) newer companies specializing in
internet commerce and e-business solutions.

     A number of companies offer products that are similar to our products and
are directed at the market for enterprise software and compete against us on a
regular basis. Many of the these competitors have more established and larger
marketing and sales organizations, significantly greater financial, technical
and other resources and a larger installed base of customers than the Company.
We believe that we compete favorably against our competition in the following
areas, which we consider to be the most important considerations for potential
customers:

     - knowledge of and experience with mid-sized businesses

     - focus on discrete manufacturing and industrial distribution vertical
       markets

     - breadth of our comprehensive enterprise application solutions

     - collaboration and workflow automation across the enterprise and outside
       the enterprise with customers and suppliers

     - rapid implementation

     - competitive pricing

     - corporate reputation based on more than 20 years of experience

     - size of installed user base

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<PAGE>   10

PROPRIETARY TECHNOLOGY

     Our ability to compete is dependent in part upon our internally developed,
proprietary intellectual property. We regard our products as proprietary trade
secrets and confidential information. We rely upon our license agreements with
customers, distribution agreements with distributors and our own security
systems, confidentiality procedures and employee agreements to maintain the
trade secrecy of our products. For all of our significant products, we have
registered with appropriate Federal agencies for protection of our programs,
documentation and other written materials under copyright and trademark laws.

EMPLOYEES

     As of June 30, 2001, we employed 680 persons of which 213 were employed in
international operations outside of North America. None of our employees are
represented by a labor union. We have never experienced a work stoppage and
believe that our employee relations are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The Company's executive officers are as follows:

<Table>
<Caption>
                 NAME                   AGE                   TITLE
                 ----                   ---                   -----
<S>                                     <C>   <C>
Lawrence J. Fox.......................  45    Chairman of the Board
Stephen A. Sasser.....................  52    President, Chief Executive Officer and
                                              Director
Lawrence W. DeLeon....................  46    Executive Vice President, Worldwide
                                              Field Operations
Stephen A. Yount......................  46    Executive Vice President, Business
                                              Development and Channel Operations
Daryll L. Wartluft....................  60    Executive Vice President, Products
                                              Group
Robert D. Williams....................  46    Vice President, Human Resources
Jorge L. Lopez........................  46    Vice President, Strategic Planning and
                                              Corporate Development
Carolyn J. Morris.....................  57    Vice President, Marketing
Daniel P. Buettin.....................  48    Vice President, Finance, Chief
                                              Financial Officer and Secretary
</Table>

     Lawrence J. Fox founded a predecessor to Frontstep in 1979 as a sole
proprietorship. He has held his present office as Chairman of the Board since a
predecessor to the Company was incorporated in 1984. From 1984 to 1998, Mr. Fox
also served as Chief Executive Officer of the Company.

     Stephen A. Sasser has held the positions of President and Chief Executive
Officer of the Company since January 1999. Mr. Sasser previously served the
Company, from the time that he joined the Company in July 1995 until January
1999, as President and Chief Operating Officer. Mr. Sasser has served as a
director of the Company since July 1995. Prior to joining Frontstep, from 1994
to 1995, Mr. Sasser served as Vice President of International Operations for
Trilogy Software, a provider of sales and marketing software. From 1992 to 1994,
Mr. Sasser was Group Vice President of the Systems Management Division and
Pacific Rim Operations of Legent Corporation ("Legent"), a provider of systems
management software products and services. From 1987 through its acquisition by
Legent in 1992, Mr. Sasser served as President of the Data Center Management
Division of Goal Systems International, Inc. ("Goal Systems") which designed,
developed, and marketed systems management software products.

     Lawrence W. DeLeon has held the position of Executive Vice President
Worldwide Field Operations since August 2000. Mr. DeLeon previously served the
Company as Vice President, Chief Financial Officer and Secretary from the time
that he joined the Company in 1995 to July 2000. From 1991 to 1995, Mr. DeLeon
served in various capacities at Legent, including Treasurer for Goal Systems,
Europe, Vice President-Finance and Administration and Vice President-Central
Europe.

                                        9
<PAGE>   11

     Stephen A. Yount has held the position of Executive Vice President Business
Development and Channel Operations since August 2000. Mr. Yount served the
Company from August 1998 to July 2000, as Vice President of America's Field
Operations, and from the time that he joined the Company in May 1996 until
August 1998, as Vice President of America's Sales and Services. From 1995 to May
1996, he was Vice President of Sales at Tyecin Systems, a provider of
client-server manufacturing software for the semi-contractor market. From 1993
to 1995, Mr. Yount served as Vice President of Sales and Services at Neuron
Data, a client-server application development software company. From 1987 to
1993, he served in various senior sales positions at Legent.

     Daryll L. Wartluft has held the position of Executive Vice President
Frontstep Product Group since August 2000. Mr. Wartluft previously served as
Vice President and General Manager, SyteLine Division from the time that he
joined the Company in May 1998 until July 2000. From 1995 to 1998, he was
President and Chief Executive Officer and a director of Pivotpoint Inc., an ERP
software and services provider. From 1994 to 1995, he served as Group Vice
President of Applications Management Division of Legent. Prior to that time, he
held various management positions with Group Bull Worldwide Information Systems,
a provider of systems management software products and services, and
International Business Machines Corporation, a provider of advanced information
technology and services.

     Robert D. Williams joined the Company in September 1995 as Vice President,
Human Resources. Prior to that time, he served as Director, Human
Resources/Associate Relations of Legent from August 1992 to August 1995. From
March 1990 to August 1992 he was Executive Director of Human Resources and
Administrative Services of Goal Systems.

     Jorge L. Lopez joined the Company in November 1996 as Vice President of
Corporate Development/ Strategic Planning. From 1995 to November 1996, Mr. Lopez
served as Vice President of Marketing for Salesoft Inc., a provider of automated
sales and marketing software. From 1989 to 1995, Mr. Lopez served as Vice
President of Strategic Alliances for Avalon Software, Inc. an enterprise
resource planning software and services company. Prior to that time, Mr. Lopez
held various marketing and technical positions with International Business
Machines Corporation, a provider of advanced information technology and
services.

     Carolyn J. Morris joined the Company November 2000 as Vice President,
Marketing. From March 2000 to November 2000, Mrs. Morris served as Chief
Executive Officer of Wireless Dynamics, a manufacturer of internet access
equipment. From May 1996 to March 2000, Mrs. Morris was Chief Operating Officer
of Nobix, Inc., a manufacturer of client-server software. Prior to 1996, Mrs.
Morris founded and managed Maxwest Inc., a management consulting firm
specializing in executive support for startup companies.

     Daniel P. Buettin joined the Company in August 2000 as Vice President,
Finance, Chief Financial Officer and Secretary. Mr. Buettin served from 1995 to
August 2000 as Vice President and Chief Financial Officer of MPW Industrial
Services Group, Inc., a publicly-traded services company. Prior to joining MPW,
Mr. Buettin served in various executive positions, including Chief Financial
Officer, with OHM Corporation, a publicly-traded services company, in Findlay,
Ohio, from 1987 to 1995. Mr. Buettin was previously with Arthur Anderson LLP.

     The executive officers of the Company are appointed by and serve at the
pleasure of the Company's Board of Directors. There are no arrangements or
understandings between any officer and any other person pursuant to which the
officer was so appointed.

ITEM 2.  PROPERTIES

     Our corporate headquarters and principal administrative, product
development, and sales and marketing operations are located in approximately
87,000 square feet of leased office and storage space in Columbus, Ohio. The
lease agreement commenced in July 1991 and will expire on June 30, 2002. The
lease agreement provides for an annual base rent and operating expenses of
approximately $1.5 million. Additionally, we have 27 leased sales and support
offices throughout the United States and elsewhere.

                                        10
<PAGE>   12

ITEM 3.  LEGAL PROCEEDINGS

     We are subject to legal proceedings and claims which arise in the normal
course of business. While the outcome of these matters cannot be predicted with
certainty, management does not believe the outcome of any of these legal matters
will have a material adverse effect on our business, financial condition or
results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

     None.

                                    PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common shares are traded in the over-the-counter market and are quoted
on the Nasdaq National Market ("NASDAQ") under the symbol "FSTP". As of
September 10, 2001, we had approximately 213 shareholders of record. The
following table sets forth, for the periods indicated, the range of high and low
sale prices for Frontstep's common shares as reported by NASDAQ:

<Table>
<Caption>
                                                               PRICE RANGE
                                                              --------------
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
FISCAL 2001
  First Quarter.............................................  $10.00   $5.31
  Second Quarter............................................    6.88    2.63
  Third Quarter.............................................    7.13    3.13
  Fourth Quarter............................................    3.90    1.89
FISCAL 2000
  First Quarter.............................................  $12.38   $7.88
  Second Quarter............................................   18.50    9.50
  Third Quarter.............................................   32.75   15.25
  Fourth Quarter............................................   20.25    8.13
</Table>

     We have never paid cash dividends on our shares. We expect that all future
earnings will be retained to finance our operations and for the growth and
development of our business. Accordingly, we do not currently anticipate paying
cash dividends on our shares in the foreseeable future. The payment of any
future dividends will be subject to the discretion of the Board of Directors of
Frontstep and will depend on our results of operations, financial position and
capital requirements, general business conditions, restrictions imposed by
financing arrangements, if any, legal restrictions on the payment of dividends
and other factors the Board of Directors deems relevant. In addition, holders of
Frontstep's outstanding preferred shares may be entitled to receive dividends on
the preferred shares prior to the payment of dividends on the common shares, in
certain cases, under the our Amended Articles of Incorporation. See also "Sale
of Unregistered Securities" immediately below.

SALE OF UNREGISTERED SECURITIES

     In July 2001, we entered into a new credit facility arrangement with
Foothill Capital Corporation. The credit facility includes a $15 million,
three-year term note and a $10 million revolving credit facility. In connection
with the new credit facility arrangement with Foothill, we issued to Foothill a
warrant to purchase 550,000 common shares at an initial exercise price of $3.36
per share, which was the average of the closing bid price for our common shares
for the 10 trading days immediately preceding the closing date for the new
credit facility. The exercise price of the warrants and the number of common
shares issuable upon exercise of the warrants are subject to adjustments from
time to time under the anti-dilution provision contained in the

                                        11
<PAGE>   13

warrants. The warrants expire in July 2006 and are exercisable at any time prior
to its expiration. The warrants were issued in reliance upon an exemption from
registration under Section 4(2) of the Act and Rule 506 promulgated by the
Commission under the Act. As required by our agreement with Foothill, we intend
to register 687,500 shares for possible issuance upon exercise of the warrants.

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected consolidated financial data as of and for the years
ended June 30, 1997 through 2001 have been derived from the Consolidated
Financial Statements of Frontstep. The selected consolidated financial data
below should be read in conjunction with the Consolidated Financial Statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K (in
thousands, except per share data).

<Table>
<Caption>
                                                   YEAR ENDED JUNE 30,
                                    --------------------------------------------------
                                      2001       2000       1999      1998      1997
                                    --------   --------   --------   -------   -------
<S>                                 <C>        <C>        <C>        <C>       <C>
STATEMENT OF OPERATION DATA:
Total revenue.....................  $118,286   $128,908   $129,072   $97,597   $65,772
Cost of revenue...................    56,913     59,988     52,025    35,701    23,690
                                    --------   --------   --------   -------   -------
Gross margin......................    61,373     68,920     77,047    61,896    42,082
Operating expenses:
  Selling, general and
     administrative...............    56,007     56,790     56,801    43,995    30,741
  Research and development........    13,332     15,684     10,217     7,901     5,659
  Amortization of acquired
     intangibles..................     3,285      3,593      2,140     1,479       610
  Restructuring and other
     charges......................    15,156      3,649        835     6,503        --
                                    --------   --------   --------   -------   -------
     Total operating expenses.....    87,780     79,716     69,993    59,878    37,010
                                    --------   --------   --------   -------   -------
Operating income (loss)...........   (26,407)   (10,796)     7,054     2,018     5,072
Other income (expense), net.......      (510)      (966)       151      (178)      107
                                    --------   --------   --------   -------   -------
Income (loss) before income
  taxes...........................   (26,917)   (11,762)     7,205     1,840     5,179
Provision for (benefit from)
  income taxes....................    (2,063)    (1,557)     3,206     3,196     1,916
                                    --------   --------   --------   -------   -------
Net income (loss).................  $(24,854)  $(10,205)  $  3,999   $(1,356)  $ 3,263
                                    ========   ========   ========   =======   =======
Net income (loss) per common share
  -- diluted......................  $  (3.30)  $  (1.38)  $   0.55   $ (0.21)  $  0.54
                                    ========   ========   ========   =======   =======
Weighted average shares
  outstanding -- diluted..........     7,535      7,411      7,264     6,317     6,079
BALANCE SHEET DATA:
Working capital...................  $  3,860   $ 19,348   $ 21,926   $13,575   $ 7,897
Total assets......................    72,593     94,368     90,600    66,382    44,252
Total long-term debt and lease
  obligations.....................     8,742      3,169      5,759     2,305       530
Total shareholders' equity........    22,214     36,709     42,401    31,301    23,361
</Table>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

     Frontstep is a leading provider of integrated ERP software and services for
mid-market manufacturing and distribution companies and business units of larger
companies. Since the second quarter of fiscal 2000, we have experienced changing
market conditions resulting from a recession in many manufacturing industries
and

                                        12
<PAGE>   14

a lessening of demand for ERP systems. Well before these market changes began to
affect results of operations, we began to enhance our product offerings beyond
traditional ERP systems to participate in higher growth market segments. These
enhancements include a comprehensive suite of integrated software and services
that (1) support the management and resources of an enterprise, (2) support
customer relationship management and other front office business activities and
(3) support an enterprise's supply chain management activities. In that regard,
in fiscal 2000, we created our Frontstep subsidiary to advance the development
of new products and related sales channels to support these new products and
services. In November 2000, the shareholders of the Company approved a change in
the Company's name to Frontstep, Inc. to signal the completion of this
transformation.

     Events of September 11, 2001.  On September 11, 2001, the United States was
violently attacked by terrorists in New York City, Washington D.C. and
elsewhere. Frontstep and its employees were not directly affected. Our hearts go
out to the victims and the victims' families of this great American tragedy.

     In the days that have followed since this event, there have been
significant indications of a broad and possibly lasting impact of this event on
our economy and the economy of other countries around the world. It is not yet
clear whether a recession or further slowdown of the economy will occur.

     Furthermore, Frontstep generally records a significant portion of our
revenues, particularly our license fees revenue, in the third month of each
fiscal quarter, often in the last several days of that month. Since the attack
has caused widespread uncertainty at the end of our first quarter of fiscal
2002, the general uncertainty is only exacerbated by the timing.

     As a result of the events of September 11, 2001, and the uncertainty that
has followed, there can be no assurance that we will achieve the financial
results we discuss below for the September 2001 quarter and for the remainder of
fiscal 2002.

     Current Financial Results and Events.  While the enterprise applications
software industry has generally been experiencing weak demand and fluctuating
economic conditions for software spending since early in 1999, we did experience
significantly improved license fees revenues and heightened demand for our
products in the quarter ended December 31, 2000. This increase in revenues and
heightened overall demand led us to believe that strategy would lead us to more
successful financial results, with improvements each quarter over comparable
periods in the prior year. However, in the latter portion of the quarter ended
March 31, 2001, customers and potential customers appeared to react to the
slowing economy by electing to defer their buying decisions. As a result, the
Company, the information technology industry in general and many other
enterprise software providers experienced significant shortfalls in revenue
levels and incurred net losses for the March 2001 quarter and subsequent fiscal
quarter as compared to an expectation of continued improvements as were
demonstrated in the quarter ended December 31, 2000.

     Consequently, in April 2001, we initiated a broad restructuring program. We
reduced our worldwide workforce by approximately 20%, discontinued certain
product development and other non-essential activities, closed certain offices
and acted to reduce operating costs. As this effort is fully realized in the
September 2001 quarter, we believe that overall operating costs will be reduced
by $28 million on an annual basis, or approximately 25%. In the quarters ended
March 31, 2001 and June 30, 2001 (the "current fiscal quarter"), we recorded an
aggregate of approximately $13.0 million, pre-tax, in related restructuring
charges and write-downs of related product assets and accounts receivable.

     As a result of the shortfall in revenues and recorded restructuring and
other charges, we reported operating losses of $15.1 million and $4.8 million,
respectively, for the quarter ended March 31, 2001 and the current fiscal
quarter. However, as a result of the significant reduction in operating costs
from the restructuring, we experienced positive cash flows in the current fiscal
quarter and reported a "normalized" operating profit, when each are adjusted to
exclude the restructuring charges and amortization of acquired intangibles. The
quarter ending September 30, 2001 is expected to be profitable as reported and
cash flows are expected to be positive.

     Previous Quarterly Financial Results and Events.  For several quarters
prior to the quarter ended December 31, 2000, we experienced a decline in
revenues related to a sluggish demand for our software
                                        13
<PAGE>   15

products and services. We believe that this decline was related to the continued
industry-wide trend of delays in new business system purchases caused initially
by the Year 2000 market dynamics and subsequently by a desire by potential
customers to better understand the Internet and the role of e-business solutions
on their overall systems strategy.

     As a result, we recorded operating losses before restructuring and other
charges of $7.1 million, $3.1 million and $1.3 million for the fiscal year ended
June 30, 2000 and for the September 2000 and December 2000 quarters,
respectively. In July 2000, we made several structural changes to discontinue
certain business operations, write off non-performing assets and to restructure
the Company to better focus on its core business strategy. In connection with
these changes, we recorded a $3.0 million, pre-tax, non-recurring charge in the
fourth quarter of fiscal year 2000 and an additional $2.2 million, pre-tax, in
the September 2000 quarter.

GENERAL

     The Company's total revenue is derived primarily from licensing software,
providing related services, including installation, implementation, training,
consulting and systems integration and providing maintenance and support on an
annual basis. Revenue is accounted for in accordance with Statement of Position
97-2, Software Revenue Recognition, as amended and interpreted from time to
time. License fees revenue is generally recognized when the software product is
shipped. Services revenues are recognized as the services are performed and
revenues from maintenance agreements are billed periodically, deferred and
recognized straight-line over the term of the agreements.

     Cost of license fees revenue includes royalties, amortization of
capitalized software development costs and software delivery expenses. Cost of
service, maintenance and support revenue includes the personnel and related
overhead costs for implementation, training and customer support services,
together with fees paid to third parties for subcontracted services.

     Selling, general and administrative expenses consist of personnel,
facilities and related overhead costs, together with other operating costs of
the Company, including advertising and marketing costs.

     Research and development expenses include personnel and related overhead
costs for product development, enhancement, upgrades, quality assurance and
testing. The amount of such expenses is dependent on the nature and status of
the development process for the Company's products. Development costs
capitalized in a given period are dependent upon the nature and status of the
development process. Upon general release of a product, related capitalized
costs are amortized over three to five years and recorded as license fees cost
of revenue.

RESULTS OF OPERATIONS

     The fiscal year that ended June 30, 2001 is our "current fiscal year" or
"fiscal 2001". The prior year that ended June 30, 2000 is the "prior fiscal
year" or "fiscal 2000". The year ended June 30, 1999 is "fiscal 1999".

  FISCAL 2001 COMPARED TO FISCAL 2000

     Revenue.  Total revenue decreased $10.6 million, or 8.2%, to $118.3 million
in fiscal 2001 from $128.9 million in fiscal 2000. The total revenue mix is
shown in the table below (in thousands, except percentage data):

<Table>
<Caption>
                                                       FISCAL YEARS ENDED JUNE 30,
                                                   -----------------------------------
                                                         2001               2000
                                                   ----------------   ----------------
<S>                                                <C>        <C>     <C>        <C>
License fees revenue.............................  $ 51,309    43.4%  $ 57,858    44.9%
Service, maintenance and support revenue.........    66,977    56.6%    71,050    55.1%
                                                   --------   -----   --------   -----
  Total revenue..................................  $118,286   100.0%  $128,908   100.0%
                                                   ========   =====   ========   =====
</Table>

     License fees revenue decreased 11.3% in the current fiscal year from the
prior fiscal year. We believe that the decrease in license fees revenue in
fiscal 2001 is due to the current economic climate that is causing our

                                        14
<PAGE>   16

customers and potential customers to defer their buying decisions related to
large capital investments, particularly information technology investments. We
expect that license fees revenues will remain stable in the short-term but will
not begin to grow again until the current economic climate improves and demand
for our products improves as a result.

     Service, maintenance and support revenue decreased 5.7% in the current
fiscal year from the prior fiscal year. The decrease is primarily the result of
a decrease in service revenues resulting from the sluggish license fees revenue
experienced by the Company in the last few quarters. Services revenues in
particular are directly dependent on new license purchases by new and existing
customers. Maintenance and support contracts and the related revenue from these
contracts have been steadily improving over the last few years as the base of
customers under such programs has continued to grow.

     Cost of Revenue.  Total cost of revenue as a percentage of total revenue
increased to 48.1% for the current fiscal year from 46.5% for the prior fiscal
year.

     Cost of license fees revenue increased $0.3 million, or 1.7%, to $20.0
million in the current fiscal year from $19.6 million in the prior fiscal year
and as a percentage of license fees revenue, increased to 38.9% in the current
fiscal year from 33.9% in the prior fiscal year. The percentage increase is
primarily attributable to an increase in the number of third party product
vendors included in our new product offerings, discounting as a result of
weakened demand and lower license fees revenue affecting certain fixed and
related costs.

     Cost of service, maintenance and support revenue decreased $3.4 million, or
8.5%, to $36.9 million in the current fiscal year from $40.4 million in the
prior fiscal year and as a percentage of service, maintenance and support
revenue, decreased to 55.2% in the current fiscal year from 56.8% in the prior
fiscal year. The decrease in cost is attributable to a decline in service
revenue resulting from sluggish license fees revenue in the current fiscal year
and the percentage decrease is primarily due to the continued growth of
maintenance and support revenues which have higher margins than services
revenues. As noted above, service revenues in particular are directly dependent
on new license purchases by new and existing customers.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses decreased $0.8 million, or 1.4%, to $56.0 million in the
current fiscal year from $56.8 million in the prior fiscal year. Such expenses
as a percentage of total revenue increased to 47.3% in the current fiscal year
from 44.1% in the prior fiscal year. The decrease in costs is attributable to
the restructuring that was undertaken during the current fiscal quarter, the
full effect of which will substantially reduce such costs further in fiscal
2002. The increase in the percentage of total revenue is due primarily to the
decrease in total revenue since many of these costs are fixed in nature and to
the fact that the restructuring did not occur until late in the current fiscal
year.

     Research and Development.  Total research and development costs, including
amounts capitalized, decreased $4.3 million or 18.9%, to $18.4 million for the
current fiscal year from $22.7 million for the prior fiscal year and decreased
as a percentage of total revenues to 15.5% in the current fiscal year from 17.6%
in the prior fiscal year. Although total research and development spending
decreased from the prior fiscal year, we are continuing to spend a substantial
portion of total revenues on the development of our expanded product offerings
and product capabilities, development of future releases of our ERP software and
development of interfaces with third-party software products. We believe that
these investments are critical to the success and market acceptance of our new
product offerings and total suite of integrated collaborative business systems.

     We capitalized development costs of $5.1 million during the current fiscal
year and $7.0 million during the prior fiscal year.

     Restructuring and Other Charges.  In April 2001, we announced a broad
restructuring plan to reduce operating costs by reducing our worldwide workforce
by approximately 20%, discontinuing certain product development and other
non-essential activities and closing certain office facilities. In relation to
this restructuring plan, we also wrote-off certain accounts receivable and other
non-performing assets. The results, including costs of the restructuring plan,
are discussed above.

     In July 2000, we announced several structural changes to discontinue
certain business operations, write off non-performing assets and to restructure
the Company to better focus on our core business strategy. These

                                        15
<PAGE>   17

changes included divesting of an operating subsidiary, discontinuing operations
of another operating subsidiary, consolidating our product development
organizations and restructuring our sales channels. The results, including costs
of this previous restructuring, are discussed above.

     Benefit from Income Taxes.  The benefit from income taxes for the current
and prior fiscal years reflects an effective tax rate of 7.7% and 13.2%,
respectively. The effective tax rate in the current fiscal year differs from the
expected corporate tax rate primarily due to valuation allowances recorded
against the deferred tax assets related to net operating losses incurred
domestically, and in both periods due to foreign losses incurred in countries
where no tax benefits will be received for the losses and the non-deductibility
of the amortization of certain intangibles.

  FISCAL 2000 COMPARED TO FISCAL 1999

     Revenue.  Total revenue decreased slightly in fiscal 2000 to $128.9 million
from $129.1 million in fiscal 1999. We believe that the decline in total revenue
in fiscal 2000 was due to the industry-wide trend of delays in new business
system purchases caused initially by the Year 2000 market dynamics and
subsequently by continued sluggish demand for ERP software as customers and
potential customers assessed the shifting technologies and the potential for
e-business solutions to support their business needs. The revenue mix is shown
in the table below:

<Table>
<Caption>
                                                       FISCAL YEARS ENDED JUNE 30,
                                                   -----------------------------------
                                                         2000               1999
                                                   ----------------   ----------------
<S>                                                <C>        <C>     <C>        <C>
License fees revenue.............................  $ 57,858    44.9%  $ 67,423    52.2%
Service, maintenance and support revenue.........    71,050    55.1%    61,649    47.8%
                                                   --------   -----   --------   -----
  Total revenue..................................  $128,908   100.0%  $129,072   100.0%
                                                   ========   =====   ========   =====
</Table>

     License fees revenue decreased 14.2% in fiscal 2000 from fiscal 1999. The
decrease in fiscal 2000 was due to the industry-wide trend of delays in new
business system purchases. We believe that the purchase delays were caused
initially by the Year 2000 market dynamics and that the purchase delays have
continued as a result of the ERP market's transformation to a broader more
comprehensive business solution .

     Service, maintenance and support revenue increased 15.2% in fiscal 2000
from fiscal 1999. This growth in fiscal 2000 was attributable to continued
increases the number of licensed software installations worldwide and the
expanding product line of the Company.

     Cost of Revenue.  Total cost of revenue as a percentage of total revenue
was 46.5% for fiscal 2000 compared to 40.3% fiscal 1999.

     Cost of license fees revenue increased to 33.9% of license fee revenue in
fiscal 2000 from 27.2% in fiscal 1999. The percentage increase was primarily due
to an increase in the rate of amortization on capitalized software expenses in
fiscal 2000. We began amortizing capitalized software costs related to certain
new products late in fiscal 1999.

     Cost of service, maintenance and support was 56.8% of service, maintenance
and support revenue in fiscal 2000 compared to 54.7% in fiscal 1999. The
increase in cost of service, maintenance and support was primarily due to the
use of subcontractors to supplement the work performed by our employees. In
general, the use of subcontractors results in lower margins than the use of our
employees, but provides increased flexibility in meeting customer demands.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses were $56.8 million in both fiscal years 2000 and 1999.
Selling, general and administrative expenses as a percent of net revenue has
remained consistent at 44.0% for both fiscal 2000 and fiscal 1999.

     Research and Development.  Total research and development costs, including
amounts capitalized, were $22.7 million or 17.6% of total revenue for fiscal
2000 compared to $15.1 million or 11.7% of total revenue in fiscal 1999. During
fiscal 2000, research and development expenses increased in dollar amount and as
a percentage of total revenues as we continued to invest heavily in the
development of an expanded product offering and the application of new Internet
technologies. In addition, the increase in research and

                                        16
<PAGE>   18

development expense is due to staff expansion relating to our development of
future releases of our existing products and development focus on interfacing
with third-party software products. Capitalized development costs were $7.0
million and $4.9 million for the years ended June 30, 2000 and 1999,
respectively.

     We incurred nonrecurring charges of approximately $638,000 in fiscal 2000
and $835,000 in fiscal 1999 relating to the write-off of acquired in-process
technology in conjunction with certain acquisitions completed in each of these
fiscal years.

     Restructuring and Other Charges.  In July 2000, we announced that we were
terminating the operations of our e-Mongoose, Inc. subsidiary. In connection
with this announcement, we determined that capitalized software costs associated
with e-Mongoose, Inc. were not recoverable and, accordingly, we recognized an
impairment charge of $1.8 million related to these unrecoverable costs. We also
determined that certain accounts receivable of e-Mongoose, Inc. were not
collectible and we reserved $714,000 of uncollectible accounts receivable.
Effective June 21, 2000, we also sold certain assets of our Visual Applications
Software, Inc. subsidiary. We recognized a $429,000 net loss in connection with
the sale.

     Provision for (benefit from) Income Taxes.  The effective tax rates for the
years ended June 30, 2000 and 1999 were (13.2)% and 44.5%, respectively. The
effective tax rate for fiscal 2000 differs from the expected corporate tax rate
primarily due to a gain on the sale of foreign operations and a valuation
allowance offset to net operating losses of certain foreign subsidiaries. In
addition, the effective tax rates for fiscal years 2000 and 1999 were impacted
by acquisition research and development write-offs, which are not deductible for
income tax purposes, the amount of foreign taxable earnings in countries with
higher effective tax rates and the non-deductibility of the amortization of
goodwill.

QUARTERLY RESULTS

     Our results of operations have fluctuated on a quarterly basis. Our
expenses, with the principal exception of sales commissions and certain
components of cost of revenue, are generally fixed and do not vary with revenue.
As a result, any shortfall of actual revenue in a given quarter would adversely
affect net earnings for that quarter.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 2001, we had cash and cash equivalents of $1.5 million and
working capital of $3.9 million. During the fiscal year ended June 30, 2001, we
used $3.5 million of cash for operating activities, including the restructuring
and other charges described above. We purchased $4.0 million of property and
equipment and used $5.1 million for capitalized software. Cash was also used for
the payment of $3.4 million on certain debt payments relating to previous
acquisitions. While the revolving credit facility borrowings of the Company
increased from $3.0 million to $8.3 million during the current fiscal year,
borrowings remained relatively constant during the second half of the fiscal
year: $8.6 million at December 31, 2000 and $8.3 million at June 30, 2001.

     In December 2000, we entered into a revolving credit facility with PNC
Bank, National Association (the "Credit Facility") to replace our previous
credit arrangement with Bank One, N.A. The Credit Facility provided the Company
with up to $20.0 million of revolving credit availability for a three-year
period based on qualifying accounts receivable and was secured by our trade
accounts receivable originating within the United States and Canada. Borrowings
under the Credit Facility bore interest at either the Federal Funds rate plus
0.5% or, at our option, the Eurodollar market rate plus 2.75%. The interest rate
is subject to change based on interest rate formulas tied to our net income. The
Credit Facility is subject to customary terms and conditions, including a
financial covenant that we maintain a minimum level of net worth.

     As of March 31, 2001, we were not in compliance with certain covenants
under the Credit Facility as a result of our reported losses and the
restructuring and other charges recorded for the quarter ended as of that date.
Although the bank waived this noncompliance as of March 31, 2001, we recognized
that the borrowing availability under the Credit Facility would not be
sufficient to support our cash needs and to repay the temporary additional
credit that the bank agreed to provide to assist in the restructuring discussed
above. A search for additional financing to meet all of our cash needs was
conducted during the current fiscal quarter.

                                        17
<PAGE>   19

     In July, 2001, we entered into a new credit facility arrangement with
Foothill Capital Corporation. The credit facility includes a $15 million,
three-year term note and a $10 million revolving credit facility. Availability
under the revolving credit facility is based on and secured by our qualifying
accounts receivable originating within the United States and Canada. Borrowings
under the revolving credit facility bear interest either at the Federal Funds
rate plus 1.5%, or at the Eurodollar market rate plus 3.0%. The term note bears
interest at the rate of 10.5% plus 1.5% per annum added to principal. The term
note is payable in monthly installments commencing October 1, 2001. The
agreement is subject to customary terms and conditions and includes financial
covenants for maintenance of a minimum tangible net worth, a minimum level of
earnings before interest, taxes, depreciation and amortization and a maximum
ratio of debt to earnings before interest, taxes, depreciation and amortization.

     As a result of the restructuring discussed above, which was completed in
the current fiscal quarter, we expect to return to profitability and positive
cash flow from operations commencing in the quarter ending September 30, 2001.
As a result of the new credit facility with Foothill and the expected return to
profitability, we anticipate that cash on hand, cash flow from operations and
available borrowings as described above will be sufficient to satisfy expected
cash needs for the next 12 months.

     While we classified our debt as a short-term liability in our balance sheet
as of March 31, 2001 in accordance with certain accounting literature, we have
now re-classified this debt as a long-term liability in our balance sheet as of
June 30, 2001 since we completed our new credit facility in July 2001.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

     Changes in demand for our products and services could cause potential
significant fluctuations in our quarterly and annual operating results.  Our
operating results may vary significantly from quarter to quarter. Our quarterly
operating results are affected by a number of factors that could materially and
adversely affect our revenues and profitability. These factors also make
estimation of operating results prior to the end of a quarter extremely
uncertain. These factors include:

     - demand for our products and services

     - competitive conditions in the software industry

     - the timing of the introduction or market acceptance of new or enhanced
       products which we offer or which are offered by our competitors

     - the potential for delay or deferral of customer purchases of our products
       in anticipation of product enhancements or new product offerings by us or
       our competitors

     - the timing of any acquisitions by us and related write-offs

     - the mix of our product and services net revenues

     - the mix of our North American and international net revenues

     - dependence on a few very large new license sales in each quarter to meet
       our quarterly goals

     - general economic conditions and other factors affecting capital
       expenditures by our customers

     - the size, timing and structure of significant licenses with our customers

     - the entry of new competitors and technological advances by competitors

     - delays in localizing our products for new markets

     - product life cycles

     The purchase of our products and services may involve a significant
commitment of capital and other resources by our customers. As a result, the
sales cycles for our products and services, from initial evaluation to delivery
or performance, vary from customer to customer. The timing of individual sales
is difficult to predict, and sales can occur in quarters subsequent to those
anticipated by us. In addition, sales through indirect channels, such as through
business partners, are difficult to predict and may have lower profit margins
than direct sales.

     Our revenues in any quarter are substantially dependent on orders signed
and shipped in that quarter. Typically, we realize higher revenues in our second
and fourth fiscal quarters. Generally, we record a majority

                                        18
<PAGE>   20

of our quarterly revenues in the third month of each quarter, mostly in the
latter half of the third month. We believe that the fluctuations in our
operating results is caused primarily by the budgeting cycles of our customers
and established buying patterns by our customers or potential customers in the
industry. As a result, our quarterly operating results are difficult to predict.
In addition, delays in product delivery or in closings of sales near the end of
a quarter could cause our quarterly operating results to fall substantially
short of anticipated levels.

     Adverse economic conditions in the general business economy or specifically
in the manufacturing industries we serve could result in reduced purchases of
our products and services.  Our customers are primarily discrete manufacturers
and industrial products distributors in discrete manufacturing environments. Our
business depends substantially upon the capital expenditures of our customers.
Capital expenditures by our customers are somewhat dependent upon the demand for
their manufactured products and the strength of their financial condition. A
recession or other adverse economic event in general or one that specifically
affects manufacturers could cause them to curtail or delay capital expenditures
for computer software products. Any significant changes in the timing or amount
of capital expenditures by manufacturers could have a material adverse effect on
our business, operating results and financial condition.

     Industries in which our customers operate have been affected by weakened
demand for their products for approximately one to two years and we believe that
the demand for our products and services has already been significantly
impacted, which has negatively affected our financial results and financial
condition. However, there can be no assurance that economic conditions relating
to our customers or potential customers will not become more severe.

     Any decrease in our licensing activity is likely to result in reduced
services revenue in future periods. Our service, maintenance and support revenue
is derived from our installation, implementation, training, consulting, systems
integration and software product maintenance and support services. Typically a
decrease in our service, maintenance and support revenue follows a decrease in
our licensed software installations. Our ability to maintain or increase our
service, maintenance and support revenue depends in large part on our ability to
increase our software licensing activity.

     The market for our products is characterized by rapid technological change,
evolving industry standards in computer hardware and software technology,
changes in customer requirements and frequent new product introductions and
enhancements.  The introduction of products embodying new technologies and the
emergence of new industry standards can cause customers to delay their
purchasing decisions and render existing products obsolete and unmarketable. The
life cycles of our software products are difficult to estimate. Consequently,
our future success will depend, in part, upon our ability to continue to enhance
our existing products and to develop and introduce in a timely manner new
products with technological developments that satisfy customer requirements and
achieve market acceptance. There can be no assurance that we will successfully
identify new product opportunities and develop and bring new products to market
in a timely and cost-effective manner or that products, capabilities or
technologies developed by others will not render our products or technologies
obsolete or noncompetitive or shorten the life cycles of our products. If we are
unable to develop on a timely and cost-effective basis new software products or
enhancement to existing products, or if our products or enhancements do not
achieve market acceptance, our business, operating results and financial
condition may be materially adversely affected.

     We derive a significant portion of our business from operations that are
subject to foreign economic conditions and currency fluctuations.  We derive a
significant portion of our business from international sales. We expect to
continue to expand our international operations, which will require significant
management attention and financial resources. Our international operations are
subject to various risks, including the following:

     - the impact of a recession in foreign countries, particularly in Europe
       and the Asia/Pacific regions

     - cultural and language difficulties associated with serving customers and
       localizing products

     - staffing and management problems related to foreign operations

     - exchange controls and reduced protection for intellectual property in
       some countries

     - political instability

                                        19
<PAGE>   21

     - unexpected changes in foreign regulatory requirements

     - difficulties in collecting accounts receivable and longer collection
       periods

     - restrictions on the repatriation of foreign earnings

     - the impact of local economic conditions and practices

     - fluctuations in foreign exchange rates

     - potential adverse foreign tax consequences

     Termination of agreement with Progress would cause a disruption of service
to our customers and may result in lower operating margins or a loss of
business.  Our core product, SyteLine, is written in PROGRESS, a proprietary
programming language which we license from Progress Software Corporation. We
market and distribute PROGRESS in connection with the sale of our products under
a non-exclusive agreement with Progress. The agreement may be terminated by
either party upon 90 days' written notice to the other party. In addition, the
agreement may be terminated immediately by either party if a material breach of
the agreement by the other party continues after 30 days' written notice. Our
relationship with Progress involves other risks which could have a material
adverse effect on our business, operating results or financial condition,
including the following:

     - the failure of Progress to continue its business relationship with us

     - the failure of Progress to develop, support or enhance PROGRESS in a
       manner that is competitive with enhancements of other programming
       languages

     - delays in the release of PROGRESS products or product enhancements that
       require a delay in the release of our products or product enhancements

     - the loss of market acceptance of PROGRESS and its relational database
       management system

     - our inability to migrate our software products to other programming
       languages on a timely basis if PROGRESS is no longer available

     Conversion of our outstanding Series A preferred shares and exercise of our
outstanding warrants could result in substantial dilution of your investment, a
detrimental effect on our liquidity and ability to raise additional capital, and
a significant decline in the market value of our common shares.  As of September
24, 2001, we had approximately 7,568,218 common shares outstanding and we had
approximately 1,587,412 additional common shares reserved for issuance upon
conversion of our outstanding Series A preferred shares and upon exercise of our
outstanding warrants and employee and director stock options. Our Series A
preferred shares and outstanding warrants and stock options also contain or are
subject to various anti-dilution and similar provisions which may require us to
issue additional common shares in certain circumstances. If these securities are
converted or exercised, other holders of our common shares may experience
significant dilution in the market value of our common shares held by them. If
the holders were to sell all or a substantial amount of those common shares into
the open market, the sales could have a negative effect on the market price of
our common shares. The sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a price we deem
appropriate.

     We have no intention of paying cash dividends.  We have never paid any cash
dividends on our common shares. We currently intend to retain all future
earnings, if any, for use in our business and we do not expect to pay any cash
dividends in the foreseeable future. In addition, dividend payments to holders
of our common shares are subject to the rights of holders of our preferred
shares. As long as our Series A preferred shares are outstanding, no dividends
may be declared or paid on our securities that rank junior to our Series A
preferred shares, including our common shares, unless all required cumulative
dividends are paid or a sum sufficient for the payment of the dividends is set
apart for such payment.

     Turnover in our senior management or other key employees could have a
material adverse effect on our business, operating results and financial
condition.  Our success depends to a significant extent upon senior management
and other key employees. The loss of one or more key employees could have a
material adverse effect on our business. We do not have employment agreements
with our executive officers, except Stephen A. Sasser, our President and Chief
Executive Officer, and we do not maintain key man life insurance on our
executive officers. We believe that our future success will depend in part on
our ability to attract and retain

                                        20
<PAGE>   22

highly skilled technical, managerial, sales, marketing, service and support
personnel. Competition for personnel in the computer software industry has
historically been intense. There can be no assurance that we will be successful
in attracting and retaining key personnel, and the failure to do so could have a
material adverse effect on our business, operating results and financial
condition.

     Our success is dependent in part upon our proprietary technology and other
intellectual property.  Our ability to compete is dependent in part upon our
internally developed proprietary intellectual property. We regard our products
as proprietary trade secrets and confidential information. We rely largely upon
a combination of copyright, trade secret and trademark laws, license agreements
with our customers, distribution agreements with our distributors, and our own
security systems, confidentiality procedures and employee agreements to maintain
the confidentiality and trade secrecy of our products. In certain cases, we also
seek to protect our programs, documentation and other written materials through
registration of our trademarks and service marks and copyrights of our products
under trademark and copyright laws in the United States and certain other
countries, but we have not secured registration of all our marks and copyrights.
None of our products are patented.

     There can be no assurance that our means of protecting our proprietary
rights in the United States or abroad are adequate or that competitors will not
independently develop similar technology. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States, and effective copyright, trademark and trade secret protection
may not be available in other jurisdictions. Preventing or detecting
unauthorized use of our products is difficult. Despite our efforts, it may be
possible for third parties to copy certain portions or reverse engineer our
products, or to obtain and use our proprietary or confidential information.

     We also rely on certain other technology which we license from third
parties, including software that is integrated with internally developed
software and used in our products to perform key functions. No assurance can be
given that the steps taken by us will prevent misappropriation of our technology
or that our license agreements will be enforceable. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Any such litigation, even if not meritorious, could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, operating results and financial condition.

     We may be exposed to property rights infringement claims.  Although we do
not believe that our products infringe the proprietary rights of third parties,
there can be no assurance that infringement or invalidity claims, including
claims for indemnification resulting from infringement claims, will not be
asserted or prosecuted against us. Regardless of the validity or the successful
assertion of such claims, defending against such claims could result in
significant costs and diversion of resources which could have a material adverse
effect on our business, operating results and financial condition. In addition,
the assertion of such infringement claims could result in injunctions preventing
us from distributing certain products, which would have a material adverse
effect on our business, operating results and financial condition. If any claims
or actions are asserted against us, we may seek to obtain a license to such
intellectual property rights. There can be no assurance, however, that such a
license would be available to us on reasonable terms or at all.

     We may be exposed to product liability claims.  Our products may contain
undetected operating errors due to the complex nature of our software. Such
operating errors are usually resolved through regular maintenance and updating
processes. However, our products also may contain more serious operating errors
or failures that may not be detected until the products have been delivered to
customers. As a result of serious operating errors or failures, our customers
could suffer major business interruptions or other problems that could lead to
claims for damages against us. Such operating errors or failures could also
delay the scheduled release of new or enhanced products or diminish the market
acceptance of our products. As a result, our financial results of operations and
financial condition may be materially adversely affected.

     Our future revenue is substantially dependent upon our installed customer
base.  In the past, we have depended on our installed customer base for
additional future revenue from services, support and maintenance and licensing
of additional products. Our maintenance and support agreements generally are
renewable annually at the option of the customer. Fees for maintenance and
support services are billed 12 months in

                                        21
<PAGE>   23

advance, and maintenance and support revenue is deferred and recognized ratably
over the term of the maintenance and support agreement. There can be no
assurance that current installed customers will renew their maintenance and
support in future periods, continue to use the Company for professional services
or purchase additional products; each of which would have a material negative
impact on our financial results and financial condition.

     We may not be able to maintain or expand our relationships with business
partners.  We believe that we need to maintain and expand our relationships with
our existing business partners and enter into relationships with additional
business partners in order to expand the distribution of our products. Many of
our business partners also sell products that compete with our products. There
can be no assurance that we will be able to maintain effective, long-term
relationships with our business partners or that selected business partners will
continue to meet our sales needs. Further, there can be no assurance that our
business partners will not market software products in competition with our
products in the future or will not otherwise reduce or discontinue their
relationships with us. If we fail to maintain successfully our existing business
partner relationships or to establish new business partner relationships in the
future, our business, operating results and financial condition could be
materially and adversely affected.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Foreign Exchange.  Frontstep's revenues originating outside of North
America were 22%, 20% and 22% of our total revenues for fiscal years 2001, 2000
and 1999, respectively. By geographic region, revenues originating in Europe
were 12%, 11% and 13% of total revenues for fiscal years 2001, 2000 and 1999,
respectively. Revenues originating in Asia Pacific were 9% of total revenues for
fiscal years 2001, 2000 and 1999. International sales are made mostly from our
foreign sales subsidiaries in the local countries and are typically denominated
in the local currency of each country. These subsidiaries also incur most of
their expenses in the local currency. Accordingly, all foreign subsidiaries use
the local currency as their functional currency.

     Our exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which costs of software, including certain development
costs, incurred in the United States are charged to our foreign sales
subsidiaries. These intercompany accounts are typically denominated in the
functional currency of the foreign subsidiary in order to centralize foreign
exchange risk with the parent company in the United States. We are also exposed
to foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. Foreign currency
gains and losses will continue to result from fluctuations in the value of the
currencies in which we conduct our operations as compared to the U.S. dollar and
future operating results will be affected by gains and losses from foreign
currency exposure. We do not currently hedge against losses arising from our
foreign currency exposure. We have considered the potential impact of a
hypothetical 10% adverse change in foreign exchange rates and we believe that
such a change would not have a material impact on financial results or financial
condition in the coming fiscal year.

     Interest Rates.  We invest our surplus cash in financial instruments such
as short-term marketable securities and interest-bearing time deposits. We also
incur interest at variable rates, dependent upon the prime rate or LIBOR rate
that may be in effect from time to time. We have considered the potential impact
of a hypothetical one hundred basis point adverse change in interest rates and
we believe that such a change would not have a material impact on financial
results or financial condition in the coming fiscal year.

                                        22
<PAGE>   24

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Frontstep, Inc.

     We have audited the accompanying consolidated balance sheet of Frontstep,
Inc. and subsidiaries as of June 30, 2001 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year
ended June 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Frontstep,
Inc. and subsidiaries at June 30, 2001, and the results of their operations and
their cash flows for the year ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP

Columbus, Ohio
August 13, 2001

                                        23
<PAGE>   25

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
Frontstep, Inc.

     We have audited the accompanying consolidated balance sheet of Frontstep,
Inc. (formerly Symix Systems, Inc.) and subsidiaries as of June 30, 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended June 30, 2000. 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Frontstep, Inc.
and Subsidiaries at June 30, 2000, and the consolidated results of their
operations and cash flows for each of the two years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.

                                          /s/ Ernst & Young LLP

Columbus, Ohio
July 27, 2000

                                        24
<PAGE>   26

                                FRONTSTEP, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                   JUNE 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                (IN THOUSANDS,
                                                              EXCEPT SHARE DATA)
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 1,512    $11,868
  Trade accounts receivable, net............................   31,446     36,956
  Prepaid expenses..........................................    3,756      2,610
  Income taxes receivable...................................       47      1,867
  Deferred income taxes.....................................    2,026      1,510
  Inventories...............................................      738        861
  Other current assets......................................      979        988
                                                              -------    -------
                                                               40,504     56,660
Capitalized software, net...................................   15,094     18,329
Intangibles, net............................................    7,911      9,113
Property and equipment, net.................................    7,646      7,986
Other assets................................................    1,438      2,280
                                                              -------    -------
Total assets................................................  $72,593    $94,368
                                                              =======    =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $15,610    $13,613
  Deferred revenue..........................................   19,067     18,223
  Current portion of long-term obligations..................    1,967      5,476
                                                              -------    -------
                                                               36,644     37,312
Noncurrent liabilities:
  Long-term debt............................................    8,337      3,000
  Deferred income taxes.....................................    2,891      4,167
  Other.....................................................      405        169
                                                              -------    -------
                                                               11,633      7,336
Minority interest...........................................    2,102      2,146
Series A Convertible Participating Preferred Stock, no par
  value.....................................................       --     10,865
Shareholders' equity:
  Series A Convertible Participating Preferred Stock, no par
    value; 1,000,000 shares authorized; 566,933 shares
    issued and outstanding at June 30, 2001; liquidation
    preference $13,606,392..................................   10,865         --
  Common stock; no par value; 20,000,000 shares authorized;
    7,872,418 and 7,807,857 shares issued at June 30, 2001
    and 2000, respectively, at stated capital amounts of
    $0.01 per share                                                79         78
  Additional paid-in capital................................   37,470     37,216
  Treasury stock, at cost; 304,200 shares...................   (1,320)    (1,320)
  Retained earnings (deficit)...............................  (21,562)     3,292
  Accumulated other comprehensive loss......................   (3,318)    (2,557)
                                                              -------    -------
                                                               22,214     36,709
                                                              -------    -------
Total liabilities and shareholders' equity..................  $72,593    $94,368
                                                              =======    =======
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        25
<PAGE>   27

                                FRONTSTEP, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                       YEAR ENDED JUNE 30,
                                                              -------------------------------------
                                                                 2001          2000         1999
                                                              -----------   -----------   ---------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>           <C>           <C>
Revenue:
  License fees..............................................   $  51,309     $  57,858     $67,423
  Service, maintenance and support..........................      66,977        71,050      61,649
                                                               ---------     ---------     -------
          Total revenue.....................................     118,286       128,908     129,072
Cost of revenue:
  License fees..............................................      19,972        19,636      18,317
  Service, maintenance and support..........................      36,941        40,352      33,708
                                                               ---------     ---------     -------
          Total cost of revenue.............................      56,913        59,988      52,025
                                                               ---------     ---------     -------
Gross margin................................................      61,373        68,920      77,047
Operating expenses:
  Selling, general and administrative.......................      56,007        56,790      56,801
  Research and development..................................      13,332        15,684      10,217
  Amortization of acquired intangibles......................       3,285         3,593       2,140
  Restructuring and other charges...........................      15,156         3,649         835
                                                               ---------     ---------     -------
          Total operating expenses..........................      87,780        79,716      69,993
                                                               ---------     ---------     -------
Operating income (loss).....................................     (26,407)      (10,796)      7,054
Interest expense............................................        (623)         (782)       (324)
Other income (expense), net.................................         113          (184)        475
                                                               ---------     ---------     -------
Income (loss) before income taxes...........................     (26,917)      (11,762)      7,205
Provision for (benefit from) income taxes...................      (2,063)       (1,557)      3,206
                                                               ---------     ---------     -------
Net income (loss)...........................................   $ (24,854)    $ (10,205)    $ 3,999
                                                               =========     =========     =======
Net income (loss) per common share:
  Basic.....................................................   $   (3.30)    $   (1.38)    $  0.60
                                                               =========     =========     =======
  Diluted...................................................   $   (3.30)    $   (1.38)    $  0.55
                                                               =========     =========     =======
Shares used in computing per share amounts:
  Basic.....................................................       7,535         7,411       6,711
  Diluted...................................................       7,535         7,411       7,264
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        26
<PAGE>   28

                                FRONTSTEP, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<Table>
<Caption>
                                                                                                     ACCUM.
                           PREFERRED STOCK     COMMON STOCK     ADDITIONAL              RETAINED     OTHER
                           ----------------   ---------------    PAID-IN     TREASURY   EARNINGS     COMPR.
                           SHARES   AMOUNT    SHARES   AMOUNT    CAPITAL      STOCK     (DEFICIT)     LOSS      TOTAL
                           ------   -------   ------   ------   ----------   --------   ---------   --------   --------
                                                                  (IN THOUSANDS)
<S>                        <C>      <C>       <C>      <C>      <C>          <C>        <C>         <C>        <C>
Balance at July 1,
  1998...................    125    $ 1,031    6,778    $68      $23,937     $(1,320)   $  9,498    $ (1,912)  $ 31,302
Issuance of common stock:
  Acquisitions...........     --         --      619      6        5,566          --          --          --      5,572
  Stock option
    exercises............     --         --       75      1          656          --          --          --        657
  Employee stock purchase
    plan.................     --         --       38     --          533          --          --          --        533
Tax benefit on stock
  options exercised......     --         --       --     --          330          --          --          --        330
Exercise of convertible
  preferred shares.......   (125)    (1,031)     144      1        1,341          --          --          --        311
Net income...............     --         --       --     --           --          --       3,999          --      3,999
Foreign currency
  translation
  adjustment.............     --         --       --     --           --          --          --        (302)      (302)
                                                                                                               --------
Comprehensive income.....     --         --       --     --           --          --          --          --      3,697
                            ----    -------   ------    ---      -------     -------    --------    --------   --------
Balance at June 30,
  1999...................     --         --    7,654     76       32,363      (1,320)     13,497      (2,214)    42,402
Issuance of common stock:
  Acquisitions...........     --         --       --     --            3          --          --          --          3
  Stock option
    exercises............     --         --      118      2        1,009          --          --          --      1,011
  Employee stock purchase
    plan.................     --         --       35     --          577          --          --          --        577
Tax benefit on stock
  options exercised......     --         --       --     --          754          --          --          --        754
Issuance of common stock
  warrants...............     --         --       --     --        2,510          --          --          --      2,510
Net loss.................     --         --       --     --           --          --     (10,205)         --    (10,205)
Foreign currency
  translation
  adjustment.............     --         --       --     --           --          --          --        (343)      (343)
                                                                                                               --------
Comprehensive loss.......     --         --       --     --           --          --          --          --    (10,548)
                            ----    -------   ------    ---      -------     -------    --------    --------   --------
Balance at June 30,
  2000...................     --         --    7,807     78       37,216      (1,320)      3,292      (2,557)    36,709
Issuance of common stock:
  Stock option
    exercises............     --         --        2     --           60          --          --          --         60
  Employee stock purchase
    plan.................     --         --       63      1          194          --          --          --        195
Convertible preferred
  stock transferred from
  temporary equity.......    567     10,865       --     --           --          --          --          --     10,865
Net loss.................     --         --       --     --           --          --     (24,854)         --    (24,854)
Foreign currency
  translation
  adjustment.............     --         --       --     --           --          --          --        (761)      (761)
                                                                                                               --------
Comprehensive loss.......     --         --       --     --           --          --          --          --    (25,615)
                            ----    -------   ------    ---      -------     -------    --------    --------   --------
Balance at June 30,
  2001...................    567    $10,865    7,872    $79      $37,470     $(1,320)   $(21,562)   $ (3,318)  $ 22,214
                            ====    =======   ======    ===      =======     =======    ========    ========   ========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        27
<PAGE>   29

                                FRONTSTEP, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                   YEAR ENDED JUNE 30,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net income (loss).........................................  $(24,854)  $(10,205)  $  3,999
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation...........................................     4,149      3,618      3,221
     Amortization...........................................     7,333      7,811      5,289
     Restructuring and other charges........................    15,156      3,649        835
     Deferred income taxes..................................    (1,792)    (2,333)       362
     Tax benefit on stock options exercised.................        --        754        330
     Changes in operating assets and liabilities, net of
       restructuring and other charges:
       Accounts receivable..................................    (1,626)     6,689    (11,392)
       Prepaid expenses and other assets....................      (837)       140     (1,964)
       Accounts payable and accrued expenses................    (3,928)    (3,409)     1,535
       Deferred revenue.....................................     1,064      1,267      3,996
       Income taxes payable/receivable......................     1,820     (1,331)      (407)
                                                              --------   --------   --------
Net cash provided by (used in) operating activities.........    (3,515)     6,650      5,804
CASH FLOW FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (3,996)    (4,496)    (3,624)
  Additions to capitalized software.........................    (5,074)    (7,009)    (4,871)
  Proceeds from sale of subsidiary..........................        --      2,585         --
  Purchase of subsidiaries, net of acquired cash............        --     (2,116)    (1,069)
                                                              --------   --------   --------
Net cash used in investing activities.......................    (9,070)   (11,036)    (9,564)
CASH FLOW FROM FINANCING ACTIVITIES:
  Proceeds from issuance of convertible preferred stock,
     net....................................................        --     10,865         --
  Proceeds from issuance of common stock warrants, net......        --      2,510         --
  Proceeds from issuance of common stock, net...............       253        654        674
  Proceeds from long-term obligations.......................    76,090     40,964     30,086
  Payments on long-term obligations.........................   (74,026)   (44,076)   (27,882)
                                                              --------   --------   --------
Net cash provided by financing activities...................     2,317     10,917      2,878
Effect of exchange rate changes on cash.....................       (88)       101          3
                                                              --------   --------   --------
Net increase (decrease) in cash and cash equivalents........   (10,356)     6,632       (879)
Cash and cash equivalents at beginning of year..............    11,868      5,236      6,115
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $  1,512   $ 11,868   $  5,236
                                                              ========   ========   ========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        28
<PAGE>   30

                                FRONTSTEP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation and Description of Business.  Frontstep, Inc. and its
subsidiaries ("Frontstep" or the "Company"), is a leading global provider of
business software and services for mid-sized manufacturing, distribution and
other companies, including business units of larger companies. The Company
offers a comprehensive suite of integrated, collaborative network-centric
software and services that (1) support the traditional back office management
and resources of an enterprise ("ERP"), (2) support customer relationship
management ("CRM") and other front office business activities and (3) support an
enterprise's supply chain management activities. The accompanying financial
statements include the accounts of Frontstep after elimination of intercompany
accounts and transactions.

     Founded in 1979, Frontstep is headquartered in Columbus, Ohio. The Company
has more than 4,000 customers that it serves from 28 sales and service offices
in North America, Europe and the Pacific Rim, as well as through independent
software and support business partners worldwide. The Company recently changed
its name from Symix Systems, Inc. to Frontstep, Inc.

     Revenue Recognition.  The Company's total revenue is derived primarily from
licensing software, providing related services, including installation,
implementation, training, consulting and systems integration and providing
maintenance and support on an annual basis. Revenue is accounted for in
accordance with Statement of Position 97-2, Software Revenue Recognition, as
amended and interpreted from time to time.

     Revenue is derived principally from the sale of internally produced
software products and maintenance and support agreements from software sales.
The Company licenses software generally under non-cancelable license agreements
and provides product support services and periodic updates including training,
installation, consulting and maintenance. License fees revenue is generally
recognized when a non-cancelable license agreement has been signed, the software
product has been shipped, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable and collection is considered
probable. For customer license agreements, which meet these recognition
criteria, the portion of the fees related to software licenses will generally be
recognized in the current period, while the portion of the fees related to
services is recognized as the services are performed. Revenue from maintenance
and support agreements is billed periodically, deferred and recognized ratable
over the life of the agreements. Revenue from consulting, education and other
services is recognized as the services are provided.

     Inventories.  Inventories consist primarily of software-related products
that are held for resale. The Company values inventory at the lower of cost or
market. Cost is determined using the specific identification method.

     Capitalized Software.  Capitalized software is stated at the lower of cost
or net realizable value. The Company capitalizes the cost of developing its
software products in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Capitalized software costs are amortized by the
straight-line method using estimated useful lives of three to five years.
Amortization expense was $3,763,000, $4,033,000, and $2,980,000 for the years
ended June 30, 2001, 2000 and 1999, respectively. In addition, during fiscal
year 2001, the Company wrote off $1,913,000 of capitalized software as part of
restructuring (see Note 2).

     Intangibles.  Intangibles consist principally of goodwill and other
intangible assets resulting from acquisitions accounted for using the purchase
method of accounting. The intangible assets are amortized using the
straight-line method over a period of three to ten years. Accumulated
amortization of intangibles as of June 30, 2001 and 2000 was $2,262,000 and
$1,047,000, respectively.

     Property and Equipment.  Property and equipment, including assets under
capital leases, are recorded at cost and include expenditures which
substantially increase the useful lives of the assets. Maintenance and

                                        29
<PAGE>   31
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

repairs that do not improve or extend the life of the respective assets are
expensed as incurred. Depreciation is provided over the estimated useful lives
of the respective assets using the straight-line method. Amortization of capital
leases is provided over the lease terms using the straight-line method.

     Depreciation and amortization on the Company's property and equipment has
been computed based on the following useful lives:

<Table>
<Caption>
                                                                YEARS
                                                               -------
<S>                                                            <C>
Furniture and fixtures......................................   3 to 7
Computers and other equipment...............................   2 to 7
Leasehold improvements......................................   5 to 10
</Table>

     Income Taxes.  Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

     Foreign Currency Translation.  The Company has determined that the
functional currency of each foreign operation is the local currency. The effects
of translation rate changes related to assets and liabilities located outside
the United States are included as a component of other comprehensive income
(loss). Foreign currency transaction gains and losses are included in "other
income (expense), net" on the Consolidated Statements of Operations.

     Comprehensive Income.  The Company believes that the only item in addition
to net income that would be included in comprehensive income is the foreign
currency translation adjustment. Comprehensive income (loss) for the years ended
June 30, 2001, 2000 and 1999 is as follows (in thousands):

<Table>
<Caption>
                                                             YEAR ENDED JUNE 30,
                                                         ----------------------------
                                                           2001       2000      1999
                                                         --------   --------   ------
<S>                                                      <C>        <C>        <C>
Net income (loss)......................................  $(24,854)  $(10,205)  $3,999
Foreign currency translation adjustment................      (761)      (343)    (302)
                                                         --------   --------   ------
Comprehensive net income (loss)........................  $(25,615)  $(10,548)  $3,697
                                                         ========   ========   ======
</Table>

     Stock-based Compensation.  The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense would
be recorded on the date of grant and amortized over the period of service, only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
and disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123.

     Statement of Cash Flows.  The Company considers all demand deposits and
highly liquid investments with an original maturity of three months or less as
cash equivalents. Cash paid for (received from) income taxes, net of refunds,
for fiscal 2001, 2000 and 1999 was $(2,251,000), $1,756,000 and $2,381,000,
respectively. Cash paid for interest was $671,000, $782,000 and $320,000 for
fiscal 2001, 2000 and 1999, respectively.

                                        30
<PAGE>   32
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     Financial Instruments.  Financial instruments consist primarily of cash,
accounts receivable, accounts payable and long-term debt. The carrying value of
all financial instruments at June 30, 2001 and 2000 approximated their fair
value.

     Long-lived Assets.  The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

     Use of Estimates.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

     Reclassifications.  Certain reclassifications have been made to prior year
amounts to conform to the 2001 presentation.

     Effect of New Accounting Standards.  In July 2001, the FASB issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
No. 142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually.

     The Company has adopted the provisions of SFAS Nos. 141 and 142 effective
with the beginning of the Company's new fiscal year 2002, which began on July 1,
2001. SFAS No. 141 requires upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Effective with adoption of SFAS No. 142, the Company is required
to reassess the useful lives and residual values of all intangible assets
acquired and make any necessary amortization period adjustments by the end of
the three months ended September 30, 2001.

     As of June 30, 2001, the Company has unamortized intangibles in the amount
of $7,911,000 which will be subject to the transition provisions of SFAS Nos.
141 and 142. Because of the extensive effort needed to comply with adopting SFAS
Nos. 141 and 142, it is not practicable to reasonably estimate the impact of
adopting these Statements on the Company's financial statements at the date of
this report, including whether it will be required to recognize any transitional
impairment losses as a cumulative effect of a change in accounting principle.

     The Financial Accounting Standards Board recently issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The statement is required to be adopted for fiscal years beginning after
June 15, 2002. Because of the effort necessary to comply with the adoption of
SFAS No. 143, it is not practicable for management to estimate the impact of
adopting this Statement at the date of this report.

                                        31
<PAGE>   33
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 2 -- RESTRUCTURING AND OTHER CHARGES

     Fiscal 2001 Restructuring.  In April 2001, the Company announced a broad
restructuring plan to reduce operating costs by reducing its worldwide workforce
by approximately 20%, or 162 employees, all of which were direct employees;
discontinuing certain product development and other non-essential activities,
including terminating activities related to its SyteCentre product and exiting
certain license agreements; and closing certain office facilities in Arizona,
California, Canada and Asia. In relation to this restructuring plan, the Company
also wrote-off certain accounts receivable and other non-performing assets. The
accounts receivable writedowns were recorded to reflect accounts deemed to be
uncollectible due to economic and other situations that occurred subsequent to
the recording of the sales related to those receivables.

     As a result of this restructuring plan, the Company recorded pre-tax
restructuring and other charges of $8,493,000 and $4,500,000 in the three months
ended March 31, 2001 and June 30, 2001, respectively. These restructuring and
other charges are recorded as a separate line in the consolidated statements of
operations. The aggregate restructuring and other charge of $12,993,000 is
comprised of $2,182,000 in employee separation costs, $1,978,000 in exit costs
for contract terminations, $6,840,000 in accounts receivable writedowns and
$1,993,000 of product asset writedowns.

     The following table displays a rollforward of the accruals established for
the restructuring and other charges from the announcement of the plan to June
30, 2001 (in thousands):

<Table>
<Caption>
                                                                    AMOUNTS     ACCRUAL AT
                                                        INITIAL     USED IN      JUNE 30,
                                                        CHARGE    FISCAL 2001      2001
                                                        -------   -----------   ----------
<S>                                                     <C>       <C>           <C>
Employee separation costs.............................  $ 2,182     $ 1,770       $  412
Exit costs............................................    1,978         320        1,658
Accounts receivable writedowns........................    6,840       6,840           --
Product asset writedowns..............................    1,993       1,993           --
                                                        -------     -------       ------
Total.................................................  $12,993     $10,923       $2,070
                                                        =======     =======       ======
</Table>

     The amounts used of $10,923,000 reflects cash payments of $2,090,000 and
non-cash utilization of $8,833,000. The remaining accrual of $2,070,000, which
is included in accounts payable and accrued expenses in the Consolidated Balance
Sheets, represents cash payments expected to be completed in the year ended June
30, 2002.

     Fiscal 2000 Restructuring.  In July 2000, the Company announced several
structural changes to discontinue certain business operations, write off
non-performing assets and to restructure the Company to better focus on its core
business strategy. These changes included divesting the Company's FieldPro
subsidiary, terminating the operations of its e-Mongoose, Inc. subsidiary,
consolidating the Company's product development organizations and restructuring
the Company's sales channels. In connection with this announcement, the Company
recorded a non-recurring charge of $3,011,000, pre-tax, in the three months
ended June 30, 2000 and an additional non-recurring charge of $2,163,000,
pre-tax, in the three months ended September 30, 2000. The aggregate pre-tax
charge of $5,174,000 included impairment and other charges of $2,297,000 related
primarily to the unrecoverable capitalized software costs, $714,000 of accounts
receivable writedowns and $2,163,000 for severance payments made to employees
associated with the operations discussed above. All severance payments were paid
during the year ended June 30, 2001 and no accruals remain for these costs as of
June 30, 2001.

                                        32
<PAGE>   34
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 3 -- ACCOUNTS RECEIVABLE

     Accounts receivable is summarized as follows (in thousands):

<Table>
<Caption>
                                                                  JUNE 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Accounts receivable.........................................  $32,877   $39,031
Less allowance for doubtful accounts........................    1,431     2,075
                                                              -------   -------
                                                              $31,446   $36,956
                                                              =======   =======
</Table>

     The following is a summary of activity in the allowance for doubtful
accounts (in thousands):

<Table>
<Caption>
                                                             YEAR ENDED JUNE 30,
                                                         ----------------------------
                                                           2001       2000      1999
                                                         ---------   -------   ------
<S>                                                      <C>         <C>       <C>
Beginning balance......................................  $   2,075   $ 1,500   $1,063
Provision for bad debts................................      9,731     3,255    1,270
Account write-offs, net................................    (10,375)   (2,680)    (833)
                                                         ---------   -------   ------
Ending balance.........................................  $   1,431   $ 2,075   $1,500
                                                         =========   =======   ======
</Table>

NOTE 4 -- PROPERTY AND EQUIPMENT

     Property and equipment is summarized as follows (in thousands):

<Table>
<Caption>
                                                                  JUNE 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Furniture and fixtures......................................  $ 3,655   $ 3,568
Computers and other equipment...............................   21,720    18,410
Leasehold improvements......................................    1,827     1,535
                                                              -------   -------
                                                               27,202    23,513
Less accumulated depreciation and amortization..............   19,556    15,527
                                                              -------   -------
                                                              $ 7,646   $ 7,986
                                                              =======   =======
</Table>

NOTE 5 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses are summarized as follows (in
thousands):

<Table>
<Caption>
                                                                  JUNE 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Accounts payable............................................  $ 5,579   $ 5,134
Accrued payroll and related costs...........................    2,441     2,827
Third party royalties.......................................    2,408     2,565
Restructuring and other charges.............................    2,070        --
Other.......................................................    3,112     3,087
                                                              -------   -------
                                                              $15,610   $13,613
                                                              =======   =======
</Table>

                                        33
<PAGE>   35
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 6 -- OPERATING LEASE COMMITMENTS

     The Company has entered into certain operating lease agreements for the
rental of office facilities and computer equipment. The facility leases provide
for annual rentals which are subject to escalation for increased operating
costs.

     Amounts expensed under all operating lease agreements were approximately
$5,401,000, $4,822,000 and $4,415,000 for the years ended June 30, 2001, 2000
and 1999, respectively.

     The future minimum lease payments required under noncancelable operating
leases for the five years ending June 30 are: 2002, $3,651,000; 2003,
$1,512,000; 2004, $957,000; 2005, $492,000; 2006, $45,000; 2007 and thereafter,
$0.

NOTE 7 -- LONG-TERM OBLIGATIONS

     Long-term debt is summarized as follows (in thousands):

<Table>
<Caption>
                                                                  JUNE 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Revolving credit facility...................................  $ 8,337   $ 3,000
PSI acquisition note payable................................    1,573     5,000
Present value of minimum capital lease payments.............      742       277
Infomentum acquisition note payable.........................       --       264
Other.......................................................       57       104
                                                              -------   -------
                                                               10,709     8,645
Less current maturities.....................................    1,967     5,476
                                                              -------   -------
                                                              $ 8,742   $ 3,169
                                                              =======   =======
</Table>

     In December 2000, the Company entered into a revolving credit facility with
PNC Bank, National Association (the "Credit Facility") to replace the Company's
credit agreement with Bank One, N.A. The Credit Facility, as amended, provides
the Company with up to $20,000,000 of revolving credit availability for a
three-year period based on qualifying accounts receivable and is secured by the
Company's trade accounts receivable originating within the United States and
Canada. Borrowings under the Credit Facility currently bear interest at either
the Federal Funds rate plus 0.5% or, at our option, the Eurodollar market rate
plus 2.75%. At June 30, 2001, the rate was 7.75%. The interest rate is subject
to change based on interest rate formulas tied to the Company's net income. The
Credit Facility is subject to customary terms and conditions, including a
financial covenant that the Company maintain a minimum level of net worth. The
Company also pays a commitment fee for unused portions of the Credit Facility of
0.25%.

     In July 2001, the Company executed a new credit facility with Foothill
Capital Corporation, which consists of a $15,000,000 three-year term note and a
$10,000,000 revolving line of credit, to replace the Credit Facility. See Note
19.

     In July 2001, the Company paid $600,000, plus accrued interest, of the PSI
acquisition note payable. The remaining $973,000 is due in six equal monthly
installments, plus interest at 10.0% per annum, commencing October 1, 2001.

     The aggregate maturities of long-term debt for the five years ending June
30 are: 2002, $1,967,000; 2003, $372,000; 2004, $8,370,000; 2005 and thereafter,
$0.

                                        34
<PAGE>   36
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 8 -- INCOME TAXES

     The components of the provision for (benefit from) income taxes are
summarized as follows (in thousands):

<Table>
<Caption>
                                                              YEAR ENDED JUNE 30,
                                                           --------------------------
                                                            2001      2000      1999
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Current:
  Federal................................................  $    --   $  (516)  $1,927
  State and local........................................       --       (17)     475
  Foreign................................................      (23)      541      582
                                                           -------   -------   ------
                                                               (23)        8    2,984
Deferred:
  Federal................................................   (1,778)   (1,399)     131
  State and local........................................     (262)     (206)      43
  Foreign................................................       --        40       48
                                                           -------   -------   ------
                                                            (2,040)   (1,565)     222
                                                           -------   -------   ------
                                                           $(2,063)  $(1,557)  $3,206
                                                           =======   =======   ======
</Table>

     The significant components of the Company's deferred tax asset and
liability are as follows (in thousands):

<Table>
<Caption>
                                                                  JUNE 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Current deferred tax asset:
  Allowance for doubtful accounts...........................  $   195   $ 1,105
  Accrued liabilities.......................................    1,831       405
                                                              -------   -------
                                                              $ 2,026   $ 1,510
                                                              =======   =======
Long-term deferred tax (asset) liability:
  Capitalized software......................................  $ 5,072   $ 4,966
  Intangibles...............................................    1,038     1,313
  Capitalized leases........................................      422       422
  Accrued liabilities.......................................      239       540
  Book over tax depreciation................................     (605)     (702)
  Domestic losses...........................................   (9,776)   (1,938)
  Foreign losses............................................     (682)     (682)
  Tax credits...............................................   (1,935)     (434)
                                                              -------   -------
                                                               (6,227)    3,485
  Less valuation allowance..................................    9,118       682
                                                              -------   -------
                                                              $ 2,891   $ 4,167
                                                              =======   =======
</Table>

     The long-term deferred tax assets pertaining to foreign losses are net
operating loss carryforwards for certain foreign subsidiaries. The Company has
set a valuation allowance for the foreign net operating loss carryforwards,
domestic tax credits and the majority of the domestic net operating loss
carryforwards. Management believes it is more likely than not that the remaining
deferred tax assets will be recovered through taxable income from future
operations.

                                        35
<PAGE>   37
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     Deferred taxes are not provided on unremitted earnings of subsidiaries
outside the United States because it is expected that the earnings are
permanently reinvested and such determination is not practicable. Such earnings
may become taxable upon the sale or liquidation of these subsidiaries or upon
the remittance of dividends.

     Differences arising between the provision for (benefit from) income taxes
and the amount computed by applying the statutory federal income tax rate to
income before income taxes are as follows:

<Table>
<Caption>
                                                               YEAR ENDED JUNE 30,
                                                              ---------------------
                                                              2001    2000    1999
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Federal tax at statutory rate...............................   (34)%   (34)%   34%
State and local income taxes net of federal tax benefit.....    (4)     (3)     4
Foreign operations taxes at rates different from U.S.
  federal statutory rate....................................     3       7      6
Disposition of foreign operation............................    --       5     --
Nondeductible acquisition research and development write
  off.......................................................    --       2      4
General business credits....................................    (2)            (7)
Nondeductible permanent differences.........................     1       4      3
Valuation allowance recorded against deferred tax assets....    28       6     --
                                                               ---     ---     --
                                                                (8)%   (13)%   44%
                                                               ===     ===     ==
</Table>

     The Company has domestic net operating losses for tax purposes of $490,000,
$347,000, $37,000, $752,000, $1,344,000, $1,779,000 and $20,316,000 which expire
in fiscal years 2008, 2010, 2012, 2013, 2018, 2019 and 2021, respectively.

NOTE 9 -- STOCK OPTION PLANS

     The Company has a non-qualified stock option plan (the "Plan") that
provides for the granting of up to 2,653,070 options to officers and other key
employees for common shares at purchase prices of not less than the fair market
value on the date of the grant as determined by the Stock Option Committee of
the Board of Directors. Options under the Plan generally vest over periods of up
to four years and must be exercised within ten years of the date of grant. As of
June 30, 2001, 1,077,322 options are outstanding at a weighted average exercise
price of $9.43.

     Shareholder approval was obtained on November 17, 1999 for a separate
non-qualified stock option plan (the "1999 Plan"). The 1999 Plan provides for
the granting of up to 600,000 options to officers and key employees for common
shares at purchase prices of not less than the fair market value on the date of
the grant as determined by the Stock Option Committee of the Board of Directors.
Options under the 1999 Plan generally vest over periods of up to four years and
must be exercised within ten years of the date of the grant. As of June 30,
2001, 523,550 options are outstanding at a weighted average exercise price of
$7.41.

     The Company also has a non-qualified stock option plan for Key Executives
(the "Key Executives Plan"). A total of 400,000 common shares are designated for
issuance under the Key Executives Plan. The Stock Option Committee of the Board
of Directors is authorized to set the price and terms and conditions of the
options granted under the Key Executives Plan. Options under the Key Executives
Plan must be exercised within ten years of the date of the grant. As of June 30,
2001, 400,000 options are outstanding at a weighted average exercise price of
$3.81.

     The Company also has a stock option plan for Outside Directors (the
"Outside Directors Plan"). The Outside Directors Plan provides for the issuance
of options for 20,000 shares of stock to each Outside Director upon his/her
election to the Board of Directors. A total of 200,000 common shares may be
issued under the Outside Directors Plan. Options under the Outside Directors
Plan vest immediately and must be exercised
                                        36
<PAGE>   38
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

within ten years of the date of grant. As of June 30, 2001, 80,000 options are
outstanding at a weighted average exercise price of $6.58.

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted under
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rates
of 5.0%, 6.5% and 6.0%, respectively; no dividend yield; volatility factor of
the Company's common shares of 1.0, 0.9 and 0.5, respectively; and expected life
of each option of 7 years, 7 years and 6 years, respectively.

     If the Company had elected to recognize compensation cost based on the fair
value of options at the grant date (which includes shares issuable under the
Employee Stock Purchase Plan -- see Note 10) as prescribed by SFAS No. 123, the
following table displays what reported net income (loss) and per share amounts
would have been (in thousands, except per share data):

<Table>
<Caption>
                                                          PRO FORMA YEAR ENDED JUNE 30,
                                                         -------------------------------
                                                           2001        2000       1999
                                                         ---------   ---------   -------
<S>                                                      <C>         <C>         <C>
Net income (loss)......................................  $(26,685)   $(11,402)   $2,955
Net income (loss) per share, assuming dilution.........     (3.54)      (1.54)     0.41
</Table>

     The pro forma financial effects of applying SFAS No. 123 may not be
representative of the pro forma effects on reported results of operations for
future years.

     The following table summarizes stock option activity:

<Table>
<Caption>
                                                                             WEIGHTED-
                                                                              AVERAGE
                                                              NUMBER OF    EXERCISE PRICE
                                                              OPTIONS(#)    PER SHARE($)
                                                              ----------   --------------
<S>                                                           <C>          <C>
Outstanding at July 1, 1998.................................  1,619,535         7.17
  Granted...................................................    263,050        15.92
  Cancelled.................................................    (52,425)       11.81
  Exercised.................................................    (74,888)        6.90
                                                              ---------
Outstanding at June 30, 1999................................  1,755,272         8.26
  Granted...................................................    377,100         9.69
  Cancelled.................................................    (79,150)       13.00
  Exercised.................................................   (117,300)        6.73
                                                              ---------
Outstanding at June 30, 2000................................  1,935,922         8.44
  Granted...................................................    351,000         5.95
  Cancelled.................................................   (204,550)       11.39
  Exercised.................................................     (1,500)        5.66
                                                              ---------
Outstanding at June 30, 2001................................  2,080,872         7.73
                                                              =========
</Table>

     The weighted average fair value of options granted during the years ended
June 30, 2001, 2000 and 1999 was $5.12, $5.92 and $5.39, respectively. At June
30, 2001, 351,884 shares remained available for grant.

                                        37
<PAGE>   39
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     The following table summarizes information regarding stock options
outstanding as of June 30, 2001:

<Table>
<Caption>
                            OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                    -----------------------------------   ---------------------
                                  WEIGHTED
                                   AVERAGE
                                  REMAINING    WEIGHTED                WEIGHTED
                                 CONTRACTUAL   AVERAGE                 AVERAGE
RANGE OF EXERCISE                   LIFE       EXERCISE                EXERCISE
    PRICE($)        OPTIONS(#)     (YEARS)     PRICE($)   OPTIONS(#)   PRICE($)
-----------------   ----------   -----------   --------   ----------   --------
<S>                 <C>          <C>           <C>        <C>          <C>
    3.81              417,500        4.2         3.81       400,000      3.81
    3.82- 5.66        489,500        4.8         5.14       379,000      5.00
    5.67- 7.56        321,250        7.6         6.61       115,250      7.25
    7.57- 9.31        373,850        5.7         7.90       287,450      7.81
    9.32- 14.81       307,572        7.0        11.46       171,147     11.87
   14.82- 18.63        72,750        6.0        18.42        55,750     18.44
   18.64- 24.06        98,450        6.4        20.64        53,325     20.65
                    ---------                             ---------
    3.81- 24.06     2,080,872        5.7         7.73     1,461,922      7.29
                    =========                             =========
</Table>

NOTE 10 -- EMPLOYEE BENEFIT PLANS

     The Company has a 401(k) plan that covers substantially all employees over
21 years of age. The Company contributes to the plan based upon employee
contributions and may make additional contributions at the discretion of the
Board of Directors. The Company made contributions to this plan of approximately
$837,000, $683,000 and $608,000, for the years ended June 30, 2001, 2000 and
1999, respectively.

     The Company has an employee stock purchase plan that is in accordance with
Section 423 of the Internal Revenue Code whereby participants are eligible to
purchase common shares of the Company during the plan year. The purchase price
for a common share is determined by the Compensation Committee of the Board of
Directors prior to the effective date. The purchase price may not be less than
90% of the per share fair market value of the Company's common shares on either
the effective date or the option date for the offering, whichever is the lesser.
Substantially all employees are eligible to participate. During the plan period
ended December 31, 2000, the plan did not have any more shares available for
purchase. Until the Compensation Committee of the Board of Directors approves
additional shares, this plan will remain inactive.

NOTE 11 -- ACQUISITIONS

     On June 10, 1999, the Company acquired Distribution Architects
International, Inc. ("DAI") for 619,000 common shares of the Company and
$813,000 in cash. DAI is a provider of supply chain management applications for
distribution organizations. Pursuant to the acquisition agreement, DAI was
merged with and into a wholly-owned subsidiary of the Company incorporated in
Ohio, and each share of DAI common stock was converted into the right to receive
0.1313 common shares of the Company. Each DAI option outstanding immediately
prior to the merger was canceled and terminated. The holder of each option was
entitled to receive that number of Frontstep shares equal to $2.17 (the per
share value of DAI stock as agreed to by DAI and Frontstep) less $1.242 (the
stock option exercise price), multiplied by the number of shares of DAI covered
by the option, and divided by $18.50. The transaction was accounted for as a
purchase and resulted in a one-time, non-recurring charge of $835,000 relating
to the write-off of acquired in-process technology of DAI.

     On February 9, 2000, the Company acquired Profit Solutions, Inc. ("PSI"), a
Minnesota corporation and provider of Web-centric customer relationship
management applications with sales, marketing, service and business intelligence
functionality, for approximately $2,100,000 in cash paid at closing and
$5,000,000 in

                                        38
<PAGE>   40
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

unsecured, subordinated promissory notes, of which, $1,573,000 remained payable
as of June 30, 2001. The transaction was accounted for as a purchase and
resulted in a one-time, non-recurring charge of $638,000 relating to the
write-off of acquired in-process technology of PSI.

     The Company believes that the in-process technologies acquired in
conjunction with the acquisitions of DAI and PSI are being developed as part of
the Company's extended ERP, front-office and supply-chain solutions consistent
with the expectations established at the time of acquisition.

     The following table sets forth the unaudited consolidated pro forma results
of operations for the periods indicated giving effect to the acquisitions noted
above as if such acquisitions had occurred at the beginning of the periods
indicated. The non-recurring charges of $835,000 and $638,000 are excluded from
pro forma net income (loss). No pro forma information is required for the year
ended June 30, 2001 since these acquisitions occurred in prior years.

<Table>
<Caption>
                                                                 YEAR ENDED JUNE 30,
                                                              -------------------------
                                                                 2000          1999
                                                              -----------   -----------
                                                              (IN THOUSANDS, EXCEPT PER
                                                                     SHARE DATA)
<S>                                                           <C>           <C>
Revenue.....................................................   $129,333      $140,034
Net income (loss)...........................................    (10,888)        2,828
Net income (loss) per share, assuming dilution..............      (1.47)         0.39
</Table>

NOTE 12 -- EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):

<Table>
<Caption>
                                                             YEAR ENDED JUNE 30,
                                                         ----------------------------
                                                           2001       2000      1999
                                                         --------   --------   ------
<S>                                                      <C>        <C>        <C>
Numerator for basic and diluted income (loss) per share
  -- net income (loss).................................  $(24,854)  $(10,205)  $3,999
                                                         ========   ========   ======
Denominator:
  Weighted average common shares outstanding...........     7,535      7,411    6,654
  Contingently issuable shares.........................        --         --       57
                                                         --------   --------   ------
     Denominator for basic income (loss) per share.....     7,535      7,411    6,711
  Effect of dilutive employee stock options............        --         --      553
                                                         --------   --------   ------
     Denominator for diluted income (loss) per share...     7,535      7,411    7,264
                                                         ========   ========   ======
Basic net income (loss) per share......................  $  (3.30)  $  (1.38)  $ 0.60
                                                         ========   ========   ======
Diluted net income (loss) per share....................  $  (3.30)  $  (1.38)  $ 0.55
                                                         ========   ========   ======
</Table>

NOTE 13 -- MINORITY INTEREST

     In June 1998, Frontstep Computer Systems (Singapore) Pte. Ltd., a
wholly-owned subsidiary of the Company, sold previously unissued shares of
common stock (representing a 13.3% interest in that subsidiary) for $2,000,000.
No gain or loss was recognized on the sale of the subsidiary stock.

     The Company and the minority interest investor also entered into a put
option agreement which provides that during a six month period commencing
September 1, 2001, the minority interest investor has the right to put its
shares in the subsidiary to the Company at a formula price as provided in the
put agreement, not to be

                                        39
<PAGE>   41
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

less than $2,000,000. The minority interest in the subsidiary will be adjusted
to its expected redemption value each year as a credit or charge to income until
the put is exercised or the redemption period expires.

     In September 1999, the Company formed a new subsidiary, Frontstep Japan
Ltd., of which 15% of the initial capitalization was contributed by a minority
interest investor. The investment is recorded on the accompanying balance sheet
as minority interest.

NOTE 14 -- PREFERRED STOCK

     The Company's Amended Articles of Incorporation authorize 1,000,000 shares
of preferred stock, no par value. The Board of Directors is authorized to
determine the rights and preferences of these shares. Effective May 10, 2000,
the Company consummated a private placement of 566,933 shares of Series A
Convertible Participating Preferred Stock and warrants to purchase 453,546
common shares (the "Transaction"). Net proceeds realized from the Transaction
were $13,375,000.

     The preferred shares are convertible to common shares at any time, in whole
or in part, at the holder's option at an initial conversion rate of two shares
of common for one share of preferred. The conversion rate is subject to
adjustment on the fourth anniversary of the Transaction if the average daily
price of the Company's common shares, weighted by trading volume, for the forty
consecutive trading days immediately preceding the fourth anniversary ("Average
Weighted Price") is less than $12 per share. The adjusted conversion rate is
determined by dividing $24 by the Average Weighted Price. This potential
adjustment to the conversion rate represents a contingent beneficial conversion
feature. Assuming the Average Weighted Price on the fourth anniversary was equal
to the closing price of the Company's common shares on June 30, 2001 ($3.46),
the adjusted conversion rate would be 6.94 shares of common for one share of
preferred. This would result in a corresponding preferred dividend charge of
approximately $25,700,000. The conversion rate is also subject to adjustment
based on anti-dilution provisions. Mandatory conversion occurs if, at any time
after the second anniversary of the Transaction, the daily price of the
Company's common shares exceeds $24 for each and every day of any period of
forty consecutive trading days.

     The Company may, at its option, redeem all, but not less than all, of the
outstanding preferred shares within thirty days after the fourth anniversary of
the Transaction for $30.72 per preferred share plus accumulated, but unpaid,
dividends, if any.

     Holders of the preferred shares have a liquidation preference whereby upon
voluntary or involuntary liquidation/dissolution/winding-up of the Company the
preferred holders have a preference against the assets of the Company available
for distribution. The liquidation preference is equal to the greater of a) $24
per preferred share outstanding plus accumulated, but unpaid, dividends, if any,
or b) the amount that would be received by a holder of the number of common
shares underlying the preferred shares if all the preferred shares were
converted to common shares immediately prior to
liquidation/dissolution/winding-up.

     The warrants are exercisable at $15 per share and expire five years from
the date of the Transaction. The exercise price is subject to adjustment on the
fourth anniversary of the Transaction if the Average Weighted Price is less than
$15 per share. The adjusted exercise price is the greater of a) the Average
Weighted Price or b) 75% of the exercise price. The exercise price is also
subject to adjustment based on anti-dilution provisions. Mandatory exercise
occurs if, at any time after the second anniversary of the Transaction, the
daily price of the Company's common shares exceeds $24 per share for each and
every day in any period of forty consecutive trading days. The Company has
determined that the fair value of the warrants on the date of the Transaction,
net of issuance costs, was $2,510,000.

     Under applicable securities exchange rules, the Company was required to
obtain shareholder approval prior to issuing common shares if the adjusted price
at the time of conversion of the preferred shares and/or exercise of the common
stock warrants is less than the market price of the Company's common shares on
the date of the Transaction ($9.1875 per share). The Company submitted to its
shareholders at the Company's
                                        40
<PAGE>   42
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

annual meeting on November 8, 2000, a proposal to approve the issuance of common
shares upon conversion of the preferred shares and/or exercise of the warrants,
at an adjusted conversion price per share if required, which is less than the
market price per common share on the date of the Transaction. This approval was
obtained. Because the Company had not obtained shareholder approval as of June
30, 2000, the proceeds from the issuance of the preferred shares were classified
as temporary equity. Due to the shareholder approval, the preferred shares have
been reclassified to permanent equity in the June 30, 2001 balance sheet.

NOTE 15 -- BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

     The Company designs, develops, markets and supports business software and
services for mid-sized manufacturing, distribution and other companies,
including business units of larger companies. The Company operates exclusively
in this market and, therefore, only reports on one primary segment.

     Summarized financial information attributable to each of the Company's
geographic areas is shown in the following table (in thousands):

<Table>
<Caption>
                                                             NORTH
                                                           AMERICA,
                                                           EXCLUDING
                                                 UNITED     UNITED                ASIA/
                                                 STATES     STATES     EUROPE    PACIFIC
                                                 -------   ---------   -------   -------
<S>                                              <C>       <C>         <C>       <C>
FISCAL 2001
Total revenue..................................  $88,615    $4,103     $14,736   $10,832
Operating income (loss) before amortization of
  intangibles and special charges..............   (8,136)    2,115         259    (2,204)
Operating income (loss)........................  (26,095)    2,115        (189)   (2,238)
Long-lived assets..............................    6,793        29         312       512

FISCAL 2000
Total revenue..................................  $98,739    $4,326     $13,941   $11,902
Operating income (loss) before amortization of
  intangibles and special charges..............     (982)    1,881      (3,376)   (1,077)
Operating income (loss)........................   (7,618)    1,881      (3,904)   (1,155)
Long-lived assets..............................    7,099        36         383       468

FISCAL 1999
Total revenue..................................  $95,696    $5,254     $16,400   $11,722
Operating income (loss) before amortization of
  intangibles and special charges..............    8,569     1,469        (806)      797
Operating income (loss)........................    6,259     1,469      (1,383)      709
Long-lived assets..............................    7,085       245         392       475
</Table>

NOTE 16 -- COMMITMENTS AND CONTINGENCIES

     The Company is subject to claims and lawsuits in the ordinary course of its
business. It is the Company's policy to vigorously defend any action brought
against it, to the fullest extent, in the normal legal process. In the opinion
of management, the outcome of these actions, which is not clearly determinable
at the present time, are either adequately covered by insurance, or if not
insured, will not, in the aggregate, have a material adverse effect upon the
Company's financial position or its results of future operations.

                                        41
<PAGE>   43
                                FRONTSTEP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 17 -- SALE OF VISUAL APPLICATIONS SOFTWARE

     Effective June 21, 2000, the Company sold certain assets of its Visual
Applications Software, Inc. subsidiary for $2,915,000. The Company has
recognized a $429,000 net loss in connection with the sale of which
approximately $1,200,000 includes write-off of purchased goodwill. The costs
related to the disposition of Visual Applications Software, Inc. are included in
"restructuring and other charges" in the Consolidated Statements of Operations
for the year ended June 30, 2000.

NOTE 18 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<Table>
<Caption>
                                                         THREE MONTHS ENDED
                                           -----------------------------------------------
                                           JUNE 30   MARCH 31   DECEMBER 31   SEPTEMBER 30
                                           -------   --------   -----------   ------------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>       <C>        <C>           <C>
FISCAL 2001
  Total revenue..........................  $29,018   $27,172      $34,063       $28,033
  Gross margin...........................   16,263    12,356       19,008        13,746
  Operating loss.........................   (4,797)  (15,090)      (1,285)       (5,235)
  Net loss...............................   (5,000)  (15,348)        (957)       (3,549)
  Basic loss per common share............    (0.66)    (2.03)       (0.13)        (0.47)
  Diluted loss per common share..........    (0.66)    (2.03)       (0.13)        (0.47)

FISCAL 2000
  Total revenue..........................  $30,989   $31,468      $34,380       $32,071
  Gross margin...........................   15,150    17,340       18,726        17,704
  Operating income (loss)................  (10,823)   (2,379)         668         1,738
  Net income (loss)......................   (9,534)   (1,854)         288           895
  Basic income (loss) per common share...    (1.27)    (0.25)        0.04          0.12
  Diluted income (loss) per common
     share...............................    (1.27)    (0.25)        0.04          0.12
</Table>

NOTE 19 -- SUBSEQUENT EVENTS

     In July 2001, the Company executed a new credit facility with Foothill
Capital Corporation (the "Foothill Credit Facility"). The Foothill Credit
Facility includes a $15,000,000, three-year term note and a $10,000,000
revolving credit facility. Availability under the Foothill Credit Facility is
based on and secured by qualifying accounts receivable originating within the
United States and Canada. The revolving credit facility bears interest either at
the Federal Funds rate plus 1.5%, or at the Eurodollar market rate plus 3.0%.
The term note bears interest at the rate of 10.5% plus 1.5% per annum added to
principal. The term note is payable in monthly installments commencing October
1, 2001. The Foothill Credit Facility is subject to customary terms and
conditions and includes financial covenants for maintenance of a minimum
tangible net worth, a minimum level of earnings before interest, taxes,
depreciation and amortization and a maximum ratio of debt to earnings before
interest, taxes, depreciation and amortization. The proceeds from the Foothill
Credit Facility were used to repay, in full, the Company's Credit Facility.

     In connection with the Foothill Credit Facility, Foothill Capital
Corporation was granted 550,000 warrants to purchase common stock priced at the
current market price as of the close of the deal ($3.36 per share), which expire
in July 2006. The warrants will be recorded as a debt discount and are subject
to certain anti-dilution provisions as defined in the agreement.

     Additionally, in July 2001, the Company repriced 453,546 existing warrants
to purchase common stock issued in fiscal year 2000 pursuant to the preferred
stock private placement, with an original exercise price of $15 per share to
$3.36 per share, which will result in a charge to earnings per share in the
first quarter of fiscal year 2002.

                                        42
<PAGE>   44

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     The Company filed a current report on Form 8-K, dated November 8, 2000, to
report under Item 4 (Changes in Registrant's Certifying Accountant) that
effective November 8, 2000, the registrant appointed KPMG LLP as its Certifying
Accountant. Ernst & Young LLP was previously the principal accountants for
Frontstep. The decision to change accountants was approved by the Audit
Committee and the Board of Directors.

     In connection with the audits of the two fiscal years ended June 30, 2000
and during the subsequent interim period through September 30, 2000, there were
no disagreements with Ernst & Young LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item is incorporated by reference to the
section entitled "Election of Directors" which appears in our Definitive Proxy
Statement for the Annual Meeting of Shareholders, to be held on November 7,
2001, to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the
end of our fiscal year. Certain other information required by this Item with
respect to executive officers of the Company is set forth in Part I hereof under
"Item 1. Business -- Executive Officers of the Registrant".

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference to the
section entitled "Compensation, Meetings and Committees of Directors" and
"Executive Compensation" which appear in our Definitive Proxy Statement for the
Annual Meeting of Shareholders, to be held on November 7, 2001, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934 within 120 days after the end of our fiscal
year.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to the
section entitled "Principal Holders of Securities" which appears in our
Definitive Proxy Statement for the Annual Meeting of Shareholders, to be held on
November 7, 2001, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120
days after the end of our fiscal year.

ITEM 13.  CERTAIN BENEFICIAL RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation -- Certain Transaction and
Relationships" which appears in our Definitive Proxy Statement for the Annual
Meeting of Shareholders, to be held on November 7, 2001, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days after the end of our fiscal year.

                                        43
<PAGE>   45

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)(1) The following consolidated financial statements of the Company and
its subsidiaries are included in Item 8:

     Reports of Independent Auditors

     Consolidated Balance Sheets as of June 30, 2001 and 2000

     Consolidated Statements of Operations for the Years Ended June 30, 2001,
2000 and 1999

     Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 2001, 2000 and 1999

     Consolidated Statements of Cash Flows for the Years Ended June 30, 2001,
2000 and 1999

     Notes to Consolidated Financial Statements

     (a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are either not
required under the related instructions, are inapplicable and therefore have
been omitted, or the required information is provided in the Consolidated
Financial Statements of the Company and its subsidiaries or Notes thereto.

     (a)(3) Exhibits

     The following exhibits are included in this Annual Report on Form 10-K:

<Table>
<Caption>
EXHIBIT NO.                 DESCRIPTION                                  PAGE
-----------   ---------------------------------------   ---------------------------------------
<S>           <C>                                       <C>
3(a)(1)       Amended Articles of Incorporation of      Incorporated herein by reference to
              Frontstep, Inc. (f/k/a Symix Systems,     Exhibit 3(a)(1) to Registrant's Annual
              Inc.) (the "Registrant") (as filed on     Report on Form 10-K for the fiscal year
              February 8, 1991)                         ended June 30, 1997 (File No. 0-19024)
3(a)(2)       Certificate of Amendment to the Amended   Incorporated herein by reference to
              Articles of Incorporation of the          Exhibit 3(a)(2) to Registrant's Annual
              Registrant (as filed on July 16, 1996)    Report on Form 10-K for the fiscal year
                                                        ended June 30, 1997 (File No. 0-19024)
3(a)(3)       Certificate of Amendment to the Amended   Incorporated herein by reference to
              Articles of Incorporation, as amended,    Exhibit 3(a)(3) to Registrant's
              of the Registrant (as filed with the      Quarterly Report on Form 10-Q for the
              Ohio Secretary of State on May 10,        fiscal quarter ended March 31, 2000
              2000)                                     (File No. 0-19024)
3(a)(4)       Certificate of Amendment to the Amended   Incorporated herein by reference to
              Articles of Incorporation, as amended,    Exhibit 3(a)(4) to Registrant's
              of the Registrant (as filed with the      Quarterly Report on Form 10-Q for the
              Ohio Secretary of State on November 8,    fiscal quarter ended September 30, 2000
              2000)                                     (File No. 0-19024)
3(a)(5)       Amended Articles of Incorporation, as     Incorporated herein by reference to
              amended, of the Registrant (reflecting    Exhibit 3(a)(5) to Registrant's
              amendments through November 8, 2000 for   Quarterly Report on Form 10-Q for the
              purposes of Securities and Exchange       fiscal quarter ended September 30, 2000
              Commission reporting compliance only)     (File No. 0-19024)
3(b)          Amended Regulations of the Registrant     Incorporated herein by reference to
                                                        Exhibit 3(b) to the Registration
                                                        Statement on Form S-1 of Registrant, as
                                                        filed with the Securities and Exchange
                                                        Commission on February 12, 1991
                                                        (Registration No. 33-38878)
4(a)(1)       Amended Articles of Incorporation of      Incorporated herein by reference to
              the Registrant (as filed on February 8,   Exhibit 3(a)(1) to Registrant's Annual
              1991)                                     Report on Form 10-K for the fiscal year
                                                        ended June 30, 1997 (File No. 0-19024)
</Table>

                                        44
<PAGE>   46

<Table>
<Caption>
EXHIBIT NO.                 DESCRIPTION                                  PAGE
-----------   ---------------------------------------   ---------------------------------------
<S>           <C>                                       <C>
4(a)(2)       Certificate of Amendment to the Amended   Incorporated herein by reference to
              Articles of Incorporation of the          Exhibit 3(a)(2) to Registrant's Annual
              Registrant (as filed on July 16, 1996)    Report on Form 10-K for the fiscal year
                                                        ended June 30, 1997 (File No. 0-19024)
4(a)(3)       Certificate of Amendment to the Amended   Incorporated herein by reference to
              Articles of Incorporation, as amended,    Exhibit 3(a)(3) to Registrant's
              of the Registrant (as filed with the      Quarterly Report on Form 10-Q for the
              Ohio Secretary of State on May 10,        fiscal quarter ended March 31, 2000
              2000)                                     (File No. 0-19024)
4(a)(4)       Certificate of Amendment to the Amended   Incorporated herein by reference to
              Articles of Incorporation, as amended,    Exhibit 3(a)(4) to Registrant's
              of the Registrant (as filed with the      Quarterly Report on Form 10-Q for the
              Ohio Secretary of State on November 8,    fiscal quarter ended September 30, 2000
              2000)                                     (File No. 0-19024)
4(a)(5)       Amended Articles of Incorporation, as     Incorporated herein by reference to
              amended, of the Registrant (reflecting    Exhibit 3(a)(5) to Registrant's
              amendments through November 8, 2000 for   Quarterly Report on Form 10-Q for the
              purposes of Securities and Exchange       fiscal quarter ended September 30, 2000
              Commission reporting compliance only)     (File No. 0-19024)
4(b)          Amended Regulations of the Registrant     Incorporated herein by reference to
                                                        Exhibit 3(b) to the Registration
                                                        Statement on Form S-1 of Registrant, as
                                                        filed with the Securities and Exchange
                                                        Commission on February 12, 1991
                                                        (Registration No. 33-38878)
4(c)          Investor Rights Agreement, dated as of    Incorporated herein by reference to
              May 10, 2000, among the Registrant, the   Exhibit 4(c) to Registrant's Quarterly
              Investors identified therein and          Report on Form 10-Q for the fiscal
              Lawrence J. Fox                           quarter ended March 31, 2000 (File No.
                                                        0-19024)
4(d)          Amendment to Investor Rights Agreement    Incorporated herein by reference to
                                                        Exhibit 4(c) to Registrant's Current
                                                        Report on Form 8-K, as filed with the
                                                        Securities and Exchange Commission on
                                                        August 30, 2000 (File No. 0-19024)
4(e)          Warrant for the Purchase of Shares of     Filed herein
              Common Stock of the Registrant issued
              to Morgan Stanley Dean Witter Venture
              Partners IV, L.P. and Exhibit A,
              identifying other identical warrants
              issued to the Investors identified on
              Exhibit A, for the number of common
              shares identified on Exhibit A, on the
              dates indicated
4(f)          Assignment and Assumption Agreement, by   Incorporated herein by reference to
              and between Morgan Stanley Dean Witter    Exhibit 4(g) to Registrant's Quarterly
              Equity Funding, Inc. and the              Report on Form 10-Q for the fiscal
              Originators Investment Plan, L.P.,        quarter ended December 31, 2000 (File
              dated November 24, 2000                   No. 0- 19024)
4(g)          Common Share Purchase Warrant, dated      Filed herein
              July 17, 2001, issued to Foothill
              Capital Corporation
4(h)          Registration Rights Agreement, dated      Filed herein
              July 17, 2001, by and between the
              Registrant and Foothill Capital
              Corporation
</Table>

                                        45
<PAGE>   47

<Table>
<Caption>
EXHIBIT NO.                 DESCRIPTION                                  PAGE
-----------   ---------------------------------------   ---------------------------------------
<S>           <C>                                       <C>
4(i)          Share Exchange Agreement, dated January   Incorporated herein by reference to
              9, 1997                                   Exhibit 99 to Registrant's Current
                                                        Report on Form 8-K, as filed with the
                                                        Securities and Exchange Commission on
                                                        January 24, 1997 (File No. 0-19024)
10(a)         Lease Agreement dated April 3, 1991 for   Incorporated herein by reference to
              corporate offices located at 2800         Exhibit 10(c) to Registrant's Annual
              Corporate Exchange Drive, Columbus,       Report on Form 10-K for the fiscal year
              Ohio                                      ended June 30, 1991 (File No. 0-19024)
10(b)         Amendment to corporate offices lease      Incorporated herein by reference to
                                                        Exhibit 10(b) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1998 (File No. 0-19024)
10(c)         Second Amendment to corporate offices     Incorporated herein by reference to
              lease                                     Exhibit 10(c) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1998 (File No. 0-19024)
10(d)         Third Amendment to corporate offices      Incorporated herein by reference to
              lease                                     Exhibit 10(c) to Registrants' Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1994 (File No. 0-19024)
10(e)         Fourth Amendment to corporate offices     Incorporated herein by reference to
              lease                                     Exhibit 10(e) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1998 (File No. 0-19024)
10(f)         Fifth Amendment to corporate offices      Incorporated herein by reference to
              lease                                     Exhibit 10(f) to Registrants' Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1998 (File No. 0-19024)
10(g)         Sixth Amendment to corporate offices      Incorporated herein by reference to
              lease                                     Exhibit 10(g) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 2000 (File No. 0-19024)
10(h)         Eighth Amendment to corporate offices     Incorporated herein by reference to
              lease, with Seventh Amendment to          Exhibit 10(h) to Registrant's Annual
              corporate offices lease attached as       Report on Form 10-K for the fiscal year
              "Exhibit A"                               ended June 30, 2000 (File No. 0-19024)
10(i)         Progress Software Application Partner     Incorporated herein by reference to
              Agreement dated February 8, 1995          Exhibit 10(e) to Registrant's Quarterly
                                                        Report on Form 10-Q for the fiscal
                                                        quarter ended March 31, 1995 (File No.
                                                        0-19024)
10(j)         Amendment to Progress Software            Incorporated herein by reference to
              Application Partner Agreement dated       Exhibit 10(h) to Registrants' Annual
              July 1, 1997                              Report on Form 10-K for the fiscal year
                                                        ended June 30, 1998 (File No. 0-19024)
10(k)         Second Amendment to Progress Software     Incorporated herein by reference to
              Application Partner Agreement dated       Exhibit 10(i) to Registrants' Annual
              July 1, 1998                              Report on Form 10-K for the fiscal year
                                                        ended June 30, 1998 (File No. 0-19024)
10(l)*        Stock Option Plan for Outside Directors   Incorporated herein by reference to
                                                        Exhibit 10(i) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1993 (File No. 0-19024)
</Table>

                                        46
<PAGE>   48

<Table>
<Caption>
EXHIBIT NO.                 DESCRIPTION                                  PAGE
-----------   ---------------------------------------   ---------------------------------------
<S>           <C>                                       <C>
10(m)*        Non-Qualified Stock Option Plan for Key   Incorporated herein by reference to
              Executives                                Exhibit 10(a) to Registrant's Quarterly
                                                        Report on Form 10-Q for the fiscal
                                                        quarter ended March 31, 1996 (File No.
                                                        0-19024)
10(n)*        Non-Qualified Stock Option Plan for Key   Incorporated herein by reference to
              Employees, as amended                     Exhibit 10(a) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1993 (File No. 0-19024)
10(o)*        1999 Non-Qualified Stock Option Plan      Incorporated herein by reference to
              for Key Employees                         Exhibit 10(n) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1999 (File No. 0-19024)
10(p)*        Sasser Employment Agreement               Incorporated herein by reference to
                                                        Exhibit 10(b) to Registrant's Quarterly
                                                        Report on Form 10-Q for the fiscal
                                                        quarter ended March 31, 1996 (File No.
                                                        0-19024)
10(q)*        Amendment to Sasser Employment            Incorporated herein by reference to
              Agreement                                 Exhibit 10(p) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1999 (File No. 0-19024)
10(r)*        Second Amendment to Sasser Employment     Incorporated herein by reference to
              Agreement                                 Exhibit 10(q) to Registrant's Annual
                                                        Report on Form 10-K for the fiscal year
                                                        ended June 30, 1999 (File No. 0-19024)
10(s)*        Stock Option Agreement between the        Incorporated herein by reference to
              Registrant and Stephen A. Sasser dated    Exhibit 10(c) to Registrant's Quarterly
              January 17, 1996                          Report on Form 10-Q for the fiscal
                                                        quarter ended March 31, 1996 (File No.
                                                        0-19024)
10(t)         Employee Stock Purchase Plan, as          Incorporated herein by reference to
              approved on July 8, 1996 and as amended   Exhibit 10(a)(a) to Registrant's Annual
              on November 11, 1998                      Report on Form 10-K for the fiscal year
                                                        ended June 30, 2000 (File No. 0-19024)
10(u)         Loan and Security Agreement, by and       Filed herein
              among the Registrant, Frontstep
              Solutions Group, Inc., brightwhite
              solutions, inc. and Frontstep Canada,
              Inc., as Borrowers, and the Lenders
              signatory thereto, as Lenders, and
              Foothill Capital Corporation, as
              Arranger and Administrative Agent
10(v)         Common Share Purchase Warrant, dated      Filed herein at Exhibit 4(g)
              July 17, 2001, issued to Foothill
              Capital Corporation
10(w)         Registration Rights Agreement, dated      Filed herein at Exhibit 4(h)
              July 17, 2001, by and between the
              Registrant and Foothill Capital
              Corporation
10(x)         Pledge and Security Agreement             Filed herein
              (Foreign), dated July 17, 2001, made by
              the Registrant and Frontstep Solutions
              Group, Inc., in favor of Foothill
              Capital Corporation, as agent for
              certain Lenders
</Table>

                                        47
<PAGE>   49

<Table>
<Caption>
EXHIBIT NO.                 DESCRIPTION                                  PAGE
-----------   ---------------------------------------   ---------------------------------------
<S>           <C>                                       <C>
10(y)         Pledge and Security Agreement             Filed herein
              (Domestic), dated July 17, 2001, made
              by the Registrant and Frontstep
              Solutions Group, Inc., in favor of
              Foothill Capital Corporation, as agent
              for certain Lenders
10(z)         Copyright Security Agreement, dated       Filed herein
              July 17, 2000, made by the Registrant,
              Frontstep Solutions Group, Inc. and
              brightwhite solutions, inc., in favor
              of Foothill Capital Corporation, as
              agent for certain Lenders
10(a)(a)      Trademark Security Agreement, dated       Filed herein
              July 17, 2001, made by the Registrant,
              Frontstep Solutions Group, Inc., and
              brightwhite solutions, inc., in favor
              of Foothill Capital Corporation, as
              agent for certain Lenders
10(a)(b)      Intercompany Subordination Agreement,     Filed herein
              dated July 17, 2001, made among the
              Registrant, Frontstep Solutions Group,
              Inc., brightwhite solutions, inc.,
              Frontstep Canada, Inc., and other
              future obligors, and Foothill Capital
              Corporation, as agent for certain
              Lenders
10(a)(c)      Securities Purchase Agreement, dated as   Incorporated herein by reference to
              of May 10, 2000, between the Registrant   Exhibit 10(a) to Registrant's Quarterly
              and the Investors identified therein      Report on Form 10-Q for the fiscal
                                                        quarter ended March 31, 2000 (File No.
                                                        0-19024)
10(a)(d)      Investor Rights Agreement, dated as of    Incorporated herein by reference to
              May 10, 2000, among the Registrant, the   Exhibit 4(c) to Registrant's Quarterly
              Investors identified therein and          Report on Form 10-Q for the fiscal
              Lawrence J. Fox                           quarter ended March 31, 2000 (File No.
                                                        0-19024)
10(a)(e)      Amendment to Investor Rights Agreement    Incorporated herein by reference to
                                                        Exhibit 4(c) to Registrant's Current
                                                        Report on Form 8-K, as filed with the
                                                        Securities and Exchange Commission on
                                                        August 30, 2000 (File No. 0-19024)
10(a)(f)      Warrant for the Purchase of Shares of     Filed herein at Exhibit 4(e)
              Common Stock of the Registrant issued
              to Morgan Stanley Dean Witter Venture
              Partners IV, L.P. and Exhibit A,
              identifying other identical warrants
              issued to the Investors identified on
              Exhibit A, for the number of common
              shares identified on Exhibit A, on the
              dates indicated
10(a)(g)      Assignment and Assumption Agreement, by   Incorporated herein by reference to
              and between Morgan Stanley Dean           Exhibit 4(g) to Registrant's Quarterly
              Witter Equity Funding, Inc. and the       Report on Form 10-Q for the fiscal
              Originators Investment Plan, L.P.,        quarter ended December 31, 2000 (File
              dated November 24, 2000                   No. 0- 19024)
21            Subsidiaries of the Registrant            Filed herein
23            Consents of Independent Auditors          Filed herein
24            Powers of Attorney                        Filed herein
</Table>

                                        48
<PAGE>   50

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

 *  Indicates management contracts or compensatory plans or arrangements that
    are required to be filed as an exhibit to this Annual Report on Form 10-K
    for the fiscal year ended June 30, 2001

     (b) There were no reports on Form 8-K filed during the three months ended
June 30, 2001.

                                        49
<PAGE>   51

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
September, 2001.

                                          FRONTSTEP, INC.

                                          By:     /s/ STEPHEN A. SASSER
                                            ------------------------------------
                                                     Stephen A. Sasser
                                               President and Chief Executive
                                                           Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 27th day of September, 2001.

<Table>
<Caption>
                     SIGNATURE                                             TITLE
                     ---------                                             -----
<S>      <C>                                          <C>

                         *                                   Chairman of the Board and Director
---------------------------------------------------
                  Lawrence J. Fox

                         *                            President, Chief Executive Officer and Director
---------------------------------------------------
                 Stephen A. Sasser

                         *                                     Vice President, Finance, Chief
---------------------------------------------------           Financial Officer and Secretary
                 Daniel P. Buettin                       Principal Financial and Accounting Officer

                         *                                                Director
---------------------------------------------------
                   John T. Tait

                         *                                                Director
---------------------------------------------------
                  Duke W. Thomas

                         *                                                Director
---------------------------------------------------
                 Larry L. Liebert

                         *                                                Director
---------------------------------------------------
                James A. Rutherford

                         *                                                Director
---------------------------------------------------
                Roger D. Blackwell

                         *                                                Director
---------------------------------------------------
                   Guy de Chazal

                         *                                                Director
---------------------------------------------------
                  Barry Goldsmith


By Power of Attorney

/s/ DANIEL P. BUETTIN
---------------------------------------------------
       Daniel P. Buettin (Attorney-in-Fact)
</Table>

                                        50
<PAGE>   52
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.                        Description                             Page
-----------                        -----------                             ----
<S>                                <C>                                     <C>
3(a)(1)                            Amended Articles of Incorporation of    Incorporated herein by reference to
                                   Frontstep, Inc. (f/k/a Symix Systems,   Exhibit 3(a)(1) to Registrant's Annual
                                   Inc.) (the "Registrant") (as filed on   Report on Form 10-K for the fiscal year
                                   February 8, 1991)                       ended June 30, 1997 (File No. 0-19024)

3(a)(2)                            Certificate of Amendment to the         Incorporated herein by reference to
                                   Amended Articles of Incorporation of    Exhibit 3(a)(2) to Registrant's Annual
                                   the Registrant (as filed on July 16,    Report on Form 10-K for the fiscal year
                                   1996)                                   ended June 30, 1997 (File No. 0-19024)

3(a)(3)                            Certificate of Amendment to the         Incorporated herein by reference to
                                   Amended Articles of Incorporation, as   Exhibit 3(a)(3) to Registrant's Quarterly
                                   amended, of the Registrant (as filed    Report on Form 10-Q for the fiscal
                                   with the Ohio Secretary of State on     quarter ended March 31, 2000 (File No.
                                   May 10, 2000)                           0-19024)

3(a)(4)                            Certificate of Amendment to the         Incorporated herein by reference to
                                   Amended Articles of                     Exhibit 3(a)(4) to Registrant's Quarterly
                                   Incorporation, as amended, of the       Report on Form 10-Q for the fiscal
                                   Registrant (as filed with the           quarter ended September 30, 2000 (File
                                   Ohio Secretary of State on              No. 0-19024)
                                   November 8, 2000)

3(a)(5)                            Amended Articles of                     Incorporated herein by reference to
                                   Incorporation, as amended, of the       Exhibit 3(a)(5) to Registrant's Quarterly
                                   Registrant (reflecting amendments       Report on Form 10-Q for the fiscal
                                   through November 8, 2000 for            quarter ended September 30, 2000 (File
                                   purposes of Securities and              No. 0-19024)
                                   Exchange Commission reporting
                                   compliance only)

3(b)                               Amended Regulations of the Registrant   Incorporated herein by reference to
                                                                           Exhibit 3(b) to the Registration
                                                                           Statement on Form S-1 of Registrant, as
                                                                           filed with the Securities and Exchange
                                                                           Commission on February 12, 1991
                                                                           (Registration No. 33-38878)

4(a)(1)                            Amended Articles of Incorporation of    Incorporated herein by reference to
                                   the Registrant (as filed on February    Exhibit 3(a)(1) to Registrant's Annual
                                   8, 1991)                                Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1997 (File No. 0-19024)

4(a)(2)                            Certificate of Amendment to the         Incorporated herein by reference to
                                   Amended Articles of Incorporation       Exhibit 3(a)(2) to Registrant's Annual
                                   of the Registrant (as filed on July     Report on Form 10-K for the fiscal year
                                   16, 1996)                               ended June 30, 1997 (File No. 0-19024)
</TABLE>



<PAGE>   53

<TABLE>

<S>                                <C>                                     <C>
4(a)(3)                            Certificate of Amendment to the         Incorporated herein by reference to
                                   Amended Articles of Incorporation, as   Exhibit 3(a)(3) to Registrant's Quarterly
                                   amended, of the Registrant (as filed    Report on Form 10-Q for the fiscal
                                   with the Ohio Secretary of State on     quarter ended March 31, 2000 (File No.
                                   May 10, 2000)                           0-19024)

4(a)(4)                            Certificate of Amendment to the         Incorporated herein by reference to
                                   Amended Articles of                     Exhibit 3(a)(4) to Registrant's Quarterly
                                   Incorporation, as amended, of the       Report on Form 10-Q for the fiscal
                                   Registrant (as filed with the           quarter ended September 30, 2000 (File
                                   Ohio Secretary of State on              No. 0-19024)
                                   November 8, 2000)

4(a)(5)                            Amended Articles of                     Incorporated herein by reference to
                                   Incorporation, as amended, of the       Exhibit 3(a)(5) to Registrant's Quarterly
                                   Registrant (reflecting amendments       Report on Form 10-Q for the fiscal
                                   through November 8, 2000 for            quarter ended September 30, 2000 (File
                                   purposes of Securities and              No. 0-19024)
                                   Exchange Commission reporting
                                   compliance only)

4(b)                               Amended Regulations of the Registrant   Incorporated herein by reference to
                                                                           Exhibit 3(b) to the Registration
                                                                           Statement on Form S-1 of Registrant, as
                                                                           filed with the Securities and Exchange
                                                                           Commission on February 12, 1991
                                                                           (Registration No. 33-38878)

4(c)                               Investor Rights Agreement, dated as     Incorporated herein by reference to
                                   of May 10, 2000, among the              Exhibit 4(c) to Registrant's Quarterly
                                   Registrant, the Investors identified    Report on Form 10-Q for the fiscal
                                   therein and Lawrence J. Fox             quarter ended March 31, 2000 (File No.
                                                                           0-19024)

4(d)                               Amendment to Investor Rights Agreement  Incorporated herein by reference to
                                                                           Exhibit 4(c) to Registrant's Current
                                                                           Report on Form 8-K, as filed with the
                                                                           Securities and Exchange Commission on
                                                                           August 30, 2000 (File No. 0-19024)

4(e)                               Warrant for the Purchase of Shares of   Filed herein
                                   Common Stock of the Registrant issued
                                   to Morgan Stanley Dean Witter Venture
                                   Partners IV, L.P. and Exhibit A,
                                   identifying other identical warrants
                                   issued to the Investors identified on
                                   Exhibit A, for the number of common
                                   shares identified on Exhibit A, on
                                   the dates indicated
</TABLE>




<PAGE>   54


<TABLE>

<S>                                <C>                                     <C>
4(f)                               Assignment and Assumption Agreement,    Incorporated herein by reference to
                                   by and between Morgan Stanley Dean      Exhibit 4(g) to Registrant's Quarterly
                                   Witter Equity Funding, Inc. and the     Report on Form 10-Q for the fiscal
                                   Originators Investment Plan, L.P.,      quarter ended December 31, 2000 (File No.
                                   dated November 24, 2000                 0-19024)

4(g)                               Common Share Purchase Warrant, dated    Filed herein
                                   July 17, 2001, issued to Foothill
                                   Capital Corporation

4(h)                               Registration Rights Agreement, dated    Filed herein
                                   July 17, 2001, by and between the
                                   Registrant and Foothill Capital
                                   Corporation

4(i)                               Share Exchange Agreement, dated         Incorporated herein by reference to
                                   January 9, 1997                         Exhibit 99 to Registrant's Current Report
                                                                           on Form 8-K, as filed with the Securities
                                                                           and Exchange Commission on January 24,
                                                                           1997 (File No. 0-19024)

10(a)                              Lease Agreement dated April 3, 1991     Incorporated herein by reference to
                                   for corporate offices located at 2800   Exhibit 10(c) to Registrant's Annual
                                   Corporate Exchange Drive, Columbus,     Report on Form 10-K for the fiscal year
                                   Ohio                                    ended June 30, 1991 (File No. 0-19024)

10(b)                              Amendment to corporate offices lease    Incorporated herein by reference to
                                                                           Exhibit 10(b) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1998 (File No. 0-19024)

10(c)                              Second Amendment to corporate offices   Incorporated herein by reference to
                                   lease                                   Exhibit 10(c) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1998 (File No. 0-19024)

10(d)                              Third Amendment to corporate offices    Incorporated herein by reference to
                                   lease                                   Exhibit 10(c) to Registrants' Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1994 (File No. 0-19024)

10(e)                              Fourth Amendment to corporate offices   Incorporated herein by reference to
                                   lease                                   Exhibit 10(e) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1998 (File No. 0-19024)
</TABLE>


<PAGE>   55



<TABLE>

<S>                                <C>                                     <C>
10(f)                              Fifth Amendment to corporate offices    Incorporated herein by reference to
                                   lease                                   Exhibit 10(f) to Registrants' Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1998 (File No. 0-19024)

10(g)                              Sixth Amendment to corporate offices    Incorporated herein by reference to
                                   lease                                   Exhibit 10(g) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 2000 (File No. 0-19024)


10(h)                              Eighth Amendment to corporate offices   Incorporated herein by reference to
                                   lease, with Seventh Amendment to        Exhibit 10(h) to Registrant's Annual
                                   corporate offices lease attached as     Report on Form 10-K for the fiscal year
                                   "Exhibit A"                             ended June 30, 2000 (File No. 0-19024)

10(i)                              Progress Software Application Partner   Incorporated herein by reference to
                                   Agreement dated February 8, 1995        Exhibit 10(e) to Registrant's Quarterly
                                                                           Report on Form 10-Q for the fiscal
                                                                           quarter ended March 31, 1995 (File No.
                                                                           0-19024)

10(j)                              Amendment to Progress Software          Incorporated herein by reference to
                                   Application Partner Agreement dated     Exhibit 10(h) to Registrants' Annual
                                   July 1, 1997                            Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1998 (File No. 0-19024)

10(k)                              Second Amendment to Progress Software   Incorporated herein by reference to
                                   Application Partner Agreement dated     Exhibit 10(i) to Registrants' Annual
                                   July 1, 1998                            Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1998 (File No. 0-19024)

10(l)*                             Stock Option Plan for Outside           Incorporated herein by reference to
                                   Directors                               Exhibit 10(i) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1993 (File No. 0-19024)

10(m)*                             Non-Qualified Stock Option Plan for     Incorporated herein by reference to
                                   Key Executives                          Exhibit 10(a) to Registrant's Quarterly
                                                                           Report on Form 10-Q for the fiscal
                                                                           quarter ended March 31, 1996 (File No.
                                                                           0-19024)

10(n)*                             Non-Qualified Stock Option Plan for     Incorporated herein by reference to
                                   Key Employees, as amended               Exhibit 10(a) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1993 (File No. 0-19024)
</TABLE>


<PAGE>   56


<TABLE>

<S>                                <C>                                     <C>
10(o)*                             1999 Non-Qualified Stock Option Plan    Incorporated herein by reference to
                                   for Key Employees                       Exhibit 10(n) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1999 (File No. 0-19024)

10(p)*                             Sasser Employment Agreement             Incorporated herein by reference to
                                                                           Exhibit 10(b) to Registrant's Quarterly
                                                                           Report on Form 10-Q for the fiscal
                                                                           quarter ended March 31, 1996 (File No.
                                                                           0-19024)

10(q)*                             Amendment to Sasser Employment          Incorporated herein by reference to
                                   Agreement                               Exhibit 10(p) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1999 (File No. 0-19024)

10(r)*                             Second Amendment to Sasser Employment   Incorporated herein by reference to
                                   Agreement                               Exhibit 10(q) to Registrant's Annual
                                                                           Report on Form 10-K for the fiscal year
                                                                           ended June 30, 1999 (File No. 0-19024)

10(s)*                             Stock Option Agreement between the      Incorporated herein by reference to
                                   Registrant and Stephen A. Sasser        Exhibit 10(c) to Registrant's Quarterly
                                   dated January 17, 1996                  Report on Form 10-Q for the fiscal
                                                                           quarter ended March 31, 1996 (File No.
                                                                           0-19024)

10(t)                              Employee Stock Purchase Plan, as        Incorporated herein by reference to
                                   approved on July 8, 1996 and as         Exhibit 10(a)(a) to Registrant's Annual
                                   amended on November 11, 1998            Report on Form 10-K for the fiscal year
                                                                           ended June 30, 2000 (File No. 0-19024)

10(u)                              Loan and Security Agreement, by and     Filed herein
                                   among the Registrant, Frontstep
                                   Solutions Group, Inc., brightwhite
                                   solutions, inc. and Frontstep Canada,
                                   Inc., as Borrowers, and the Lenders
                                   signatory thereto, as Lenders, and
                                   Foothill Capital Corporation, as
                                   Arranger and Administrative Agent

10(v)                              Common Share Purchase Warrant, dated    Filed herein at Exhibit 4(g)
                                   July 17, 2001, issued to Foothill
                                   Capital Corporation

10(w)                              Registration Rights Agreement, dated    Filed herein at Exhibit 4(h)
                                   July 17, 2001, by and between the
                                   Registrant and Foothill Capital
                                   Corporation
</TABLE>


<PAGE>   57



<TABLE>

<S>                                <C>                                     <C>
10(x)                              Pledge and Security Agreement           Filed herein
                                   (Foreign), dated July 17, 2001, made
                                   by the Registrant and Frontstep
                                   Solutions Group, Inc., in favor of
                                   Foothill Capital Corporation, as
                                   agent for certain Lenders

10(y)                              Pledge and Security Agreement           Filed herein
                                   (Domestic), dated July 17, 2001, made
                                   by the Registrant and Frontstep
                                   Solutions Group, Inc., in favor of
                                   Foothill Capital Corporation, as
                                   agent for certain Lenders

10(z)                              Copyright Security Agreement, dated     Filed herein
                                   July 17, 2000, made by the
                                   Registrant, Frontstep Solutions
                                   Group, Inc. and brightwhite
                                   solutions, inc., in favor of Foothill
                                   Capital Corporation, as agent for
                                   certain Lenders

10(a)(a)                           Trademark Security Agreement, dated     Filed herein
                                   July 17, 2001, made by the
                                   Registrant, Frontstep Solutions
                                   Group, Inc., and brightwighte
                                   solutions, inc., in favor of Foothill
                                   Capital Corporation, as agent for
                                   certain Lenders

10(a)(b)                           Intercompany Subordination Agreement,   Filed herein
                                   dated July 17, 2001, made among the
                                   Registrant, Frontstep Solutions
                                   Group, Inc., brightwhite solutions,
                                   inc., Frontstep Canada, Inc., and
                                   other future obligors, and Foothill
                                   Capital Corporation, as agent for
                                   certain Lenders

10(a)(c)                           Securities Purchase Agreement,          Incorporated herein by reference to
                                   dated as of May 10, 2000, between       Exhibit 10(a) to Registrant's Quarterly
                                   the Registrant and the Investors        Report on Form 10-Q for the fiscal
                                   identified therein                      quarter ended March 31, 2000 (File No.
                                                                           0-19024)

10(a)(d)                           Investor Rights Agreement, dated        Incorporated herein by reference to
                                   as of May 10, 2000, among the           Exhibit 4(c) to Registrant's Quarterly
                                   Registrant, the Investors               Report on Form 10-Q for the fiscal
                                   identified therein and Lawrence         quarter ended March 31, 2000 (File No.
                                   J. Fox                                  0-19024)
</TABLE>


<PAGE>   58

<TABLE>

<S>                                <C>                                     <C>
10(a)(e)                           Amendment to Investor Rights            Incorporated herein by reference to
                                   Agreement                               Exhibit 4(c) to Registrant's Current
                                                                           Report on Form 8-K, as filed with the
                                                                           Securities and Exchange Commission on
                                                                           August 30, 2000 (File No. 0-19024)

10(a)(f)                           Warrant for the Purchase of             Filed herein at Exhibit 4(e)
                                   Shares of Common Stock of the
                                   Registrant issued to Morgan
                                   Stanley Dean Witter Venture
                                   Partners IV, L.P. and Exhibit A,
                                   identifying other identical
                                   warrants issued to the Investors
                                   identified on Exhibit A, for the
                                   number of common shares
                                   identified on Exhibit A, on the
                                   dates indicated

10(a)(g)                           Assignment and Assumption Agreement,    Incorporated herein by reference to
                                   by and between Morgan Stanley Dean      Exhibit 4(g) to Registrant's Quarterly
                                   Witter Equity Funding, Inc. and the     Report on Form 10-Q for the fiscal
                                   Originators Investment Plan, L.P.,      quarter ended December 31, 2000 (File No.
                                   dated November 24, 2000                 0-19024)

21                                 Subsidiaries of the Registrant          Filed herein

23                                 Consent of Independent Auditors         Filed herein

24                                 Powers of Attorney                      Filed herein
</TABLE>


----------
*Indicates management contracts or compensatory plans or arrangements that are
required to be filed as an exhibit to this Annual Report on Form 10-K for the
fiscal year ended June 30, 2001