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



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FORM 10-Q

|                                                                                                
|------------------------------------------------------------------------------------------------
|[ü]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|For the quarterly period ended September 30, 2001                                               
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|OR                                                                                              
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

Commission File Number 0-27574



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PowerCerv Corporation
(Exact name of registrant as specified in its charter)

|                                                                       |  |                                                
|---------------------------------------------------------------------- |  | -----------------------------------------------
|Florida
(State or other jurisdiction of
incorporation or organization) |  | 59-3350778
(I.R.S. Employer
Identification No.)

400 North Ashley Drive, Suite 2700, Tampa, Florida 33602
(Address of principal executive offices, including zip code)

(813) 226-2600
(Registrants telephone number, including area code)

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

As of November 8, 2001, there were 1,534,538 shares of the registrants common
stock, $.001 par value, outstanding.



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TABLE OF CONTENTS



|                              |                                                                                                |                                                             |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------- |  |  |  |  |  | 
|Part I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                  
|                              |                                                                                                | Condensed Consolidated Balance Sheets                      
|                              |                                                                                                | Condensed Consolidated Statements of Operations (Unaudited)
|                              |                                                                                                | Condensed Consolidated Statements of Cash Flows (Unaudited)
|                              | Notes to Condensed Consolidated Financial Statements (Unaudited)                              
|                              | Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosure about Market Risk                             
|                              | INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REVIEW REPORT                                       
|Part II. Other Information   
|                              | Item 1. Legal Proceedings                                                                     
|                              | Item 2. Changes in Securities and Use of Proceeds                                             
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      
|Signatures                   
|Accountants' Letter          



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##### Table of Contents



PowerCerv Corporation
Form 10-Q

Index

|                                                                                              |                                                                                                                             |  |      |   | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                              |                                                                                                                             |  | Page
|Part I. Financial Information                                                                 |                                                                                                                             |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Financial Statements                                                                  |                                                                                                                             |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000                            |  |      | 2 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2001 and 2000 (unaudited) |  |      | 3 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 (unaudited)           |  |      | 4 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Notes to Condensed Consolidated Financial Statements (unaudited)                                                            |  |      | 5 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                             |  | 11   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                                             |  | 19   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Independent Certified Public Accountants Review Report                                       |                                                                                                                             |  | 20   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Part II. Other Information                                                                    |                                                                                                                             |  |      |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Legal Proceedings                                                                     |                                                                                                                             |  | 21   |  
|Item 2.
Changes in Securities and Use of Proceeds                                             |                                                                                                                             |  | 21   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                             |  | 21   |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Signatures                                                                                    |                                                                                                                             |  | 22   |  





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##### Table of Contents






Part I. FINANCIAL INFORMATION




Item 1. Financial Statements




PowerCerv Corporation

Condensed Consolidated Balance Sheets(In thousands)

|                                                                       |                                                                          |                                            |       |                    |       |                   |       |       |       | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------ | ----- | ------------------ | ----- | ----------------- | ----- | ----- | ----- | 
|                                                                       |                                                                          |                                            |       | September 30, 2001 |       | December 31, 2000
|                                                                       |                                                                          |                                            |       |                    |       |                  
|                                                                       |                                                                          |                                            |       | (unaudited)        |       |                   |       |      
|Assets                                                                 |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Current assets:                                                        |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Cash and cash equivalents                                                |                                            | $     | 1,334              |       |                   | $     | 2,136 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accounts receivable, net of allowance of $2,022 and
$1,831, respectively |                                            |       | 1,772              |       |                   |       | 2,538 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Other current assets                                                     |                                            |       | 635                |       |                   |       | 668   |      
|                                                                       |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                       |                                                                          | Total current assets                       |       |                    | 3,741 |                   |       |       | 5,342 | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Property and equipment, net                                            |                                                                          |                                            | 118   |                    |       |                   | 511   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intangible assets, net                                                 |                                                                          |                                            | 422   |                    |       |                   | 565   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Notes receivable, net                                                  |                                                                          |                                            | 641   |                    |       |                   | 888   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Deposits and other assets                                              |                                                                          |                                            | 25    |                    |       |                   | 28    |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Deferred tax asset, net of allowance $13,298 and
$12,335, respectively |                                                                          |                                            |      |                    |       |                   |      |      
|                                                                       |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                       |                                                                          | Total assets                               |       | $                  | 4,947 |                   |       | $     | 7,334 | 
|                                                                       |                                                                          |                                            |       |                    |       |                   |       |      
|Liabilities and Shareholders Equity                                   |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Current liabilities:                                                   |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accounts payable                                                         |                                            | $     | 884                |       |                   | $     | 508   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accrued expenses                                                         |                                            |       | 1,517              |       |                   |       | 1,719 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Deferred revenue                                                         |                                            |       | 1,200              |       |                   |       | 1,490 |      
|                                                                       |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                       |                                                                          | Total current liabilities                  |       |                    | 3,601 |                   |       |       | 3,717 | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Shareholders equity                                                   |                                                                          |                                            | 1,346 |                    |       |                   | 3,617 |      
|                                                                       |                                                                          |                                            |       |                    |       |                   |       |      
|                                                                       |                                                                          | Total liabilities and shareholders equity |       | $                  | 4,947 |                   |       | $     | 7,334 | 
|                                                                       |                                                                          |                                            |       |                    |       |                   |       |      

See accompanying independent certified public accountants review report and
notes to condensed consolidated financial statements.

2



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PowerCerv Corporation

Condensed Consolidated Statements of Operations (Unaudited)(In thousands, except per share amounts)

|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |       |       |        |        |  
|-------------------------------------------- | ------------------------------ | ----------------- | ------------------------------- | ------------------------ | ----- | ------------------ | ---- | ----------------- | ----- | ----- | ---- | ----- | ----- | ------ | ------ | ----- | ----- | ------ | ------ | -
|                                             |                                |                   |                                 |                          |       | Three months ended |      | Nine months ended
|                                             |                                |                   |                                 |                          |       | September 30,      |      | September 30,    
|                                             |                                |                   |                                 |                          |       |                    |      |                  
|                                             |                                |                   |                                 |                          |       | 2001               |      | 2000              |       | 2001  |      | 2000 
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |      
|Revenues:                                    |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                            
|                                            
|                                            
|                                            
|                                             | License fees                   |                   | $                               | 125                      |       |                    | $    | 1,470             |       |       | $    | 1,211 |       |        | $      | 2,998 |      
|                                            
|                                            
|                                            
|                                            
|                                             | Service fees                   |                   |                                 | 1,430                    |       |                    |      | 2,129             |       |       |      | 4,006 |       |        |        | 6,433 |      
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                             |                                |                   | Total revenues                  |                          |       | 1,555              |      |                   |       | 3,599 |      |       |       | 5,217  |        |       |       | 9,431  |       
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|Costs and expenses:                          |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                            
|                                            
|                                            
|                                            
|                                             | Cost of licenses               |                   |                                 | 58                       |       |                    |      | 369               |       |       |      | 215   |       |        |        | 609   |      
|                                            
|                                            
|                                            
|                                            
|                                             | Cost of services               |                   |                                 | 858                      |       |                    |      | 1,226             |       |       |      | 2,826 |       |        |        | 4,616 |      
|                                            
|                                            
|                                            
|                                            
|                                             | General and administrative     |                   |                                 | 673                      |       |                    |      | 736               |       |       |      | 1,966 |       |        |        | 3,146 |      
|                                            
|                                            
|                                            
|                                            
|                                             | Sales and marketing            |                   |                                 | 386                      |       |                    |      | 1,054             |       |       |      | 1,391 |       |        |        | 4,500 |      
|                                            
|                                            
|                                            
|                                            
|                                             | Research and development       |                   |                                 | 423                      |       |                    |      | 834               |       |       |      | 1,514 |       |        |        | 3,182 |      
|                                            
|                                            
|                                            
|                                            
|                                             | Work force reduction and other |                   |                                 |                         |       |                    |      | 162               |       |       |      | 193   |       |        |        | 873   |      
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                             |                                |                   | Total costs and expenses        |                          |       | 2,398              |      |                   |       | 4,381 |      |       |       | 8,105  |        |       |       | 16,926 |       
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                             |                                |                   | Operating loss                  |                          |       | (843               | )    |                   |       | (782  | )    |       |       | (2,888 | )      |       |       | (7,495 | )     
|                                            
|                                            
|                                            
|                                            
|Interest and other income (expense),
net     |                                |                   | 15                              |                          |       |                    | 37   |                   |       |       | 66   |       |       |        | (36    | )    
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                             |                                |                   |                                 | Loss before income taxes |       |                    | (828 | )                 |       |       | (745 | )     |       |        | (2,822 | )     |       |        | (7,531 | )
|                                            
|                                            
|                                            
|                                            
|Income tax expense                           |                                |                   |                                |                          |       |                    | 7    |                   |       |       | 10   |       |       |        | 255    |      
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                             |                                |                   | Net loss and comprehensive loss |                          | $     | (828               | )    |                   | $     | (752  | )    |       | $     | (2,832 | )      |       | $     | (7,786 | )     
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|Net loss per share:                          |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                            
|                                            
|                                            
|                                            
|                                             |                                | Basic and diluted |                                 | $                        | (0.54 | )                  |      | $                 | (0.49 | )     |      | $     | (1.84 | )      |        | $     | (5.07 | )     
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|Shares used in computing net loss
per share: |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      
|                                            
|                                            
|                                            
|                                            
|                                             |                                | Basic and diluted |                                 |                          | 1,535 |                    |      |                   | 1,535 |       |      |       | 1,535 |        |        |       | 1,535 |       
|                                             |                                |                   |                                 |                          |       |                    |      |                   |       |       |      |       |       |        |        |      

See accompanying independent certified public accountants review report and
notes to condensed consolidated financial statements.

3



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PowerCerv Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)

|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |        |       |        |     | 
|---------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------- | ----------------------------------------------- | ---- | ------------------------------- | ------ | ------ | ----- | ------ | --- | 
|                                               |                                                                             |                                   |                                             |                                                 |      | Nine months ended September 30,
|                                               |                                                                             |                                   |                                             |                                                 |      |                                
|                                               |                                                                             |                                   |                                             |                                                 |      | 2001                            |        | 2000  
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|Cash flows from operating activities:          |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                                                                    |                                   | $                                           | (2,832                                          | )    |                                 | $      | (7,786 | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile net loss to net cash
used in operating activities: |                                   |                                             |                                                 |      |                                 |        |        |      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Depreciation and amortization     |                                             |                                                 | 557  |                                 |        |        | 585   |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Deferred revenue                  |                                             |                                                 | (290 | )                               |        |        | (427  | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Changes in assets and liabilities |                                             |                                                 | 988  |                                 |        |        | 3,009 |       
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|                                               |                                                                             |                                   | Net cash flows used in operating activities |                                                 |      | (1,577                          | )      |        |       | (4,619 | )  
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|Cash flows from investing activities:          |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Payment received on notes receivable                                        |                                   |                                             | 234                                             |      |                                 |        |       |      
|                                              
|                                              
|                                              
|                                              
|                                               | Return of investment in third party                                         |                                   |                                             |                                                |      |                                 |        | 500    |      
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of intangible asset                                                |                                   |                                             |                                                |      |                                 |        | (250   | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of property and equipment, net                                    |                                   |                                             | (21                                             | )    |                                 |        | (29    | )    
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|                                               |                                                                             |                                   |                                             | Net cash flows provided by investing activities |      |                                 | 213    |        |       |        | 221 | 
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|Cash flows from financing activities:          |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from issuance of common stock                                  |                                   |                                             |                                                |      |                                 |        | 871    |      
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from issuance of preferred stock                               |                                   |                                             | 562                                             |      |                                 |        |       |      
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|                                               |                                                                             |                                   |                                             | Net cash flows provided by financing activities |      |                                 | 562    |        |       |        | 871 | 
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|Net decrease in cash and cash equivalents      |                                                                             |                                   | (802                                        | )                                               |      |                                 | (3,527 | )     
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                                             |                                   | 2,136                                       |                                                 |      |                                 | 6,224  |       
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       
|Cash and cash equivalents, end of period       |                                                                             | $                                 | 1,334                                       |                                                 |      | $                               | 2,697  |       
|                                               |                                                                             |                                   |                                             |                                                 |      |                                 |        |       

See accompanying independent certified public accountants review report and
notes to condensed consolidated financial statements.

4



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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)(In thousands, except peer share amounts)

A. Basis of Presentation

The condensed consolidated balance sheet of PowerCerv Corporation and its
subsidiary (collectively, the Company) as of September 30, 2001, and the
condensed consolidated statements of operations for the three and nine months
ended September 30, 2001 and 2000 and the condensed consolidated statements of
cash flows for the nine months ended September 30, 2001 and 2000 have been
prepared by the Company, without audit. In the opinion of management, all
adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2001, and for
all periods presented have been made. The condensed consolidated balance sheet
at December 31, 2000, has been derived from the Companys audited consolidated
financial statements at that date.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission (SEC) rules and regulations. However, management
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2000, included in the Companys 2000 Annual Report on Form 10-K filed with
the SEC on April 17, 2001 (2000 Annual Report).

The results of operations for the three and nine months ended September
30, 2001, are not necessarily indicative of results that may be expected for
any other interim period or for the full fiscal year.

In June 2001, the Company implemented a one-for-nine reverse stock split.
All share and per share amounts included herein give effect to the reverse
stock split.

In August 2001, the Company closed on the sale of $800 of Preferred Stock
at $1.00 per share. The Company received $600 in cash and $200 in notes
receivable. The Preferred Stock is convertible to Common Stock at a conversion
rate of one share of Common Stock for each share of Preferred Stock being
converted. The Preferred Stock carries no dividend or coupons and will be
redeemable after five years. In connection with this transaction, the Company
issued warrants to a shareholder.

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
the year beginning January 1, 2002; however certain provisions of that
Statement apply to goodwill and other intangible assets acquired between July
1, 2001, and the effective date of SFAS 142. The Company has not yet analyzed
the effect, if any, of these new standards; accordingly, the Company is unable
at present to state what effect, if any, the adoption of these standards will
have on the Companys financial statements.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to
all
5Table of Contents

PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)(In thousands, except peer share amounts)

entities. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This Statement is for financial statements
issued for fiscal years beginning after June 15, 2002. The Company is
evaluating the impact of the adoption of this standard and has not yet
determined the effect of adoption on its financial position and results of
operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions
of the statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its financial position and results of operation.

B. Revenue Recognition

License fees represent revenue from the licensing of the Companys open,
modifiable Integrated Enterprise Response Software Solutions with innovative
e-Commerce application products. License fees also include royalties earned on
the application products and related intellectual properties. Service fees
represent revenue from consulting services, education services and support and
maintenance services.

The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition(SOP 97-2), as amended by Statement of Position 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2(SOP 98-4) and Statement of
Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions(SOP 98-9). Revenue is recognized from
licenses of the Companys software products when the contract has been
executed, the product(s) has been shipped, collectibility is probable and the
software license fees are fixed or determinable. In the event that the contract
provides for multiple elements (e.g., software products, post-contract customer
support, consulting services), the total fee is allocated to these elements
based on vendor-specific objective evidence of fair value. If any portion of
the license fees is subject to forfeiture, refund or other contractual
contingencies, the Company will postpone revenue recognition until these
contingencies have been removed. Historically, product returns and allowances
have been immaterial. The Company generally accounts for consulting and
education services separate from software license fees for those multi-element
arrangements where services are a separate element and are not essential to the
customers functionality requirements and there is vendor-specific objective
evidence of fair value for these services. Consulting and education revenue is
recognized as the services are performed. Revenue from support and maintenance
activities is recognized ratably over the term of the maintenance period and
the unrecognized portion is recorded as deferred revenue.

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)(In thousands, except peer share amounts)

C. Earnings (Loss) Per Share Data

The following table sets forth the computation of basic and diluted
earnings (loss) per share (EPS) for the periods indicated:

|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |        |  
|----------- | ------------------------------------------------------------------------ | - | ------------------ | ----- | ----------------- | - | ----- | ----- | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|            |                                                                          |   | Three Months Ended |       | Nine Months Ended
|            |                                                                          |   | September 30,      |       | September 30,    
|            |                                                                          |   |                    |       |                  
|            |                                                                          |   | 2001               |       | 2000              |   | 2001  |       | 2000
|            |                                                                          |   |                    |       |                   |   |       |       |     
|Basic:      |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|           
|           
|           
|           
|            | Net loss                                                                 |   | $                  | (828  | )                 |   | $     | (752  | )    |   | $     | (2,832 | ) |   | $     | (7,786 | )
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|            | Average shares outstanding                                               |   |                    | 1,535 |                   |   |       | 1,535 |      |   |       | 1,535  |   |   |       | 1,535  |  
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|Basic EPS   |                                                                          | $ | (0.54              | )     |                   | $ | (0.49 | )     |      | $ | (1.84 | )      |   | $ | (5.07 | )     
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|Diluted:    |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|           
|           
|           
|           
|            | Net loss                                                                 |   | $                  | (828  | )                 |   | $     | (752  | )    |   | $     | (2,832 | ) |   | $     | (7,786 | )
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|            | Average shares outstanding                                               |   |                    | 1,535 |                   |   |       | 1,535 |      |   |       | 1,535  |   |   |       | 1,535  |  
|           
|           
|           
|           
|            | Net effect of dilutive
stock options
based on the treasury stock method |   |                    |      |                   |   |       |      |      |   |       |       |   |   |       |       |  
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|            | Totals                                                                   |   |                    | 1,535 |                   |   |       | 1,535 |      |   |       | 1,535  |   |   |       | 1,535  |  
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       
|Diluted EPS |                                                                          | $ | (0.54              | )     |                   | $ | (0.49 | )     |      | $ | (1.84 | )      |   | $ | (5.07 | )     
|            |                                                                          |   |                    |       |                   |   |       |       |      |   |       |        |   |   |       |       

Common stock equivalents in the three and nine month periods ended
September 30, 2001 and September 30, 2000, were anti-dilutive due to the net
loss sustained by the Company during those periods. Therefore, the diluted net
loss per share in these periods is the same as the basic net loss per share.

The Company held its annual meeting of shareholders on June 1, 2001. At
this meeting, the shareholders approved an amendment to PowerCervs Articles of
Incorporation to effect a reverse stock split and authorized the Board of
Directors to make the final determination on the reverse stock split. The
Board of Directors at its June 1, 2001, meeting approved a 1-for-9 reverse
stock split effective June 4, 2001. Prior periods have been adjusted to
reflect the reverse stock split.

D. Commitments

The Company has entered into employment agreements with certain of its
executive officers. Information regarding these agreements is available in the
Companys 2000 Annual Report.

E. Contingencies

A complaint was filed on July 24, 1997, in the United States District
Court for the Middle District of Florida, entitled J. Conrad Lifsey v. Harold
Ross, Gerald Wicker, Marc J. Fratello, Roy E. Crippen, III, Donald B. Hebb,
Jr., Thomas S. Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit Investors
III, L.P (collectively the Defendants). The complaint purports to be a class
action on behalf of those persons who purchased
7Table of Contents

PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)(In thousands, except peer share amounts)

shares of the Companys common
stock from March 1, 1996 (the date of the Companys initial public
offering of its common stock (IPO)) through July 24, 1996. The
complaint alleges, among other things, that defendants violated the Securities
Act of 1933 (the Securities Act) and the Securities Exchange Act
of 1934 (the Exchange Act) in connection with the Companys IPO and in its
subsequent securities filings, press releases and other public statements. The
plaintiffs sought damages of an unspecified amount, rescission of certain
securities sales and certain other remedies.

In January 2001, the district court granted the Defendants motion to
dismiss but provided the plaintiffs leave to file an amended
complaint. The plaintiffs filed an amended complaint and the
Defendants again filed a motion to dismiss the amended pleading. In July 2001,
the parties to the litigation reached an agreement in principle for settlement
of the litigation. The district court entered an order on July 12, 2001,
dismissing the case without prejudice. The
parties have agreed to a settlement and have filed with the Court a Memorandum
of Understanding. The parties are currently drafting and negotiating the terms
of the settlement. The Company believes that the entire settlement
amount will be paid by the
Companys insurer.

The Company, in the normal course of business, is also subject to
miscellaneous other legal proceedings. The Company is defending these
proceedings and anticipates that it will be successful and/or able to resolve
these matters in a manner that will not materially affect the Companys
financial condition or results of operations.

F. Income Taxes

As of September 30, 2001, the Company had a deferred tax asset of $13,298
that is fully reserved.

During the first quarter of 2000, the Company recorded a charge related to
estimated federal and state income tax and interest totaling $359 resulting
from an Internal Revenue Service examination of the Companys 1996 and 1995
federal income tax returns. The amount allocated to tax expense was $209, and
$150 was allocated to interest expense. The Internal Revenue Service has
rendered an unfavorable assessment resulting in the estimated exposure amount.
The Company has appealed this assessment, although there can be no assurances
of a successful outcome.

G. Segment Reporting

The Company has identified its operating segments as its services and
license product segments. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. The services segment provides consulting, education,
support and maintenance services, and the license product segment provides
Integrated Enterprise Response Software Solutions with innovative e-Commerce
application products.

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)(In thousands, except peer share amounts)

The following tables provide the various segment data:

|                                 |  |                                       |                                      |          |  |             |       |       |  |         |      |          |  |             |       |       |  |   |        |   |  |   |       |  |  |   |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------------- | ------------------------------------ | -------- |  | ----------- | ----- | ----- |  | ------- | ---- | -------- |  | ----------- | ----- | ----- |  | - | ------ | - |  | - | ----- |  |  | - | ------ | - |  | - | ------ | -
|                                 |  | Three Months Ended September 30, 2001 | Nine Months Ended September 30, 2001
|                                 |  |                                       |                                     
|                                 |  | License                               |                                      | Services |  | Unallocated |       | Total |  | License |      | Services |  | Unallocated |       | Total
|Revenues from external
Customers |  | $                                     | 125                                  |          |  | $           | 1,430 |       |  |         |     |          |  | $           | 1,555 |       |  | $ | 1,211  |   |  | $ | 4,006 |  |  |   |       |   |  | $ | 5,217  |  
|                                
|                                
|                                
|                                
|Segment profit (loss)            |  | $                                     | (742                                 | )        |  | $           | 572   |       |  | $       | (658 | )        |  | $           | (828  | )     |  | $ | (1,909 | ) |  | $ | 1,180 |  |  | $ | (2,103 | ) |  | $ | (2,832 | )

|                                 |  |                                       |                                      |          |  |             |       |       |  |         |      |          |  |             |       |       |  |   |        |   |  |   |       |  |  |   |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------------- | ------------------------------------ | -------- |  | ----------- | ----- | ----- |  | ------- | ---- | -------- |  | ----------- | ----- | ----- |  | - | ------ | - |  | - | ----- |  |  | - | ------ | - |  | - | ------ | -
|                                 |  | Three Months Ended September 30, 2000 | Nine Months Ended September 30, 2000
|                                 |  |                                       |                                     
|                                 |  | License                               |                                      | Services |  | Unallocated |       | Total |  | License |      | Services |  | Unallocated |       | Total
|                                 |  |                                       |                                      |          |  |             |       |       |  |         |      |          |  |             |       |      
|Revenues from external
Customers |  | $                                     | 1,470                                |          |  | $           | 2,129 |       |  |         |     |          |  | $           | 3,599 |       |  | $ | 2,998  |   |  | $ | 6,433 |  |  |   |       |   |  | $ | 9,431  |  
|                                
|                                
|                                
|                                
|Segment profit (loss)            |  | $                                     | (787                                 | )        |  | $           | 903   |       |  | $       | (868 | )        |  | $           | (752  | )     |  | $ | (5,293 | ) |  | $ | 1,817 |  |  | $ | (4,310 | ) |  | $ | (7,786 | )

There were no transactions between segments. The unallocated amounts are
made up of the following items:

|                                         |  |   |                    |      |                    |   |                    |        |                    |   |      |      |   |   |        |        |   |  |  |  | 
|---------------------------------------- |  | - | ------------------ | ---- | ------------------ | - | ------------------ | ------ | ------------------ | - | ---- | ---- | - | - | ------ | ------ | - |  |  |  | 
|                                         |  |   | Three              |      | Nine               |   | Three              |        | Nine              
|                                         |  |   | Months Ended       |      | Months Ended       |   | Months Ended       |        | Months Ended      
|                                         |  |   | September 30, 2001 |      | September 30, 2001 |   | September 30, 2000 |        | September 30, 2000
|                                         |  |   |                    |      |                    |   |                    |        |                   
|General and administrative costs         |  | $ | (673               | )    |                    | $ | (1966              | )      |                    | $ | (736 | )    |   | $ | (3,146 | )     
|                                        
|                                        
|                                        
|                                        
|Work force reduction                     |  |   |                   |      |                    |   | (193               | )      |                    |   | (162 | )    |   |   | (873   | )     
|                                        
|                                        
|                                        
|                                        
|Interest and other income (expense), net |  |   | 15                 |      |                    |   | 66                 |        |                    |   | 37   |      |   |   | (36    | )     
|                                        
|                                        
|                                        
|                                        
|Income tax expense                       |  |   |                   |      |                    |   | (10                | )      |                    |   | (7   | )    |   |   | (255   | )     
|                                         |  |   |                    |      |                    |   |                    |        |                    |   |      |      |   |   |        |       
|                                         |  |   | $                  | (658 | )                  |   | $                  | (2,103 | )                  |   | $    | (868 | ) |   | $      | (4,310 | )

I. Work Force Reduction and Other

During the first quarter of 2001, the Company announced and completed a
work force reduction in line with its objective to streamline overall
operations and improve financial condition. The Company recorded a
restructuring charge of $169 related to severance costs for approximately 30
employees (1 senior-level staff and 29 non senior-level employees primarily in
research and development and services). As of September 30, 2001,
approximately $33 remains in accrued liabilities for severance payments.

During the second quarter of 2001, the Company implemented a minor
workforce reduction resulting in the elimination of approximately nine
positions throughout the Company. The Company recorded a restructuring charge
of $24 related to severance costs associated with the terminations.
As of September 30, 2001, these costs have been substantially paid.

During the second quarter of 2000, the Company initiated actions to reduce
its work force and undertook cost cutting measures. The Company recorded a
restructuring charge related to a work force
reduction and other expenses totaling $873 of which $711 was recorded in
the second quarter and $162 was recorded in the third quarter. The total
restructuring charge includes severance and related costs of $649 (4
senior-level staff and 35 non senior-level employees primarily in sales,
services and research and development) and costs of $224 related to office
closings. As of September 30, 2001, approximately

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)(In thousands, except peer share amounts)

$241 remains in accrued
liabilities in connection with the 2000 restructuring including $209 of
severance cost. As part of the restructuring plan, the Companys Chairman
assumed the role of Chief Executive Officer, and the previous Chief Executive
Officer is no longer with the Company. Office closings were completed during
the third quarter of 2000.

J. Preferred Stock

During the third quarter of 2001, the Company issued 800 shares of convertible
Preferred Stock. The Preferred Stock is convertible to Common Stock at a
conversion rate of one share of Common Stock for each share of Preferred Stock
being converted. The Preferred Stock carries no dividend or coupons and will
be redeemable after five years. In consideration for the Preferred Stock, the
Company received cash of $600 and notes receivable of $200 and incurred
financing costs of $38. The notes receivable are included as a reduction of
shareholders equity.

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PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

The Company is focused on delivering open, modifiable Integrated
Enterprise Response Software Solutions with innovative e-Commerce capabilities
to mid-size U.S. companies with annual revenues up to $750 million. The Company
has focused its resources, including product development, marketing and sales
efforts, on the needs and requirements of companies in this market. The
Companys revenues currently consist primarily of software license fees and
fees for services relating to the Companys applications, including consulting,
education and maintenance and support.

The Company was organized in April 1992, and through calendar year 1994 a
substantial part of the Companys revenue was derived from technology resales
and consulting and education services. The Company began selling its own
license product in the fourth quarter of 1993. Since then, the Company has
brought several additional applications to the market. Service fees remain the
Companys largest single revenue source, although the Companys strategy is to
seek to increase revenue generated from licensing its application products. On
March 31, 1999, the Company sold its general consulting and general education
business (consulting and education services other than its application-related
services) to a related party. It also finalized a strategy developed in 1998
to discontinue resales of various third-party software products.

License fees represent revenue from licensing the Companys open,
modifiable Integrated Enterprise Response Software Solutions with innovative
e-Commerce application products and royalties earned on the Companys
application products and related intellectual properties. Service fees
represent revenue from implementing the Companys application products,
consulting services, education services and maintenance and support services.

Beginning January 1, 1998, the Company has recognized revenue in
accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position 97-2, Software Revenue Recognition (SOP
97-2), as amended by Statement of Position 98-4 (SOP 98-4), Deferral of the
Effective Date of a Provision of SOP 97-2.Revenue is recognized from licenses
of the Companys software products when the contract has been executed, the
product(s) has been shipped, collectibility is probable and the software
license fees are fixed or determinable. In the event that the contract
provides for multiple elements (e.g., software products, post-contract customer
support, consulting services), the total fee is allocated to these elements
based on vendor-specific objective evidence of fair value. If any portion of
the license fee is subject to forfeiture, refund or other contractual
contingencies, the Company will postpone revenue recognition until these
contingencies have been removed. Historically, product returns and allowances
have been immaterial. The Company generally accounts for consulting and
education services separate from software license fees for those multi-element
arrangements where services are a separate element and are not essential to the
customers functionality requirements and there is vendor-specific objective
evidence of fair value for these services. Consulting and education revenue
is recognized as the services are performed. Revenue from support and
maintenance activities is recognized ratably over the term of the maintenance
period and the unrecognized portion is recorded as deferred revenue. Prior to
January 1, 1998, the Company recognized revenue in accordance with the American
Institute of Certified Public Accountants Statement of Position 91-1, Software
Revenue Recognition.

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PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
the year beginning January 1, 2002; however certain provisions of that
Statement apply to goodwill and other intangible assets acquired between July
1, 2001, and the effective date of SFAS 142. The Company has not yet analyzed
the effect, if any, of these new standards; accordingly, the Company is unable at present to state what effect, if
any, the adoption of these standards will have on the Companys financial
statements.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to
all entities. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This Statement is for financial statements
issued for fiscal years beginning after June 15, 2002. The Company is
evaluating the impact of the adoption of this standard and has not yet
determined the effect of adoption on its financial position and results of
operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions
of the statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its financial position and results of operation.

This Quarterly Report on Form 10-Q 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 expectations, estimates and projections about the Companys industry,
managements beliefs and certain assumptions made by the Companys management.
Words such as anticipates, expects, intends, plans, believes,
seeks, estimates, may, will, to, could, would, or continue and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions
that are difficult to predict; therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements.
PowerCerv is subject to the risks detailed herein or detailed from time to time
in PowerCervs filings with the Securities and Exchange Commission.

12



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##### Table of Contents



PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

Results of Operations

The following table sets forth, for the periods indicated, certain
financial data regarding the Companys revenues derived from license fees
and service fees from continuing operations:

|                             |  |                    |       |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|---------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | --- | ---- |  | ------ | ----- | ---- |  | - | ----- | - |  |  | --- | -- |  | - | ----- | -
|                             |  | Three months ended |       | Nine months ended
|                             |  | September 30,      |       | September 30,    
|                             |  |                    |       |                  
|Revenues                     |  | 2001               |       | Change            |  | 2000 |     | 2001 |  | Change |       | 2000
|                             |  |                    |       |                   |  |      |     |      |  |        |       |     
|License fees                 |  | $                  | 125   |                   |  |      | (91 | %)   |  | $      | 1,470 |      |  | $ | 1,211 |   |  |  | (60 | %) |  | $ | 2,998 |  
|                            
|                            
|                            
|                            
|Percentage of total revenues |  |                    | 8     | %                 |  |      |     |      |  |        | 41    | %    |  |   | 23    | % |  |  |     |    |  |   | 32    | %
|                             |  |                    |       |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|Service fees                 |  | $                  | 1,430 |                   |  |      | (33 | %)   |  | $      | 2,129 |      |  | $ | 4,006 |   |  |  | (38 | %) |  | $ | 6,433 |  
|                            
|                            
|                            
|                            
|Percentage of total revenues |  |                    | 92    | %                 |  |      |     |      |  |        | 59    | %    |  |   | 77    | % |  |  |     |    |  |   | 68    | %
|                             |  |                    |       |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  

License fees.The Companys license fees are derived from licensing the
Companys application products. In addition, any royalty fees earned are
included in license fees. The Company establishes its licensing fees using a
tiered pricing approach based on the number of concurrent servers and users.
Source code licenses are available at an additional cost.

License fees decreased for the three and nine-month periods ended
September 30, 2001, compared to the same periods in 2000. The decrease was due
to fewer license deals closed in the second and third quarters of the current
year partly due to a significant slowdown in the economy and delayed recovery.
The Company continues its telemarketing activities in an effort to
generate sales leads. Although the Company believes there will likely be growth in its license revenue,
there can be no assurance that the Companys license revenues will increase in
accordance with managements expectations, if at all.

Service fees. The Companys service fees consist of revenue from
consulting, education and support and maintenance services for the Companys
application software licenses. Consulting services are primarily provided on a
time and materials basis, education services are generally priced on a
per-student basis and annual support and maintenance are based on a percentage
of related license fees. Management believes that the decrease in service
revenue resulted from fewer new license deals closed in previous quarters.
Generally, to the extent that revenue from licensing its application products
increases, the Company believes the demand for application consulting services
(and related revenue) over subsequent quarters will likely increase; however,
there can be no assurance that license revenue will increase or that if it does
increase, revenue from service fees will increase correspondingly.

13



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PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

Costs and Expenses

The following table sets forth, for the periods indicated, certain financial
data regarding the Companys costs associated with its license fees and
services:

|                        |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|----------------------- |  | ------------------ | --- | ----------------- |  | ---- | --- | ---- |  | ------ | ----- | ---- |  | - | ----- | - |  |  | --- | -- |  | - | ----- | -
|                        |  | Three months ended |     | Nine months ended
|                        |  | September 30,      |     | September 30,    
|                        |  |                    |     |                  
|Cost of Revenues:       |  | 2001               |     | Change            |  | 2000 |     | 2001 |  | Change |       | 2000
|                        |  |                    |     |                   |  |      |     |      |  |        |       |     
|Cost of licenses        |  | $                  | 58  |                   |  |      | (84 | %)   |  | $      | 369   |      |  | $ | 215   |   |  |  | (65 | %) |  | $ | 609   |  
|                       
|                       
|                       
|                       
|Gross profit percentage |  |                    | 54  | %                 |  |      |     |      |  |        | 75    | %    |  |   | 82    | % |  |  |     |    |  |   | 80    | %
|                        |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|Cost of services        |  | $                  | 858 |                   |  |      | (30 | %)   |  | $      | 1,226 |      |  | $ | 2,826 |   |  |  | (39 | %) |  | $ | 4,616 |  
|                       
|                       
|                       
|                       
|Gross profit percentage |  |                    | 40  | %                 |  |      |     |      |  |        | 42    | %    |  |   | 29    | % |  |  |     |    |  |   | 28    | %
|                        |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  

Cost of licenses. The cost of licenses consists primarily of production
costs, royalties associated with certain modules of the Companys application
products and the amortization of intangible assets. The cost of licenses for
the three and nine-month periods ended September 30, 2001 decreased 84% and
65%, respectively compared to 2000 primarily resulting from fewer third party
fees on licenses sold offset by higher amortization expense. The gross profit
percentage for the three months ended September 30, 2001 decreased compared to
the same period in 2000 due to significantly lower license fees and the fixed
nature of amortization costs.

Cost of services.The cost of services consists primarily of compensation
and travel costs associated with providing consulting, product support and
maintenance, technical services and education. The cost of services decreased
30% and 39% for the three and nine-month periods ended September 30, 2001,
respectively, compared to 2000 primarily due to a lower compensation expense
and operating costs for the periods. In addition to the 2000 workforce
reduction, the Companys January 2001 work force reduction resulted in the
elimination of approximately seven service positions. The Company expects to
realize gross annual savings of approximately $600 as a result of these
terminations. A minor work force reduction was also implemented in the second
quarter of 2001 resulting in the termination of two additional service
positions. The Company believes that these reductions have resulted in lower
expenses and increased utilization of remaining service personnel; however,
there can be no assurance that the Company will return to profitability as a
result of these actions.

The following table sets forth, for the periods indicated, certain
financial data regarding the Companys operating expenses:

|                             |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|---------------------------- |  | ------------------ | --- | ----------------- |  | ---- | --- | ---- |  | ------ | ----- | ---- |  | - | ----- | - |  |  | --- | -- |  | - | ----- | -
|                             |  | Three months ended |     | Nine months ended
|                             |  | September 30,      |     | September 30,    
|                             |  |                    |     |                  
|Operating Expenses:          |  | 2001               |     | Change            |  | 2000 |     | 2001 |  | Change |       | 2000
|                             |  |                    |     |                   |  |      |     |      |  |        |       |     
|General and administrative   |  | $                  | 673 |                   |  |      | (9  | %)   |  | $      | 736   |      |  | $ | 1,966 |   |  |  | (38 | %) |  | $ | 3,146 |  
|                            
|                            
|                            
|                            
|Percentage of total revenues |  |                    | 43  | %                 |  |      |     |      |  |        | 20    | %    |  |   | 38    | % |  |  |     |    |  |   | 33    | %
|                             |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|Sales and marketing          |  | $                  | 386 |                   |  |      | (63 | %)   |  | $      | 1,054 |      |  | $ | 1,391 |   |  |  | (69 | %) |  | $ | 4,500 |  
|                            
|                            
|                            
|                            
|Percentage of total revenues |  |                    | 25  | %                 |  |      |     |      |  |        | 29    | %    |  |   | 27    | % |  |  |     |    |  |   | 48    | %
|                             |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  
|Research and development     |  | $                  | 423 |                   |  |      | (49 | )%   |  | $      | 834   |      |  | $ | 1,514 |   |  |  | (52 | %) |  | $ | 3,182 |  
|                            
|                            
|                            
|                            
|Percentage of total revenues |  |                    | 27  | %                 |  |      |     |      |  |        | 23    | %    |  |   | 29    | % |  |  |     |    |  |   | 34    | %
|                             |  |                    |     |                   |  |      |     |      |  |        |       |      |  |   |       |   |  |  |     |    |  |   |       |  

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##### Table of Contents



PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

General and administrative (G&A).G&A expenses include general
compensation, communications, accounting, human resources, legal and related
facilities expenses. The decrease in G&A expenses for the three and nine-month
periods ended September 30, 2001, compared to 2000, primarily resulted from
lower compensation, bad debt and other operating costs. G&A expense increased
as a percentage of total revenue due to significantly lower revenue in the
three months ended September 30, 2001. The Company believes that cost cutting
measures have resulted in lower expenses and
increased utilization of remaining G&A personnel; however, there can be no
assurance that the Company will return to profitability as a result of these
actions.

Sales and marketing.Sales and marketing expenses primarily consist of
compensation paid to sales and marketing personnel; costs of marketing,
including direct mail and telemarketing activities; costs of public relations,
including trade shows and conferences; and related communications costs. Sales
and marketing costs decreased 63% and 69% for the three and nine-month periods
ended September 30, 2001, respectively, as compared to the same periods in 2000
primarily as a result of lower compensation in the current periods. The sales
and marketing expense as a percentage of total revenue decreased due to
substantial cost cutting measures implemented by the Company in 2000 and 2001.
The Companys January 2001 work force reduction resulted in the elimination of
approximately four sales and marketing positions. The Company expects to
realize gross annual savings of approximately $220 as a result of these
terminations. A minor work force reduction was also implemented in the second
quarter of 2001 resulting in the elimination of three additional sales and
marketing positions. Further, certain non-critical costs were discontinued or
deferred until revenue increases to adequate levels. The Company believes that
these reductions have resulted in lower expenses and increased utilization of
remaining sales and marketing personnel; however, there can be no assurance
that the Company will return to profitability or that there will not be any
negative impact as a result of these actions.

Research and development (R&D).R&D costs consist primarily of
compensation and related facilities, software and equipment costs associated
with developing, maintaining and enhancing the Companys products.
Historically, the Company has not capitalized any internal R&D costs as the
costs incurred during the period between the point in time that technological
feasibility is established and that a product is released to the market have
been insignificant. R&D costs decreased 49% and 52% for the three and
nine-month periods ended September 30, 2001, as compared to the same periods in
2000, primarily due to decreased personnel costs. The Companys January 2001
work force reduction resulted in the elimination of approximately 17 R&D
positions. The Company expects to realize gross annual savings of
approximately $1.3 million as a result of these terminations. A minor work
force reduction was also implemented in the second quarter of 2001 resulting in
the elimination of two additional R & D positions. The Company believes that
these reductions have resulted in lower expenses and increased utilization of
remaining R&D personnel; however, there can be no assurance that the Company
will return to profitability or that there will not be any negative impact as a
result of these actions.

Work force reduction and other.



During the first quarter of 2001, the Company announced and completed a
work force reduction in line with its objective to streamline operations and
improve financial condition. The Company recorded a restructuring charge of
$169 related to severance costs for approximately 30 employees (1
senior-level

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##### Table of Contents



PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

staff and 29 non senior-level employees primarily in research and development
and services). As of September 30, 2001, approximately $33 remains in accrued
liabilities for severance payments in connection with the restructuring.

During the second quarter of 2001, the Company implemented a minor
workforce reduction resulting in the elimination of approximately nine
positions throughout the Company. The Company recorded a restructuring charge
of $24 related to severance costs associated with the terminations. As of
September 30, 2001, these costs have been substantially paid.

During the second quarter of 2000, the Company initiated actions to reduce
its work force and undertook cost cutting measures. The Company recorded a
restructuring charge related to a work force reduction and other expenses
totaling $873 of which $711 was recorded in the second quarter and $162 was
recorded in the third quarter. The total restructuring charge includes
severance and related costs of $649 (4 senior-level staff and 35 non
senior-level employees primarily in sales, services and research and
development) and costs of $224 related to office closings. As of September 30,
2001, approximately $241 remains in accrued liabilities including $209 of
severance cost. As part of the restructuring plan, the Companys Chairman has
assumed the role of Chief Executive Officer, and the previous Chief Executive
Officer is no longer with the Company. Office closings were completed during
the third quarter of 2000.

The Company believes that these reductions have resulted in lower expenses
and increased utilization of its remaining personnel; however, there can be no
assurance that the Company will return to profitability as a result of these
actions.

Income taxes.

As of September 30, 2001, the Company had a deferred tax asset of $13,298
that is fully reserved.

During the first quarter of 2000, the Company recorded a charge related to
estimated federal and state income tax and interest totaling $359 resulting
from an Internal Revenue Service examination of the Companys 1996 and 1995
federal income tax returns. The amount allocated to tax expense is $209, and
$150 was allocated to interest expense. The Internal Revenue Service has
rendered an unfavorable assessment resulting in the estimated exposure amount.
The Company has appealed this assessment, although there can be no assurances
of a successful outcome.

Liquidity and Capital Resources

The following tables set forth, for the periods indicated, certain financial
data regarding the periods indicated, certain financial data regarding the
Companys working capital balances, cash and cash equivalents, cash used in
operating activities, cash provided by investing activities and cash provided
by financing activities:

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PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

|                          |  |                    |       |        |  |                   |  |  |  |     |    |  |  |   |       | 
|------------------------- |  | ------------------ | ----- | ------ |  | ----------------- |  |  |  | --- | -- |  |  | - | ----- | 
|                          |  | As of             
|                          |  |                   
|                          |  | September 30, 2001 |       | Change |  | December 31, 2000
|                          |  |                    |       |        |  |                  
|Working capital           |  | $                  | 140   |        |  |                   |  |  |  | (91 | %) |  |  | $ | 1,625 | 
|                         
|                         
|                         
|                         
|Cash and cash equivalents |  |                    | 1,334 |        |  |                   |  |  |  | (38 | %) |  |  |   | 2,136 | 

Working capital and cash and cash equivalents decreased as of September
30, 2001 compared to December 31, 2000, due to significantly reduced revenues
resulting in lower cash and accounts receivable balances and operating losses
for the year.

|                                      |  |                            |        |        |  |      |     |    |  |   |        |  
|------------------------------------- |  | -------------------------- | ------ | ------ |  | ---- | --- | -- |  | - | ------ | -
|                                      |  | For the nine              
|                                      |  | months ended September 30,
|                                      |  |                           
|                                      |  | 2001                       |        | Change |  | 2000
|                                      |  |                            |        |        |  |     
|Cash used in operating activities     |  | $                          | (1,577 | )      |  |      | 66  | %  |  | $ | (4,619 | )
|                                     
|                                     
|                                     
|                                     
|Cash provided by investing activities |  |                            | 213    |        |  |      | (4  | %) |  |   | 221    |  
|                                     
|                                     
|                                     
|                                     
|Cash provided by financing activities |  |                            | 562    |        |  |      | (35 | %) |  |   | 871    |  

For the nine month period ended September 30, 2001, cash used by operating
activities totaled $1,577 due principally to lower than anticipated license
revenue for the period and consequently lower service fees for the nine month
period.

The Companys cash provided by investing activities totaled $213 for the
nine-month period ended September 30, 2001, principally due to payments
received on notes receivable ($234) offset by purchases of fixed assets ($21).
The cash used in investing activities for the nine-month period ended September
30, 2000, was principally due to the proceeds from a return of the Companys
investment in a third party ($500), offset by purchases of software and fixed
assets ($279).

The Companys cash provided by financing activities totaled $562 for the
nine-month period ended September 30, 2001, resulting from a private equity
offering in which the Company issued convertible preferred stock.

At September 30, 2001, the Companys primary source of liquidity consisted
of its cash and cash equivalents balance of $1,334 and its short-term accounts
receivable balance of $1,772. The Company is currently seeking other sources
of equity. There can be no assurances that such funds will be available to
the Company or, if available, would be on terms satisfactory to the Company.

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PowerCerv Corporation

Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations(dollars in thousands)

Management has
recognized that the Company's revenue is not likely to return to the
levels previously achieved in the near future. The Company is dependent upon its ability to
generate cash flows from its license and service fees, as well as the
collection of its outstanding accounts receivable, to maintain its current
liquidity levels. As a result of the
continuing economic downturn and its anticipated impact on the
Company's revenues, management has taken
steps to streamline operations and improve the financial condition of the
Company. These steps include restructuring initiatives that commenced in 2000
as well as strategies and actions already taken or planned for 2001, including
workforce reductions that were implemented in the first and second quarters of
2001. Additionally, management has reduced or deferred certain wages for
senior executives and will use best efforts to eliminate
costs that have been evaluated as non-critical to the success of the Companys
core strategies.

In the third quarter
of 2001, the Company successfully completed the sale of 800 shares
of its Series C Convertible Preferred Stock. The Company received
$600 in cash and two notes receivable in the aggregate principal
amount of $200.

If the Companys existing cash reserves and restructuring decisions prove
insufficient to fund its future cash requirements and the Company is not able
to obtain other sources of funds, the Companys ability to pursue its business
strategy beyond the year 2001 could be materially adversely effected. However,
as a result of the Companys restructuring decisions, the amount of cash used
in operations decreased substantially in the first half of 2001 as compared to
the previous year. As more fully discussed above, the Company has implemented,
or is in the process of initiating, cost cutting measures and other actions
that management currently believes will provide adequate working capital for at
least twelve months. However, there can be no assurance that the Company will
return to profitability as a result of these actions nor that further actions
will not be necessary in 2001.

Nasdaq gave the Company until August 15, 2001, to comply with the
continued listing requirements of the Nasdaq SmallCap Market, in particular the
requirement to maintain a minimum net worth of $2 million. The Company was
unable to comply with the continued listing requirements, therefore the
Companys common stock now trades in the over-the-counter market on the OTC
Bulletin Board or through the pink sheets. The Companys
shareholders may find it more difficult to obtain a price quotation for or sell
the Companys common stock. The delisting of the Companys common stock from
the Nasdaq SmallCap Market therefore may have an adverse impact on the market
price and liquidity of the Companys common stock.

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PowerCerv Corporation




Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company had no holdings of derivative financial or commodity
instruments at September 30, 2001. The Company has no significant exposure to
interest rate or foreign currency exchange rate risks. An increase in interest
rates of 100 basis points would not significantly impact the Companys net
income. Generally, all of the Companys business is transacted in U.S. dollars.
Accordingly, foreign exchange rate fluctuations should not have a significant
impact on the Company.

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##### Table of Contents






INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REVIEW REPORT

The Board of Directors
PowerCerv Corporation

We have reviewed the accompanying condensed consolidated balance sheet of
PowerCerv Corporation as of September 30, 2001, and the related condensed
consolidated statements of operations for the three and nine month periods
ended September 30, 2001 and 2000 and the condensed consolidated statements of
cash flows for the three and nine-month periods ended September 30, 2001 and
2000. These financial statements are the responsibility of the Companys
management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statement of operations,
stockholders equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 23, 2001, except for Note 3 as to which
the date is April 13, 2001, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
2000, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.

/s/ Grant Thornton, LLP

Tampa, Florida
October 18, 2001

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##### Table of Contents






PowerCerv Corporation

Part II. Other Information




Item 1. Legal Proceedings

A complaint was filed on July 24, 1997, in the United States District
Court for the Middle District of Florida, entitled J. Conrad Lifsey v. Harold
Ross, Gerald Wicker, Marc J. Fratello, Roy E. Crippen, III, Donald B. Hebb,
Jr., Thomas S. Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit Investors
III, L.P (collectively the Defendants). The complaint purports to be a class
action on behalf of those persons who purchased shares of the Companys common
stock from March 1, 1996 (the date of the Companys initial public offering of
its common stock (IPO)) through July 24, 1996. The complaint alleges, among
other things, that defendants violated the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange
Act) in connection with the Companys IPO and in its subsequent securities
filings, press releases and other public statements. The plaintiffs sought
damages of an unspecified amount, rescission of certain securities sales and
certain other remedies.

In January 2001, the
district court granted the Defendants motion to
dismiss but provided the plaintiffs leave to file an amended
complaint. The plaintiffs filed an amended complaint and the
Defendants again filed a motion to dismiss the amended pleading. In July 2001,
the parties to the litigation reached an agreement in principle for settlement
of the litigation. The district court entered an order on July 12, 2001,
dismissing the case without prejudice. The parties have agreed to a settlement and have filed with the Court a Memorandum
of Understanding. The parties are currently drafting and negotiating the terms
of the settlement. The Company believes that the entire settlement
amount will be paid by the
Companys insurer.

The Company, in the normal course of business, is also subject to
miscellaneous other legal proceedings. The Company is defending these
proceedings and anticipates that it will be successful and/or able to resolve
these matters in a manner that will not materially affect the Companys
financial condition or results of operations.




Item 2. Changes in Securities and Use of Proceeds

In the third quarter
of 2001, the Company sold an aggregate of 800,000 shares of its
Series C Convertible Preferred Stock to nine investors at a purchase
price of $1.00 per share. Each share of Series C Preferred Stock is
convertible into one share of the Company's common stock, subject to
certain adjustments. The offering was undertaken in accordance with
the exemption from registration set forth in Section 4(2) of the
Securities Act. Offers to buy the Series C Preferred Stock were made
to a limited number of qualified investors and no general solicitation
was involved. Each of the purchasers was an accredited investor.

As consideration for
the shares, the Company received $600,000 in cash and two notes
receivable in the aggregate principal amount of $200,000. The Company
did not pay any commissions in connection with this offering. In
order to undertake this offering, the Company was required pursuant
to the terms of a shareholders' agreement to obtain the consent of a
significant shareholder. In connection with obtaining that
shareholder's consent, the Company granted to that shareholder a
warrant to purchase up to 222,222 shares of the Series C Preferred
Stock at a purchase price of $1.00 per share. The warrant may be
exercised until August 30, 2002.




Item 6. Exhibits and Reports on Form 8-K

|    |  |                                                                             |  | 
|--- |  | --------------------------------------------------------------------------- |  | 
|(a) |  | Exhibits                                                                    |  | 
|   
|   
|   
|   
|    |  | 15.1
Accountants Letter regarding Unaudited Interim Financial
Information.
|   
|   
|   
|   
|(b) |  | Reports on Form 8-K                                                         |  | 
|   
|   
|   
|   
|    |  | None                                                                        |  | 

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PowerCerv Corporation




Form 10-Q

(for the quarterly period ended September 30, 2001)

Signatures

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

|      |  |                   |  |  |  |                                                                                                                              | 
|----- |  | ----------------- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------- | 
|      |  |                   |  |  |  | PowerCerv Corporation                                                                                                       
|     
|Date: |  | November 14, 2001 |  |  |  | /s/ Marc J. FratelloMarc J. Fratello,
President, Chief Executive Officer and
Chairman of the Board
(Duly Authorized Officer)
|     
|      |  |                   |  |  |  |                                                                                                                             
|     
|Date: |  | November 14, 2001 |  |  |  | /s/  Aria L. SiplinAria L. Siplin,
Chief Financial Officer, Treasurer
(Principal Financial Officer)                         

22