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

FORM 10-K

(MARK ONE)

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|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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|[ ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934                                        

Commission File Number
000-30581

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

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|Maryland
(State or other jurisdiction of
incorporation or organization)      |  | 52-1956677
(I.R.S. Employer
Identification No.)
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|8890 McGaw Road, Columbia, Maryland
(Address of principal executive offices) |  | 21045
(Zip Code)                               

Registrants telephone number, including area code: (410) 423-4000
Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.001 per share

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

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

The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 29, 2001 based upon the closing price of the Common
Stock on the Nasdaq National Market for such date, was $91,652,536.

As of March 29, 2001 there were 31,032,070 shares of the Registrants common
stock outstanding.





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TABLE OF CONTENTS



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|Item 1. Business                                                                             
|Item 2. Properties                                                                           
|Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of the Security Holders                              
|Item 5. Market for Registrant's Common Equity and Related Stockholder Matters                
|Item 6. Selected Consolidated Financial Data                                                 
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. Quantitative and Qualitative Disclosure about Market Risk                           
|Item 8. Consolidated Financial Statements and Supplementary Data                             
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                              
|Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|Item 13. Certain Relationships and Related Transactions                                      
|Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|Signatures                                                                                   
|Ex-10.7 Employment Agreement                                                                 
|Ex-23 Consent of Independent Auditors                                                        



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PART I

This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words believes, anticipates, plans, expects, intends and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the captions Risk Factors contained in Item 1
and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in Item 7, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time. We do not
undertake any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

Item 1. BUSINESS




Overview

As a leading provider of XML-based portal software, Sequoia Software has
redefined what portals do for business. Sequoias adaptable portal software
brings together information, processes and people and strengthens relationships
throughout the value chain.

Portals allow users a simple, Web-based, single point of access to the
applications and information they need to do business. Sequoias XPSTM is
portal software that provides a foundation from which many types of portals can
be deployed. Whether a company is deploying a corporate portal with the
objective of providing easier access to many systems and data sources, or a
portal that extends beyond the enterprise to facilitate business processes
across suppliers, partners and customers, XPS can address these business needs.

By allowing an enterprise to flexibly mold its business model to XPS
Sequoia provides next generation software that gives people what they never had
before  software that can adapt and change over time. XPS acts as the glue
that connects employees, customers, partners, and suppliers located anywhere in
the world in a virtual enterprise so they can more effectively collaborate and
exchange information. XPS intelligently and securely accesses information from
back-end systems, delivers it through a personalized interface, and allows
users to interact with that data. For example, a company may implement a
portal to allow distributors and partners to access their order history,
current inventory levels, negotiated price lists and upcoming promotions. XPS
will provide the access and interface to these applications, as well as the
security to allow only to the authorized information for that particular
partner or distributor.

We have incorporated application server-like functionality called
ThruSpeed technology into XPS. This gives an organization the
ability to provide widespread, distributed use of the portal, thereby improving
system performance and reliability. ThruSpeed improves the portals ability to
process transactions and ensures the portal will be able to accommodate a
growing user and information base while providing reliable access. The
scalability of XPS ensures that it can easily grow to meet evolving needs. In
recent independent testing, XPS showed that the increase in the peak number of
transactions that could be executed per second was relative to the addition of
hardware. Because XPS is designed to leverage additional hardware to increase
transaction throughput, businesses have a clear growth path for handling
additional portal activity.

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Industry Overview

The portal industry is new, fragmented and continuously evolving.
Magazine articles have indicated that there are hundreds of portal vendors in
the market. In truth, the market is crowded with application vendors, business
intelligence vendors and a large number of other vendors who, in most cases,
are taking their traditional client-server based applications and turning them
into portal applications. They are not true portal software vendors. They
are essentially turning their user interfaces into portals. These applications
tend to be proprietary applications, thereby not enabling an organization to
bring together all the different applications in an enterprise.

The second segmentation in the portal landscape is the infrastructure
vendors. The enterprise application integration vendors, the app-server
vendors, some of the platform vendors, and the infrastructure vendors are
looking to extend their reach into the portal software space. These vendors
see the portal software markets explosive growth potential, and are trying to
seize upon the opportunity to leverage the sale of their infrastructure
software to reach the end user through a portal product. The infrastructure
approach, however, provides the customer with the building blocks to build a
portal. These building blocks are more time consuming and labor and capital
intensive than the portal software that Sequoia and other portal software
vendors provide. At this stage in the market, the infrastructure vendors still
have premature portal products.

Finally, the pure-play portal software vendors like Sequoia deliver
functionality that the other two areas of the market are lacking. This
functionality includes the ability to integrate across the enterprise without
regard to proprietary applications and the ability of systems administrators to
quickly deploy their solution. Our products also provide the flexibility to
maintain and add to the portals functionality. These pure play vendors are
typically smaller, less established companies, seeking to secure the market by
moving into the portal space before others. These vendors tie in the ability
to aggregate information and personally interact with end users that are coming
in through a variety of access devices with layered infrastructure services for
managing the integration of content, applications, and processes. These
features and services are provided to the end user through a single,
personalized view.

The confusion in the portal market is partially a result of a 1998 Merrill
Lynch report that incorrectly estimated that the market for enterprise
information portals would grow from $4.4 billion in 1998 to over $14 billion by
2002. In November 2000, Merrill Lynch corrected this prediction and
re-forecast the overall market to grow from $168 million in 1999 to $2 billion
in 2004.

Other research has also indicated that there are substantial growth
opportunities in the portal software market. The Delphi Groups September 22,
2000 report on Corporate Portals Today: The 2000 Market Surveyfound that
more than half of all responding organizations are thinking about or are
interested in an enterprise information portal.

To further substantiate this growth, The Delphi Groups Business Portals:
Applications and ArchitectureFebruary 5, 2001 report stated that a research
survey of portal implementation plans at over 600 organizations executed in
December 2000, respondents indicated clearly that they expect to extend portal
interfaces across their business value chains to link up to customers,
employees, and partners through enterprise portal projects.

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Sequoias XML-based portal software provides the foundation from which
organizations can deploy the right kind of portal solution to fit their
business needs, whether it is a simple corporate
portal or a portal that provides the ability to synchronize business
processes and connect customers, partners, and suppliers in a virtual
enterprise.

Our Competition

The market for portal software is rapidly changing and intensely
competitive, and is likely to become more competitive as the lines between new
and existing technologies begin to blur and consolidation occurs across the
software industry. We believe that, while none of our competitors or potential
competitors currently produces XML-based portal software comparable to ours, we
face significant current and potential competition in the portal software
market. We believe, however, we currently utilize XML in a capacity that is
different from the competition. Most of the portal software companies that
market their use of XML actually use XML only as a document type that can be
displayed within the portal. We use XML for the routing of data, indexing,
rules evaluation, integration, and presentation. We use XML messaging as a way
to communicate within the portal as well as to integrate external applications
into the portal. XML allows XPS, and the organizations using it, to be
flexible.

Our existing and anticipated competition mainly comes from large software
vendors, vendors of proprietary enterprise application integration and
application server products, in-house divisions and others that intend to add
XML capabilities to their products. A number of infrastructure software
vendors and enterprise application integrators are now marketing their products
as a means to build a portal. Several application server vendors have
re-positioned themselves as portal companies. These vendors do not yet have
true portal software products. Recently, platform vendors like Microsoft and
IBM have announced portal software products but do not currently offer a
complete portal software solution.

Only the software vendors with flexible, extensible products designed
specifically to successfully integrate data and applications in a fully
functional interactive portal have the ability to coordinate existing
applications from an architecture-neutral perspective and to provide both
functionality and the flexibility to maintain and further develop an
organizations portal.

The Sequoia Solution

The goal of creating an electronic doorway to an organization requires
integration of enterprise applications within the organization, management of
the organizations enormous volume of data and facilitation of the
organizations e-business strategies, each of which is a significant challenge.
Our XML-based portal software, XPS, aggregates and organizes information
across an enterprise using a powerful, context-based approach to information
management. Using XPS a business can seamlessly integrate multiple sources of
information into a personalized, user-friendly, real-time interface that can be
accessed from a factory floor kiosk, a salespersons mobile device or a
business partners desktop. XPS is flexible enough to integrate different
software programs that would otherwise be incompatible and scalable enough to
meet the needs of even the largest enterprise, yet XPS can be implemented
faster than traditional enterprise software packages and remains user-friendly.

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XPS provides an advanced capability to access and interact with
information through a single, personalized, point of access. This allows
businesses to continue to use their existing software applications while
improving communications and decision-making processes and identifying new
revenue opportunities. The way XPS uses XML ensures that XPS is flexible
enough to serve the changing needs of a business while empowering the
organization to accelerate interaction between those in the dynamic value
chain, ultimately boosting the
organizations ability to acquire and retain customers. Businesses can
use an XPS-powered portal as an enterprise resource that supports fundamental
improvements in business processes and provides a single point of control and
configuration for key information assets. Companies are also maximizing the
competitive value of their information resources by using portals to exchange
data among all of their employees worldwide. Similarly, organizations are
looking for ways to provide customers and partners a single point of access for
all the electronic information and services available from that organization.

Our comprehensive, integrated, interactive solution provides our customers
with the following benefits:

The Ability to Work Smarter and Faster

By aggregating applications, information, and business processes, XPS gets
the right information to the right user at the right time. It intelligently
accesses relevant information from back-end systems, delivers it through a
personalized interface, and allows users to interact with the data based on
their role in the enterprise. Users can send and receive information and work
from any Web-enabled device (desktop, PDA, cell phone, etc). This expedites
the distribution of information, enabling users to make smarter and faster
decisions, as well as improve collaboration across the value chain.

The Ability to Work Their Way

XPS adapts to an organizations existing business processes without
forcing them to change their business model. XPS can actually adjust over
time. As processes and partnerships evolve, XPS can efficiently incorporate
changes so that companies within the virtual enterprise can continue to
effectively collaborate and exchange information. The flexible, open,
XML-based architecture of XPS also allows for additional functionality to be
snapped-in as needed. By providing the ability to distribute specific services
onto separate servers, the scalability offered with XPSs ThruSpeed
technology ensures that an XPS-powered portal will be able to accommodate a
growing user/information base. XPS also provides secure and reliable access to
users through a built-in, extensible security broker.

The Ability to Get Started Quickly

Building a custom application to provide better access to information and
to automate processes can be difficult, time-consuming and demanding on
resources. The buy (portal software) versus build (an in-house solution)
question is much easier to answer with a portal software package like XPS.
Relative to enterprise software applications, XPS makes it easy to get a fully
functional portal up and running. We believe XPSs flexible architecture and
out-of-the-box functionality significantly reduce time to deployment. Its
familiar browser interface

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requires little training for users. Our
implementation methodology is designed to maximize improvements while
minimizing disruption and cost. XPS can help a business create a fully
operational portal in short, structured, scalable steps.

Leverage Existing IT Expenditures

XPS allows portal users to more easily work with the many different
applications they need to do their job, allowing them to better leverage their
investments in existing technology. We bring the user into contact with
hard-to-reach information and increase efficiencies through the streamlining of
business processes.

Maximize Their Portal Investment

XPS also offers a full range of e-business components such as Business to
Business Integration, an Application Server, Collaboration, Search &
Categorization, for a single price within one package. This is unlike many
competitors portal software where a company is forced to use other partners of
our competitors to receive the right mix of functionality.

The Sequoia Strategy

Our goal is to lead the portal software market by providing the most
innovative and useful technology to our customers, along with superior service
and support. The key elements of our business strategy are to:

Maintain and Extend Leadership in the XML-Based Portal Software Market.

We plan to establish XPS as the portal software of choice by offering our
customers the most innovative and useful technology and outstanding customer
service. We are expanding our relationships with our current business partners
and developing relationships with new ones. We have designed our product to
take full advantage of the benefits offered by XML. We intend to continue to
protect our XML-based technologies through patents, and leverage XML to develop
new products for our customers. We are actively working with XML industry
groups such as W3C and Oasis to create industry standards.

Further Develop Indirect Distribution Channels.

We plan to continue to leverage our sales and marketing efforts through
relationships with application service providers, system integrators,
consultants and independent software vendors. We intend to continue to foster
these relationships to fuel additional growth because they significantly extend
our market reach. We plan to continue to develop these relationships in
increasing numbers and to expand the depth of existing relationships. With the
new formation of our Value Added Reseller Program, we plan to further expand
our indirect distribution channel. By leveraging these channels, we expect
sales to reach a much larger distribution base.

Extend Our Strategic Relationships.

We intend to expand our relationships to pursue strategic opportunities
for the marketing and sale of our products. These relationships provide us
with an important endorsement of our software and a distribution mechanism for
exposing the capabilities of our products. We have

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developed relationships
with technology partners, OEM/embedded solutions partners, value added
resellers and systems integrators.

The goal of our Technology Partner program is to develop and maintain
strong, value-added relationships with key vendors that provide successful
solutions to our customers. The program capitalizes on the strengths of each
partner to increase the total value delivered to Sequoias customers. This
growing network of partners includes industry-leading software, hardware, and
Web-services vendors who work with Sequoia to optimize product integration and
work closely
on joint business development. Some of our technology partners are
SeeBeyond, Bitmo, Semio, Citrix, and Netegrity.

Our OEM/Embedded Solution program helps us capitalize on the market of
independent software vendors and software developers who want to Web-enable
existing software solutions, tie applications together to create a suite
environment, extend portal architecture including personalization and taxonomy,
and/or expose applications as e-business applications that foster interaction
with customers, suppliers, and e-marketplaces. Some of our Embedded Solution
partners include TREEV and Sagent Technology.

Our System Integrator program is designed to provide partners with the
necessary tools to effectively develop, project manage, and deploy solutions
based on XPS. Standard system integrators primarily integrate XPS and adds
value by providing consultative pre-sales support, basic integration services,
and first tier technical support. Strategic system integrators choose to
embrace XPS as part of their business practice. They will provide consultative
pre-sales support, offer a fully integrated solution, training, and act as
first tier technical support for the entire solution. Some of our System
Integrator partners include Cap Gemini Ernst and Young and Commerce One Global
Solutions.

Our Value Added Reseller (VAR) program is designed to provide partners
with the necessary tools to effectively market, sell, and support XPS. VARs
resell XPS and add value by providing consultative pre-sales support, offering
basic integration services or a fully integrated solution, training, and first
tier technical support. We intend to continue to leverage our relationships
with our value added providers to increase our customer base and sales.

Increase Our Market Share Among Large Customers.

We believe our leadership position as a provider of XML-based portal
software can be attributed to the flexible nature of XPS, which is designed to
integrate a wide range of applications and information and to scale to support
hundreds of thousands of users. Large organizations, such as GE, Eastman
Chemical, Waste Management and Flextronics International have implemented
XPS-powered portals. We intend to leverage our reputation for having the
products and expertise capable of providing flexible, scalable and reliable
portal solutions for large and complex organizations to help us to attract new
customers and partners and increase our market share.

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XML Standard

XPS uses eXtensible Markup Language, or XML, an emerging standard that
defines a universal method for structuring data as its core technology. XML
was formally recommended by the World Wide Web Consortium as a standard in
February 1998. Since then, a number of industry leaders, including Microsoft,
IBM, Sun and Oracle have announced support for XML.

We believe that XML will be a key enabler of portal software and
e-business solutions. XML, like Hyper Text Markup Language, or HTML, descends
from the Internets original data standard, Standard Generalized Markup
Language, or SGML. Unlike HTML, the standard currently used for formatting
information on the Internet, XML enables information to be coded for content
rather than solely for presentation. This coding difference allows
applications to examine and manipulate data for content as well as context.
Descriptive tags are attached to
each piece of data so applications can understand the meaning of the data
and process it accordingly. This characteristic of XML eliminates the need for
re-keying data and enables users to quickly identify, retrieve, parse,
interpret and transmit critical business intelligence, including data, text,
images and streaming audio/video.

Products

We are a market leader for XML-based portal software. Our principal
product, XPS with ThruSpeed, is next generation software
that can adapt and change over time. XPS connects employees, customers,
partners, and suppliers located anywhere in the world to a virtual enterprise
so they can more effectively collaborate and exchange information.

XPS consists of a component-based architecture that can be tailored to
take an organization from e-business ground zero to a multi-purpose B-to-B
portal, bringing together employees, partners, distributors and customers. It
improves access to information, allows users to act quickly upon accessed
information and enhances collaboration. XPS accomplishes these functions by
providing an automated mechanism that periodically gathers and channels
internal and external content. Content may originate from many sources,
including network directories and file systems, enterprise applications,
databases or Web sites. Once XPS identifies and collects content, it creates
an index that enables users to rapidly search for, identify and retrieve
relevant information. XPS leverages our patent-pending XML indexing technology
that allows users to perform contextual searches on XML-based information. We
believe that XPS allows companies to improve employee productivity, customer
support, and partner relationships by creating a highly interactive
environment. This architecture allows our customers to create interactive
portals that allow for real-time updating of underlying information sources.
Using XPSs interactive capabilities, organizations can streamline business
processes and allow users to create a personalized, self-service environment.
For example, the process of aggregating inventory information from suppliers
can be automated, and personalized views of the data can be defined based on
what information is applicable to a users job role.

XPS 3.5

XPS 3.5 is designed to deploy almost any kind of portal application an
organization would need, so it includes a multitude of features designed to
benefit a business in different ways depending on how it is used. Weve
grouped these features according to the benefits they provide to make it easier
to see how a business might put XPSs functionality to work.

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XML Server Software

As the engine that powers XPS, XML Server Software gives the software its
speed, flexibility, reliability, and scalability. Advanced distributed caching
and performance-based load-balancing capabilities enable XPS to handle a
business high transaction volumes fast without sacrificing the portals
reliability. Its open, XML-based architecture allows a company to increase
system capacity as the companys business (and associated number of
transactions) grows. Scaling the portal to accommodate an expanding user and
transaction base can be as uncomplicated adding new hardware.

The components that make up the XML Server Software are cluster manager,
load balancing, senders/receivers, message broker, session manager, and
auditing.

The cluster manager and load balancer work together to distribute the
workload of XPS across multiple machines. The cluster manager manages a set of
servers, often referred to as agent servers, and the load balancer determines
the CPU usage of each server, assigning an incoming request to the server that
is the least busy, that is, has the lowest CPU cycle usage.

The senders and receivers are the doorways into and out of the portal.
Senders and receivers accept and send XML messages through a number of
supported protocols including HTTP, POP3/SMTP and COM.

Upon receiving a message through a receiver, the message broker determines
what type of process needs to be invoked, based upon the content of the
message. The session manager handles all of the necessary data to maintain a
user session.

The auditing capability tracks portal events and can be configured to
track all events or just specific types of events within the portal. For
example, all successful logins and accesses of information and applications
could be tracked. The portal event information is stored in a database.
Reporting tools can be used to provide audit reports based on that data.

Security

XPS features a built-in, extensible security broker, providing NT and
active-directory authentication. Companies can extend the capabilities of our
security broker by using XPSs application program interfaces and sample code
enabling them to create multiple, customizable authentication capabilities,
including LDAP and database authentication. In addition, XPSs role-based
personalization features assures that sensitive data will only be seen by those
authorized to see it.

Dynamic Presentation Engine

XPSs Dynamic Presentation Engine enables companies to completely
customize the view of the portal in terms of both appearance and content.
Customization is done at both the administrator and user level. Administrators
determine which applications and content are relative to particular users or
groups of users. Additionally, pages, themes, and templates let users
personalize the content delivered to their desktop. XML style sheets (which
can be created within the portal) provide the administrator with the ability to
display different data items in a

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documents and different formats based on the
needs and authorization level of the end user. By ensuring that specific kinds
of information are only accessible to those who need to see it, XPS provides an
extra level of personalization and efficiency for employees  and an extra
level of security for the business. For example, documents containing employee
data may be displayed to the HR department will display all data available,
whereas the same documents displayed to other employees might not display
salary and performance data.

Search and Categorization

XPS significantly reduces the time users spend sifting through documents
and data by providing precise, context-based searching of XML data and
full-text searching of text data. Built-in administrative tools enable users
to further organize content by creating taxonomies that fit the way those users
navigate information. Taxonomy is the categorization of data into a structure
that can be used for easy navigation. A common structure used by taxonomies is
a tree
structure, much like the structure used by MS Windows Explorer to navigate
data that is stored in a local file system.

XML search allows users to do structured searches of XML content. This
allows the user to specify an XML element or attribute to be searched, and the
value contained within that element or attribute to be matched in the search
result. For example, a user may specify a search for the text John within
the context of an XML element called name. Full text search and index are
used for unstructured, text-match searching. For example, a user may search
for just the text, John. Any text match in any document will return a hit.

Meta search provides the ability to use popular Internet search engines to
execute searches in multiple search engines simultaneously.

Collaboration

In a virtual enterprise organizations may not be in the same part of the
world as their partners. The problem is that it can be nearly impossible to
coordinate the meetings and day-to-day communication necessary to keep the
enterprise running. We believe XPS addresses this problem by providing
real-time messaging capabilities that enable users to stay current with
business associates regardless of where they are in the world.

XPS provides document-centric collaboration with check-in/check-out and
versioning. This allows for groups of users to work on the same document set
without overwriting anothers changes, as well as managing multiple versions of
the same document.

Businesses can use XPS to create HTML forms that will capture form input.
This input is captured as XML data. Once a form has been created, the data
entry forms become both an XML document publishing mechanism, as well as a
formatted view previously stored XML content.

Business Process Automation

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The powerful business process automation components included with XPS
simultaneously equip a business to establish online partnerships, build a
virtual enterprise, and streamline its electronic business processes.

A graphical flow editor and a rules engine enable an organization to
design customizable workflows, routing information automatically and
significantly reducing the time spent, work duplicated, and human errors made
during the manual transfer of information. These flows may contain integration
agents, scripts, decision points, and other routing logic.

Through its XML data-transformation capabilities, XPS makes it easy to
integrate new partners into a businesss virtual enterprise, regardless of the
communication standards those new partners have in place. When exchanging XML
messages with other systems and applications, transformation becomes the key to
seamless interchange. The transformation provides the ability to map XML
elements in different message formats to one another. Once mapped, the
transformation agents automatically execute the transformation of one message
format into the other. New message types may also be registered within the
portal as new inputs are required.

XPSs business process automation components include flows, trading
partners, data transformation, message types, scripting engine, style sheet
editor, and business protocols.

Integration Gateways

Different businesses require different types of integration to data and
applications that they wish to access through the portal. Some businesses may
want to integrate quickly and at low cost, while others may need an integration
strategy that offers high volume interaction and a more complex level of
integration. XPS offers multiple integration strategies to satisfy a variety
of business needs. Content delivery agents (CDAs) and spiders enable
organizations to easily establish interfaces with internal and external
information sources and bring data into their portals. Integration agents
(IAs) provide greater flexibility and tighter integration, and connectors allow
you to bring significant functionality from existing enterprise systems into
the portal.

At the interface level, the content delivery agent is used to display the
interface of a given application into the portal and perform data exchange with
that application. CDAs are usually implemented as scripts, although they may
be compiled into COM objects to enhance performance.

Spiders offer one-directional data level integration. Spiders can traverse a
specific data source and bring the information in that data source back into
the portal for processing. Processing may include indexing, submission to a
business process flow, etc.

Integration agents provide tight integration into back-end applications.
IAs are data-centric agents that may also be used to act upon data within the
portal, regardless of whether they interface to a back-end system. IAs are
custom developed to talk to a particular data source or application, although
there are a number of IAs available out of the box.

Connectors are third-party applications that sit between the portal and a
back-end application, providing translation between the messages in XPS and the
required inputs to or

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outputs from a particular back-end system. Partnerships
with third-party connector vendors allow XPS to take advantage of the domain
expertise of these companies without changes or overhead in the portal itself.

Administration and the Software Development Kit (SDK)

By providing a single point of administration for all of the portals
components, we believe XPS offers a significant advantage over implementing a
suite of commercially available e-business applications. Because each of these
applications has its own administrative interface, businesses that cobble
together their own solutions spend a lot of time, money, and effort configuring
each application separately and accessing multiple interfaces to accomplish
simple tasks. XPS users can spend this time, money, and effort working on the
tasks that bring their companies business and sharpen their competitive edge.

The Portal Management Console provides for the administration of all
portal resources, as well as other system resources such as MS SQL 7 and MS
Internet Information Server. XPS also provides a rich environment in which
developers can configure and customize business process automation and
presentation capabilities without having to go into the Portal Management
Console. The Business Integration Services Workbench is a rich development
environment for building business process flows, writing scripts, and
business rules. Content Delivery Services Workbench provides the full
development environment for creating CDAs, templates, pages, and style sheets.

A well-documented set of application program interfaces further round out
the developer SDK, including design-time tools and sample source code. This
facilitates customization of the portal, and makes it easier for software
vendors who wish to embed XPS into their own applications.

e-Business Infrastructure Applications

Our architectural approach of developing separate platform and application
components allows us to easily unbundle particular components for the marketing
and sale of stand-alone e-business infrastructure products. For example, the
XML search engine could be sold separately. The XML server software, along
with the Business Process Automation could be sold as the engine to power
other software products. This gives Sequoia the ability to offer appropriate
products as market demand changes and evolves.

Services

We offer our customers and indirect channel partners an array of training
and expert product services in connection with the sale, distribution and use
of our products. We believe these services are an important part of our
success and the success of our customers. Our expert product services group is
primarily focused on strengthening the implementation capabilities of our
channel partners, which provide most of the services in conjunction with the
sale of our products. Our product support group is expanding rapidly to
support our growing customer base. We intend to leverage our services to
broaden market awareness of the advantages of our solutions and to create
opportunities to sell new or enhanced products to customers.

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Expert Services

Technical Training. We regularly offer instructor-led, multimedia-driven
courses that focus on the implementation, administration and management of our
products. We also offer product education to our technical specialists through
our series of product training courses, which are delivered at our corporate
training center.

Reselling, Consulting and Implementation. We focus a significant amount
of our efforts on our business partners that are authorized to resell our
products and that provide consulting and implementation services to both our
customers and their own. To ensure that those consulting and implementation
services are provided properly, we assign product experts to each customer
engagement, and require that our indirect channel partners be fully certified
on our products.

Product Support

Ongoing product and customer support is important to our continued success
and we strive to provide our customers with quick and helpful responses to
inquiries. We provide an online community at www.mysequoia.com for our
customers and partners. mySequoia offers a compilation of answers to
frequently asked questions, product news, downloadable upgrades and agents as
well as a live-chat forum, product installation and configuration details, and
product announcements.

Our product and customer support personnel answer product questions and
provide troubleshooting advice. The customer support team is active in many
areas of our business and participates in product training for new employees,
reviewing and offering input for product documentation and assisting with the
quality assurance effort for each software release.

Sales and Marketing

Our sales and marketing function is focused on delivering XML-based portal
software solutions that are directed at the specific needs of our customers.
To accomplish this, we are focusing our marketing efforts on developing greater
awareness of the benefits of XML-powered portals. Moreover, in addition to
targeting the portal software market, we are focusing on specific market
segments that are aggressively seeking to adopt innovative technologies in
order to acquire a competitive advantage. In the portal software market, these
market segments include process manufacturing, consumer packaged goods and
retail, technology and communications, healthcare, professional services,
public sector, and transportation and travel.

For each of these markets segments, we intend to continue to sell and
market XPS in the following ways:



| |  |  |  | Creating strategic business alliances with channel partners,
independent software vendors and service companies that have
established brand identity for each market segment
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | Making connections to industry-specific application software                                                                                                                
|
| |  |  |  | Create industry-specific product overviews, or white papers, and case studies                                                                                             
|
| |  |  |  | Sponsor exhibits, host Web seminars, and speak at industry trade shows                                                                                                      

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Sales

Direct Sales. As of December 31, 2000, our direct sales force consisted
of 26 sales professionals and 13 technical sales support specialists primarily
based at our principal offices, as well as sales offices throughout the U.S.
and in Ireland and the U.K. Our direct sales force focuses on end-users and
channel partners to generate product demand. We intend to increase the number
of sales professionals and technical sales support specialists located both
domestically and internationally.

Indirect Channels. We intend to significantly expand our installed base
and service capabilities through relationships with indirect channel partners.
Our indirect channel partners consist of applications service providers,
systems integrators and consultants that market, sell, implement and support
our products and independent software vendors that can incorporate and embed
our products into their own e-business solutions. Some of our indirect channel
partners are Acuent, BITMO, Cap Gemini, Cediti of Belgium, Citrix Systems,
divine interVentures, Enterworks, GE Capital IT Solutions, General Dynamics
Defense Systems, ImageVision.Net, Impact Innovations Group, Lockheed Martin
Management & Data Systems, Microsoft, SAIC, Software AG, Inc. You can find a
complete listing of our partners on our Web site at www.sequoiasoftware.com.

Marketing

Our marketing organization consists of four distinct groups: Strategic
Marketing, Product Marketing, Marketing Management, and Marketing
Communications. Each group has
responsibility for a specific set of marketing functions. The Strategic
Marketing group is responsible for developing the branding, positioning and
messaging strategy, which includes market research and analysis. The Product
Marketing group, the technical component of the marketing department, is
responsible for understanding market needs and communicating those needs to
product development. Marketing Management is responsible for the execution of
the marketing plan and for the tactics that drive awareness of Sequoia and its
products, which will ultimately lead to sales interest. These efforts include
direct marketing, trade shows, seminars, Web seminars, advertising, speaking
engagements, and sponsorships. Marketing Communications addresses the
collateral and creative design needs of the organization, including the Web
site.

Research and Development

Our development staff is responsible for enhancing and supporting our
existing products and expanding our product line. We believe that a
technically skilled software development organization will continue to be a
core component of our success. As of December 31, 2000, we had a development
staff of 73 personnel, including 60 developers and quality assurance personnel,
and 13 product support personnel.

We have made substantial investments in research and development,
primarily through internal development, but also through technology
acquisitions. Our research and development expenditures for the years ended
December 31, 1998, 1999 and 2000 were approximately $1.0 million, $3.6 million,
and $7.3 million respectively. Our costs for the development of new software
products and substantial enhancements to existing software products are
expensed as

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research and development costs until technological feasibility has
been established, at which time any additional development costs are
capitalized until the product is available for general release to our
customers. We expect that we will continue to commit significant resources to
research and development in the future, as it is a key component of our
strategy. We focus our research and development activity on enhancing our
existing software and developing new software products. We work closely with
our customers and strategic partners to identify areas on which to focus our
new product development efforts.

We believe that we have demonstrated significant innovations in our
application of XML technologies to address the problems of e-business. While
we evaluate externally-developed technologies for integration into our
software, most enhancements to our software have been, and we expect will
continue to be, developed internally. Our current product development
activities focus on product enhancements to XPS and the integration of external
services and partner technology. We believe that we must continue to design,
develop and introduce new products that take advantage of market opportunities
and comply with emerging standards.

Customers

Our customers represent a broad array of enterprises within diverse
industry sectors, including consumer packaged goods, technology &
communications, healthcare, and process manufacturing. Customers are generally
organizations that seek to leverage emerging technology to achieve a
competitive advantage in their markets. Our customers are using XPS to deploy
intranet, or corporate portals, B2B portals and Internet portals. Since the
commercial release of XPS in March 1999, the number of our licensed users has
grown rapidly. Licensing arrangements range from departmental-size solutions
to enterprise-wide commitments.

Today, our representative customer list includes S.C. Johnson,
Flextronics, Eastman Chemical, Smuckers, BBC, General Electric Power Systems,
EMI Music, Mitchell Industries, W.R. Grace, the Mills Corporation, Waste
Management Inc., Lockheed Martin, and Lehman Brothers, plus recognized repeat
orders from existing customers expanding their deployment of XPS, such as
Baylor Health Care System. In addition, the Company recorded a three-year,
multi-million dollar agreement with Sagent Technology, under which Sequoia is
licensing its technology for integration with the Sagent Solution, creating the
industrys first interactive, e-business intelligence portal.

We believe our customers have chosen XPS due to its scalable architecture,
low cost of ownership and rapid deployment capabilities. Our customers use XPS
to create interactive portals that facilitate collaboration within and outside
of the enterprise, integrate disparate business processes and existing systems,
enable better decision-making and optimize operations. Customers also use XPS
to for collaboration with their customers, employees, suppliers and partners.

Intellectual Property and Licensing

Our success and ability to compete is dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely primarily on a
combination of patent, copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions and other similar measures
to protect our proprietary information. For example, we license rather than
sell our software to customers and

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require licensees to enter into license
agreements that impose certain restrictions on licensees ability to utilize
the software. We have applied for three U.S. patents covering our core XML
technology, one of which is a provisional application. We have no patents or
patent applications pending in any foreign countries. We have four U.S.
trademark registrations and three pending trademark applications.
Additionally, we have filed three intent-to-use trademark applications in the
United States for our product names and corporate logo. We own the
registration rights for 16 Internet domain names, including those pertaining to
our company name, one of our subsidiarys company name and certain aspects of
our XML technology. There can be no assurance that any of our patents,
copyrights or trademarks will not be challenged or invalidated.

We also enter into license agreements with respect to our technology,
documentation and other proprietary information. Those licenses are generally
non-transferable and typically have a perpetual term. Despite our best efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology that we consider
proprietary and third parties may attempt to develop similar technology
independently. In particular, we provide our licensees with access to object
code versions of our software, and other proprietary information underlying our
licensed software. Policing unauthorized use of our products is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted.

From time to time we integrate third-party software into our products.
This third-party software may not continue to be available on commercially
reasonable terms. We currently license software from DT Software, Inc. under
a perpetual license agreement for indexing functionality in XPS. If we cannot
maintain licenses to this or comparable third-party software, shipments of our
products could be delayed until equivalent software could be developed or
licensed and integrated into our products, which could materially adversely
affect our business, operating results and financial condition.

Overall, the protection of our proprietary rights may not be adequate and
our competitors may independently develop similar technology. Due to rapid
technological change, we believe that factors such as the technological and
creative skill of our personnel, new product developments and enhancements to
existing products are more important than the various legal protections of our
technology to establishing and maintaining a technology leadership position.

We do not believe that any of our products, trademarks, copyrights or
other proprietary rights infringe the proprietary rights of third parties
except for one instance. In July 1999, we received a notice from NetRight
Technologies, Inc., objecting to our use of the mark iManage. We had ceased
using the mark prior to the receipt of the notice and we do not anticipate any
further action. Additionally, by letter dated September 29, 2000, General
Automation of Irvine, California notified Company that General Automation has
owned a 1984 federal registration for the mark SEQUOIA since 1996 and expressed
concern regarding Companys use of SEQUOIA. By letter dated November 14,
2000, Company responded that it, along with many other computer,
computer-related and software businesses, has used SEQUOIA for several years
and questioned General Automations implied assertion that it has senior rights
in the mark SEQUOIA. As of the date of this Company Disclosure Schedule,
Company has received no further oral or written communication from General
Automation regarding this matter. Third parties may assert infringement claims
against us in the future with respect to current or future products. Further,
we expect that software product developers will increasingly be subject to

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infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps.

All of our employees sign nondisclosure and confidentiality agreements.
From time to time, we hire or retain employees or consultants who have worked
for independent software vendors or other companies developing products similar
to those offered by us. Those prior employers may claim that our products are
based on their products and that we have misappropriated their intellectual
property. Any claims of that variety, with or without merit, could cause a
significant diversion of management attention, result in costly and protracted
litigation, cause product shipment delays or require us to enter into royalty
or licensing agreements. Those royalty or licensing agreements, if required,
may not be available on terms acceptable to us or at all, which would have a
material adverse affect on our business. For additional discussion regarding
our intellectual property risk, see Risk Factors. Our software products rely
on our intellectual property, and any failure by us to protect our intellectual
property could enable our competitors to market products with similar features
that may reduce demand for our products which would adversely affect our
revenues on page 20.

Competition

The market for XML-pure portal software is rapidly changing and intensely
competitive, and is likely to become more competitive as the number of entrants
and new technologies increases and as the market consolidates. We believe
that, while none of our competitors or potential competitors currently produces
an XML-based solution comparable to ours, we face current or potential
competition from large software vendors, vendors of proprietary enterprise
application integration and application server products, in-house divisions and
others that intend to add XML capabilities to their products. A number of
infrastructure software vendors and enterprise application integrators are now
marketing their tools as a means to build a portal. Several application server
vendors have re-positioned themselves as portal companies; however, these
vendors do not yet have true portal software products. Recently, platform
vendors like Microsoft and IBM have announced portal software products but do
not currently offer a complete portal software solution.

Our customers and other companies with which we have strategic
relationships may also compete with us in the future. These competitors may
emerge rapidly and gain significant market share quickly. In addition, new and
improved technologies or the expansion of existing technologies may increase
competitive pressures. As a result, we may not be able to compete
successfully, and our business, operating results and financial condition could
be harmed.

We compete principally on the basis of:



| |  |  |  | product quality and performance, including scalability and
breadth and depth of solution;
| |  | - |  | -----------------------------------------------------------------------------------------
|
| |  |  |  | interoperability of solution with existing applications;                                 
|
| |  |  |  | speed and ease of deployment;                                                            
|
| |  |  |  | customer service; and                                                                    
|
| |  |  |  | price.                                                                                   

We believe that we compete favorably in each of these areas and that our
products have more functionality than those of any of our competitors and are
easier to implement than their

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products. We also believe that our product is
more scalable and allows our customers to benefit more fully from the
advantages of XML than our competitors products.

We believe that the principal competitive factors affecting our market
include:



| |  |  |  | the number of customers;              
| |  | - |  | --------------------------------------
|
| |  |  |  | the number of strategic alliances; and
|
| |  |  |  | strength of sales channels.           

Although we believe our solution currently competes favorably with respect
to these factors, our market is relatively new and rapidly evolving. We may
not be able to maintain our competitive position against current and potential
competitors, especially those with greater financial, marketing, service,
support, technical and other resources, such as larger customer bases and
greater brand recognition that may have lower overhead costs than us and
therefore be able to offer advantageous pricing. Additionally, some of our
competitors may be able to secure alliances with customers and affiliates on
more favorable terms than we can. We expect that competition will increase as
other established and emerging companies enter the portal solution market and
as new products and technologies are introduced. Increased competition may
result in price reductions and lower gross margins.

Employees

As of December 31, 2000, we employed 226 full-time employees, which
included 81 in sales and marketing, 40 in expert product services, 73 in
research and development and 32 in administration, operations and finance. Our
future success will depend in part on our ability to attract, retain and
motivate highly qualified technical and management personnel, for whom
competition is intense. As of December 31, 2000, all of our employees own
options to purchase our stock. From time to time, we have employed, and will
continue to employ, independent contractors and consultants to support research
and development, marketing and sales, and business development. Our employees
are not represented by a collective bargaining agreement and we have never
experienced a strike or similar work stoppage. We consider our relations with
our employees to be good.

RISK FACTORS

Risks Related To Our Business

We are in an early stage of development and have a limited operating history,
and as a result, you may have difficulty evaluating our business and operating
results.

We have a limited operating history and cannot be certain that our
business strategy will be successful. We commenced operations in 1992 and
commercially released our first XML-based software product in November 1998.
An investor in our common stock must consider the risks and uncertainties
frequently encountered by early stage companies in new and rapidly evolving
markets. Our past results and rates of growth may not be meaningful and you
should not rely on them as an indication of our future performance.

We have a history of losses, we expect future losses, and we may not be
profitable or maintain profitability in the future.

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We have incurred substantial net losses in each fiscal quarter since
September 30, 1996 and do not expect to achieve profitability in the
foreseeable future. For the year ended December 31, 2000, we incurred a net
loss of $20.5 million and had an accumulated deficit of $143.5 million after
accretion of our redeemable convertible preferred stock. We cannot assure you
that our revenues will grow or that we will achieve or maintain profitability
in the future. Given the level of our planned operating and capital
expenditures, we expect to incur losses and negative cash flows for the
foreseeable future.

There can be no assurance that we will be able to increase revenue or
achieve profitability on a quarterly or an annual basis, which may restrict our
ability to pursue our business strategy. Even if we ultimately do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. Our ability to increase revenue and achieve
profitability will be affected by other risks and uncertainties described in
this section and in Managements Discussion and Analysis of Financial
Condition and Results of Operations. The failure to attain profitability will
have a material adverse effect on our business and the value of our common
stock.

Because we derive a substantial portion of our revenues from a limited number
of customers, if we are unable to maintain these relationships or attract
additional customers, our revenues would be adversely affected and we may be
unable to achieve profitability.

Our top ten customers for the year ended December 31, 2000 accounted for
48% of revenues. One customer accounted for 11% of our revenues for the year
ended December 31, 2000. We expect that a limited number of customers will
continue to represent a material percentage of revenues for the foreseeable
future. The loss of a major customer, or fewer or smaller orders by existing
customers, could adversely affect our revenues. In addition, any significant
delays in or cancellations of a major customers development projects or delays
in or cancellations of new product announcements and releases by us could
result in smaller or canceled orders for our products and could materially
affect our financial condition or results of operations.

Our operating results are subject to fluctuations and, if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.

Our quarterly revenue and operating results are difficult to predict and
are likely to fluctuate significantly from quarter-to-quarter. Our quarterly
results of operations have varied in the past, and you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. In some future periods, our results of operations are
likely to be below the expectations of public market analysts and investors.
In this event, the price of our common stock would likely decline. Factors
that have either caused our results to fluctuate in the past or that are likely
to affect us in the future include the following:



| |  |  |  | the size, timing and contractual terms of sales of our
products and services due to the unpredictable sales cycle for our
products;
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | technical difficulties in our software that could delay
product shipments or increase the costs of introducing new products;       
|
| |  |  |  | introductions of new products or new versions of existing
products by us or our competitors;                                       

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| |  |  |  | our ability and the ability of our partners to implement products for our customers;  
| |  | - |  | --------------------------------------------------------------------------------------
|
| |  |  |  | changes in our mix of revenues generated from product sales and services; and         
|
| |  |  |  | changes in our mix of sales channels through which our
products and services are sold.

We depend on our XPS product and related services and any decrease in demand
for this product and related products and services could have an adverse effect
on our revenues and our financial performance.

We expect to derive substantially all of our revenues from the sale of our
XPS product and related services. We expect revenues from this product and
related products and services to account for substantially all of our revenues
for the foreseeable future. As a result, factors adversely affecting the
pricing or demand for our XPS product and related products and services, such
as competition and technological change, could materially harm our business.
We expect to continue to be dependent on XPS and related products and services
in the foreseeable future, and any factor adversely affecting the market for
portal software in general, or our software in particular, would adversely
affect our ability to generate revenues. Our future financial performance will
depend in large part on the successful development, introduction and customer
acceptance of our products and product enhancements in a timely and cost
effective manner. We expect to commit significant resources to market and
further develop the XPS product and related products and services and enhance
the brand awareness of XPS. The market for our software may not continue to
grow or may grow at a slower rate than we expect. Furthermore, the market may
not accept our products and services. If this market fails to grow or grows
more slowly than we anticipate, or if the market fails to accept our products
and services, our business could suffer.

Capacity restrictions of our software could reduce the demand for and use of
our products which may limit our ability to generate software licensing
revenues.

The capacity boundaries of XPS may, at some future time, be reached. If
and when these boundaries are reached, they may be insufficient to enable some
of our customers to achieve their desired levels of information aggregation and
interaction. We may lose customers or fail to gain new customers if the
capacity boundary of XPS limits the ability of our customers to achieve
expected levels of information aggregation and interaction.

Our failure to obtain or maintain third-party licenses could subject us to
significant damages and disrupt our business.

We currently, and expect to continue to, incorporate into our pre-packaged
software licensed third-party software that enables the implementation of our
products. In addition, we license software technology used to develop our
software. The loss or inability to maintain any of these software licenses
could result in delays or reductions in product shipments until equivalent
software could be identified and licensed or compiled, which could adversely
affect our business and impair our future growth.

Our failure to manage our expanding operations could impair our future growth.

The planned expansion of our operations will place a significant strain on
our management, financial controls, operations systems, personnel and other
resources. Our ability to manage our

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future growth, should it occur, will
depend in large part upon a number of factors including our ability to rapidly:



| |  |  |  | build and train our sales and marketing staff to create an
expanding presence in the rapidly evolving portal software market,
and keep them fully informed over time regarding the technical
features, issues and key selling points of our products;       
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | develop our customer support capacity as sales of our
products grow, so that we can provide customer support without
diverting engineering resources from product development efforts;
and                                                                  
|
| |  |  |  | expand our internal management and financial controls
significantly, so that we can maintain control over our operations
and provide support to other functional areas within Sequoia as the
number of our personnel and size of our organization increases.

We may not succeed with these efforts. Our failure to efficiently expand
and develop these areas could cause our expenses to grow, could cause our
revenues to decline or grow more slowly than expected or could otherwise impair
our growth.

The variable sales cycles of our software products, licenses and services could
cause significant fluctuation in our quarterly results, which could result in
volatility in the price of our stock.

The typical sales cycle of our software is unpredictable and generally
involves a significant commitment of resources by our customers. A customers
decision to license our software generally involves the evaluation of the
available alternatives by a significant number of personnel in various
functional and geographic areas and is subject to delays over which we may have
little or no control, including budgeting constraints, internal purchase review
procedures and the inclusion or exclusion of our products on customers
approved standards list. Accordingly, we typically must expend substantial
resources educating prospective customers about our software solutions.
Therefore, the length of time between the date of initial contact with the
potential customer and the execution of a software license agreement typically
ranges from three to six months and is subject to delays over which we may have
little or no control. This cycle may lengthen in the future. As a result, our
ability to predict the timing and amount of specific sales is limited and any
delay or failure to complete one or more large transactions
could have a material adverse effect on our business and could cause
operating results to vary significantly from quarter-to-quarter, which could
result in volatility in our stock price.

XPS is based on XML, which has not yet achieved broad market acceptance and, if
broad market acceptance for XML does not develop, our business could be harmed.

XPS is based on XML, an emerging standard for sharing data over the
Internet. While we anticipate that XML will achieve broad market acceptance in
the near future, it is possible that a competing standard perceived to be
superior could replace XML, in which case the market may not accept an
XML-based product. If a new standard were perceived to be superior, our
software might not be compatible with the new standard or we might not be able
to develop a product using this standard in a timely manner. Consequently, a
failure of XML-based products to

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achieve broad market acceptance or the
introduction of a competing standard perceived to be superior in the market
could limit our growth.

Our software products rely on our intellectual property, and any failure by us
to protect our intellectual property could enable our competitors to market
products with similar features that may reduce demand for our products which
would adversely affect our revenues.

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our software products
or technology. Policing unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as those in the United States. Our
success and ability to compete depend substantially upon our internally
developed technology, which is incorporated in the source code for our
products. We protect our intellectual property through a combination of
patent, copyright, trade secret and trademark law. We presently have two
patent applications and one provisional patent application pending in the
United States. We have two trademark registrations and two trademark
applications pending in the United States. In addition, Radian Systems, our
wholly owned subsidiary, has three intent-to-use trademark applications and one
trademark application pending in the United States.

We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to our source
code and other intellectual property and the distribution of our software,
documentation and other proprietary information. These measures afford only
limited protection and may be inadequate. Others may develop technologies that
are similar or superior to our technology or design around the copyrights and
trade secrets we own.

Our products employ technology that may infringe the proprietary rights of
others, and we may be liable for significant damages as a result.

We expect that software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
grows and overlaps. We believe that our products do not employ technology that
infringes any proprietary rights of third parties. Nevertheless, third parties
may claim that we infringe their intellectual property rights. Regardless of
whether these claims have any merit, they could:



| |  |  |  | be time-consuming to defend;                                                                                              
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | result in costly litigation;                                                                                              
|
| |  |  |  | divert our managements attention and resources;                                                                          
|
| |  |  |  | cause product shipment delays; or                                                                                         
|
| |  |  |  | require us to enter into royalty or licensing agreements,
which may not be available on terms acceptable to us, if at all.

A successful claim of product infringement against us or our failure or
inability to license the infringed or similar technology could damage our
business because we would not be able to sell our products without redeveloping
them or otherwise incurring significant additional expenses.

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Our software products are complex and may contain unknown defects that could
harm our reputation, result in product liability or decrease market acceptance
of our products, increase our cost of doing business and impede our growth.

Our software products are complex, and may contain undetected errors or
result in failures, which are not detected until after commencement of
commercial shipments. Any of these errors could be significant and could harm
our business and ongoing results. Any significant errors may result in:



| |  |  |  | costly litigation;                                
| |  | - |  | --------------------------------------------------
|
| |  |  |  | diversion of managements attention and resources;
|
| |  |  |  | damage to our reputation;                         
|
| |  |  |  | increase in our product development costs;        
|
| |  |  |  | loss of sales; or                                 
|
| |  |  |  | delay in market acceptance of our products.       

In addition, the sale and support of our products may entail the risk of
product liability or warranty claims based on damage incurred by our customers
due to such errors or failures. In addition, the failure of our products to
perform to customer expectations could give rise to warranty claims. Although
we carry general liability insurance, our current insurance coverage may be
insufficient to protect us from all liability that may be imposed under these
types of claims.

Intense competition and consolidation in our industry could limit our ability
to attract and retain customers.

The market for our products is intensely competitive, highly fragmented,
characterized by rapid technological change, evolving industry standards,
changes in customer needs and significantly affected by new product
introductions and improvements. Many of our competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, greater name recognition, a broader range of products to offer and a
larger installed base of customers than us, any of which could provide them
with a significant competitive advantage. We expect that the rapid evolution
of Internet-based software applications and standards will require us to adapt
our software products to remain competitive. If we are unable to compete
successfully, we may be unable to attract and retain customers. Increased
competition could also result in price reductions for our products and lower
profit margins, either of which could materially and adversely affect our
business, results of operations and financial condition.

We expect to face increased competition in the future from our current
competitors. In addition, new competitors, or alliances among existing and
future competitors, may emerge and rapidly gain significant market share. We
also may face increased competition from existing large business application
software vendors that may broaden their product offerings to include portal
software. For example, Microsoft could decide to either add features to its
operating system that directly compete with our software solutions or develop
solutions that compete with ours. Their significant installed customer bases
and abilities to offer a broad solution and price these new products as
incremental add-ons to existing systems could provide them with a significant
competitive advantage. Our principal competitors include:

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| |  |  |  | other vendors of portal software solutions;                                                                                              
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | developers of software that address only certain technology
components of portal software (e.g., enterprise application
integration); and
|
| |  |  |  | in-house development efforts by potential clients or
partners.                                                                           

We need to expand our sales and distribution capabilities, and failure to do so
could impede our growth.

We need to substantially expand our direct and indirect sales and
distribution efforts, both domestically and internationally, in order to
increase market awareness and sales of our software and services. We continue
to expand our direct sales force and plan to hire additional sales personnel.
Competition for qualified sales and marketing personnel is intense, and we
might not be able to hire and retain adequate numbers of such personnel to
maintain our growth. We also plan to expand our relationships with system
integrators, enterprise software vendors and other third-party resellers to
further develop our indirect sales channel. As we continue to develop our
indirect sales channel, we will need to manage potential conflicts between our
direct sales force and third-party reselling efforts.

If we do not develop and maintain successful relationships with indirect sales
channel partners, including systems integrators and complementary technology
vendors, we may not be able to attract and retain customers.

We pursue business alliances with indirect channel partners to endorse our
products, implement our software, provide customer support services, promote
and resell products that integrate with our products and develop
industry-specific software products. These alliances provide an opportunity to
license XPS to our partners installed customer bases. In many cases, these
parties have established relationships with our existing and potential
customers and can influence the decisions of these customers. We rely upon
these companies for recommendations of our products and related services during
the evaluation stage of the purchasing process, as well as for implementation
and customer support services. A number of our competitors have stronger
relationships with indirect channel partners who, as a result, may be more
likely to recommend our competitors products and services. In addition, some
of our competitors have relationships with a greater number of these indirect
channel partners and, therefore, have access to a broader base of customers.
If we are unable to establish, maintain and strengthen these relationships, we
will have to devote substantially more resources to the selling and marketing,
implementation and support of our products. Our efforts may not be as
effective as these indirect channel partners, which could significantly harm
our operating results.

If the market for the Windows NT operating system declines or develops more
slowly than we expect, sales of XPS will be materially adversely affected and
our revenues will suffer.

We built XPS to function on a platform using Microsofts Windows NT
operating system. If the market for the Windows NT operating system declines
or develops more slowly than we expect, our business and operating results will
be significantly harmed. Market acceptance of the Windows NT operating system
will depend on many factors, including Microsofts development and support of
the Windows NT market. For example, Microsoft could decide to discontinue or
lessen its support of the Windows NT market. Similarly, Microsoft could decide
to shift its

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support to another operating system to the detriment of Windows
NT. In addition, we cannot predict the ability of the Windows NT operating
system to compete against existing and emerging operating systems, including
AIX, HP-UX, Linux and Solaris. Any decline in the market penetration of Window
NT operating systems will lead to a shrinking market for our product.

We plan to develop international operations and if we fail to do so
effectively, it could harm our future growth.

We intend to expand our international sales efforts in the future. We
have very limited experience in marketing, selling and supporting our software
and services abroad. Expansion of our international operations will require a
significant amount of attention from our management and substantial financial
resources. If we are unable to grow our international operations successfully
and in a timely manner, it could harm our future growth. In addition, doing
business internationally involves additional risks, particularly:



| |  |  |  | unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
| |  | - |  | -----------------------------------------------------------------------------
|
| |  |  |  | restrictions on repatriation of earnings;                                    
|
| |  |  |  | differing intellectual property rights;                                      
|
| |  |  |  | differing labor regulations;                                                 
|
| |  |  |  | changes in a specific countrys or regions political or economic conditions;
|
| |  |  |  | greater difficulty in staffing and managing foreign operations; and          
|
| |  |  |  | fluctuating currency exchange rates.                                         

If we are unable to attract and retain key management and personnel, we may
become unable to operate our business effectively and our stock price may
decline.

We depend to a significant degree on the skills, experience and efforts of
our key executive officers and our employees, including without limitation:
Richard C. Faint, Jr., our chairman of the board and chief executive officer;
Mark A. Wesker, our president and chief operating officer; Gregory G. Heard,
our chief financial officer; Bill Brennan, our executive vice president of
corporate development who joined us in December 2000; Paul Martin, our chief
technical officer, the members of our research and development staff and a
number of other key management, sales, support, technical and services
personnel. Qualified personnel are in great demand throughout the software
industry, and our future success depends in large part on our ability to
attract, train, motivate and retain highly skilled employees and the ability of
our executive officers and other members of senior management to work
effectively as a team. The loss of the services of any executive officer or
the failure to attract and retain the highly trained technical personnel that
are integral to our sales, product development, service and support teams,
could have a material adverse effect on our business.

If we undertake acquisitions, they may be expensive and disruptive to our
business and could have an adverse effect on our business, future operations
and stock price.

We may from time to time purchase or make investments in companies,
products or technologies that differ from our core business. If we purchase a
company, we could have difficulty in assimilating that companys technologies,
employees and operations. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our

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expenses. We also expect that we would incur substantial expenses if we
acquired other businesses or technologies. Furthermore, we may use the
proceeds of this offering, incur debt or issue equity securities to pay for any
future acquisitions. If we issue additional equity securities, our
stockholders could experience dilution and the market price of our stock may
decline. We currently have no agreements or understandings regarding any
future acquisitions.

If we are unable to obtain additional capital, we may be unable to conduct our
business as planned.

We may require additional capital to finance our growth or to fund
acquisitions or investments in complementary businesses, technologies or
product lines. This additional financing may not be available to us on a
timely basis if at all, or, if available, on terms acceptable to us. Moreover,
additional financing may cause dilution to existing stockholders.

Risks Related to Our Industry

The demand for our software and growth could be impaired by external factors
that may be out of our control.

The demand for our software products and growth of our business may be
adversely affected by external factors that we cannot control, including:



| |  |  |  | a decrease in the speed and reliability of the Internet and
our customers internal networks that may hinder the ability of our
customers to utilize our solution, which may reduce the demand for
our software;                     
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | the lack of growth or widespread acceptance and use of the
Internet as an effective medium for commerce by consumers,
businesses and business applications; and                                                                      
|
| |  |  |  | the adoption of Internet laws or regulations that cause
companies, including our customers to seek alternative methods for
conducting business due to increased costs or administrative burdens
of doing business using the Internet.

We are unable to control such factors, and these factors may create a
significant risk that the value of our common stock will decline.

Increased security risks of e-business may deter future use of our software and
services.

A fundamental requirement for e-business is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise or breach of the security features
contained in our software or the algorithms used by our customers and their
business partners. This could make it difficult to protect content and
transactions on Internet e-commerce marketplaces or proprietary information in
our customers and their business partners databases. Anyone who is able to
circumvent security measures could misappropriate proprietary, confidential
customer information or cause interruptions in our customers and their
business partners operations. Our customers and their business partners may
be required to incur significant costs to protect against security breaches or
to alleviate problems caused by breaches, reducing their demand for our
software. Further, a well-publicized compromise of

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security could deter
businesses from using the Internet to conduct transactions that involve
transmitting confidential information. The failure of the security features of
our software to prevent security breaches, or well publicized security breaches
affecting the Internet in general, could significantly harm our business,
operating results and financial condition.

Our executive officers and directors are able to exercise significant influence
over our company, which could adversely affect our business and depress our
stock price.

Our executive officers and directors will continue to control
approximately 57.6% of our common stock and will exercise significant influence
over stockholder voting matters which will limit the influence of our new
stockholders. If our officers and directors act together, they will be able to
influence the composition of the board of directors and will continue to have
significant influence over our affairs in general.

In addition, members of our Board of Directors are directors of companies,
equity investment firms and other capital providers that may regularly compete
with us or invest in or acquire interests in businesses that compete with us.
See Management. These directors may have conflicting fiduciary obligations to
our stockholders and the stockholders of the other companies for which they
serve as directors or in which they hold management positions. We and these
directors have agreed that these directors are under no obligation to bring to
our company any investment or business opportunities of which they become
aware, even if such opportunities are within our scope and objectives.

Some of our stockholders may be able to control all matters submitted for
stockholder approval, and you will be subject to their decisions which may
differ from those of other stockholders and could delay or prevent a change of
control.

Some of our stockholders own a large enough stake in us to have a
significant influence on the matters presented to stockholders. As a result,
these stockholders may be able to control all matters requiring stockholder
approval, including the election and removal of directors, the approval of
significant corporate transactions, such as any merger, consolidation or sale
of all or substantially all of our assets, and the control of our management
and affairs. Accordingly, that concentration of ownership may delay, defer or
prevent a change of control of our company, impede a merger, consolidation,
takeover or other business combination involving our company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of our company, any of which could have a material adverse effect on
the market price of our common stock. See our discussion under the caption
Principal Stockholders for more information regarding ownership of our
outstanding shares.

Future sales of our common stock by our existing stockholders may cause our
stock price to decline.

If our existing stockholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly. The
perception in the public market that our existing stockholders might sell
shares of common stock could depress our market price.

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We have implemented certain anti-takeover provisions, which could delay or
prevent a change of control of Sequoia that stockholders consider favorable.

At the time we complete this offering, our charter and our bylaws, in
conjunction with Maryland law, will contain provisions that could make it more
difficult for a third-party to obtain control of Sequoia even if doing so would
be beneficial to stockholders. For example, our charter will provide for a
classified board of directors and give the board of directors the ability to
expand its size and fill any vacancies without stockholder approval.

Item 2. PROPERTIES




Our principal administrative, sales, marketing and research and
development facility is located in Columbia, Maryland and consists of
approximately 64,000 square feet of office space held under a lease that
expires in January of 2006. We are continuing to lease 7,285 square feet of
office space at our previous location in Columbia, Maryland under a lease that
expires in July of 2002. We also lease 6,156 square feet of office space in
Seattle, Washington under a lease that expires in July of 2002.

Item 3. LEGAL PROCEEDINGS




We are involved from time to time in routine litigation that arises in the
ordinary course of our business, but are not currently involved in any
litigation that we believe could reasonably be expected to have a material
adverse impact on our financial position, results of operations or cash flows.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




None.

PART II.

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




Our common stock is traded on the Nasdaq National Market under the symbol
SQSW. Public trading of the common stock commenced on May 12, 2000. Prior to
that, there was no public market for the common stock. The following table
sets forth, for the periods indicated, the high and low sale price per share of
the common stock as reported by the Nasdaq National Market.

|                              |                                  |  |      |       |     |  |   |      | 
|----------------------------- | -------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|                              |                                  |  | High |       | Low
|                              |                                  |  |      |       |    
|Year Ended December 31, 2000:
|                             
|                             
|                             
|                             
|                              | Second Quarter from May 12, 2000 |  | $    | 18.00 |     |  | $ | 5.63 | 
|                             
|                             
|                             
|                             
|                              | Third Quarter                    |  |      | 21.75 |     |  |   | 5.56 | 
|                             
|                             
|                             
|                             
|                              | Fourth Quarter                   |  |      | 7.13  |     |  |   | 1.66 | 

As of March 29, 2001, there were approximately 236 holders of record of

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our common stock. The number of holders of record of Common Stock is not
representative of the number of beneficial holders because many shares are held
by depositories, brokers or other nominees.

We have never declared or paid any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. Our lines of credit currently prohibit the payment of cash dividends.

The Company filed a registration statement under the Securities Act
effective May 11, 2000, File No. 333-96421. From the effective date of the
registration statement to December 31, 2000, the Companys use of net proceeds
from the offering of securities covered thereby was as follows:

|                                    |                           |   |            |            | 
|----------------------------------- | ------------------------- | - | ---------- | ---------- | 
|NET OFFERING PROCEEDS TO ISSUER     |                           | $ | 33,658,000 |           
|                                   
|                                   
|                                   
|                                   
|                                    |                           |   |            |           
|                                   
|                                   
|                                   
|                                   
|USE OF PROCEEDS:                   
|                                   
|                                   
|                                   
|                                   
|Sales and marketing expenses        |                           |   | 4,166,000  |           
|                                   
|                                   
|                                   
|                                   
|Research and product development    |                           |   | 4,273,000  |           
|                                   
|                                   
|                                   
|                                   
|General and administrative expenses |                           |   | 1,199,000  |           
|                                   
|                                   
|                                   
|                                   
|Capital expenditures                |                           |   | 2,044,000  |           
|                                   
|                                   
|                                   
|                                   
|Financing activity, net             |                           |   | (1,246,000 | )         
|                                   
|                                   
|                                   
|                                   
|Temporary investment:              
|                                   
|                                   
|                                   
|                                   
|                                    | Cash and cash equivalents |   |            | 23,222,000 | 
|                                    |                           |   |            |           
|Total                               |                           | $ | 33,658,000 |           
|                                    |                           |   |            |           

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA




The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with Managements Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this Annual Report on Form 10-K. The
financial data for the years ended December 31, 1996 and 1997 have been derived
from, and are qualified by reference to, our audited financial statements. The
consolidated financial data for the years ended December 31, 1998, 1999, and
2000 are derived from, and are qualified by reference to, our audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.

On July 1, 1999, we acquired Radian Systems. We accounted for this
acquisition using the purchase method of accounting, and the results of
operations of Radian Systems are included in our consolidated financial data
for periods subsequent to June 30, 1999.

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|                                                                            |                                       |      |       |      |  |      |       |      |  |      |        |   |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------- | ------------------------------------- | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------- | - |  | - | -------- | -
|                                                                            | Year ended December 31,              
|                                                                            |                                      
|                                                                            |                                       | 1996 |       | 1997 |  | 1998 |       | 1999 |  | 2000
|                                                                            |                                      
|                                                                            | (in thousands, except per share data)
|Total revenues                                                              |                                       | $    | 1,787 |      |  | $    | 3,676 |      |  | $    | 4,011  |   |  | $ | 8,398   |   |  | $ | 19,729   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                                       |      | (142  | )    |  |      | (548  | )    |  |      | (2,957 | ) |  |   | (12,792 | ) |  |   | (20,523  | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss attributable to common
stockholders                                |                                       |      | (265  | )    |  |      | (739  | )    |  |      | (6,527 | ) |  |   | (21,306 | ) |  |   | (117,569 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Total assets                                                                |                                       |      | 2,318 |      |  |      | 2,544 |      |  |      | 5,689  |   |  |   | 22,283  |   |  |   | 49,209   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Long-term debt, less current portion                                        |                                       |      | 192   |      |  |      | 153   |      |  |      | 77     |   |  |   | 474     |   |  |   | 721      |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Redeemable convertible preferred
stock                                      |                                       |      | 2,000 |      |  |      | 2,191 |      |  |      | 12,161 |   |  |   | 43,479  |   |  |   |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic and diluted loss per common
share attributable to common
stockholders |                                       |      | (0.07 | )    |  |      | (0.19 | )    |  |      | (1.71  | ) |  |   | (4.36   | ) |  |   | (5.34    | )

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




Overview

We are a leading provider of XML-based Internet infrastructure software
for creating interactive e-business portals. Interactive portals are a new
generation of e-business solutions that are designed to tap into todays vast
corporate and Internet information reservoirs in order to bring the right
information to the right people at the right time. This new type of XML-based
information portal is distinctively capable of intelligently aggregating data
and content from disparate sources, personalizing that information based upon a
users profile, and enabling the user to interact with the original information
source. These capabilities meet a growing need for software products that can
sift through the increasing volumes of corporate and Internet-based information
to identify and facilitate new e-business opportunities. From corporate
intranets and extranets to Internet-based content and commerce providers, our
products address a growing demand for a new breed of dynamic, flexible and
standards-based e-business software that brings information and people
together.

Sequoia Software was founded in March 1992. During the period from our
inception to 1996, we generated revenues primarily from developing custom
software products that provided information management functionality to our
customers. Beginning in early 1996, we saw potential for a new generation of
software, based on Internet standards and designed to bring the right
information to the right people at the right time. By early 1998, we had
transitioned our business model from custom information technology products and
services to pre-packaged, XML-based software licensing, professional services
and maintenance. This transition is reflected in our financial results and
should be considered when performing historical comparisons. We commercially
released our first XML-based software product in November 1998, and we released
XPS in March 1999. We released subsequent versions of XPS in December 1999 and
June 2000. We have grown from 142 employees as of December 31, 1999 to 226
employees as of December 31, 2000.

On July 1, 1999, we acquired Radian Systems for an aggregate purchase
price of approximately $5.0 million in cash and stock. We accounted for the
acquisition using the
purchase method of accounting. As such, the results of operations of
Radian Systems have been included in our results of operations beginning July
1, 1999, and the acquired net assets were

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recorded at their estimated fair
value on July 1, 1999. We recorded approximately $5.4 million of goodwill and
other identifiable intangible assets in connection with this acquisition, which
are being amortized over a three, four or five-year period.

We derive our revenues from software licenses, maintenance and services.
In addition, we have previously sold hardware purchased from third parties for
the convenience of our customers. Licenses for our software often contain
multiple elements, including the product license, maintenance and other
services. We allocate the total arrangement fee among each deliverable based
on the relative fair value of each of the deliverables determined based on
specific objective evidence.

License revenues include fees from licensing our XPS software as well as
third-party software. We license some of the software that we have developed
to our customers under contractual arrangements which require significant
modification and customization of the software. We account for these
contractual arrangements using the percentage of completion method, and we
measure progress to completion based on labor costs incurred.

We recognize license revenues when persuasive evidence of an arrangement
exists, delivery has occurred and the fee is fixed or determinable and probable
of collection. We include software license fees billed but not recognized as
revenue in deferred revenue.

The services we provide include installation, basic consulting, as well as
software customization and modification to meet specific customer needs. We
recognize service fees provided under long-term contracts to install and
customize our software or third-party software using the percentage of
completion method. We measure progress to completion by comparing costs
incurred to estimated total costs or contract milestones.

The maintenance we provide includes telephone support, bug fixes, and
rights to upgrades on a when and if available basis associated with software
licenses. We collect these maintenance fees in advance and recognize them
ratably over the maintenance period. We include maintenance fees collected but
not recognized as revenue in deferred revenue.

We occasionally sell hardware purchased from third parties as a
convenience to our customers. We recognize revenues from these sales when the
hardware is shipped. We do not expect the sale of hardware to continue to be a
material part of our operations as we transition our business model from custom
information technology products and services to pre-packaged software
licensing, services and maintenance.

Our cost of license revenues includes manufacturing, packaging and
distribution expenses, amortization of capitalized software development costs
and, after June 30, 1999, the cost of purchased third-party licenses sold to
our customers. Our cost of services and maintenance includes salaries and
related expenses for our expert product services organization, costs of
third-party consultants, and an allocation for overhead and recruitment.

Research and development expenses include new software development and the
salaries and other costs associated with our in-house development staff and
contract software developers. We include costs of developing new software
products and substantial enhancements to existing software products in research
and development expenses until we establish technological feasibility, at which
time we capitalize all further development costs until we make the product

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available for general release. We define the establishment of
technological feasibility as the earlier of the completion of a working model
or a detailed program design of the software product that has been tested to be
consistent with the product design specifications and that is free of any
uncertainties related to known high-risk development issues.

Sales and marketing expenses include salaries and related costs, as well
as direct marketing costs, including trade shows, public relations,
advertising, marketing materials and market research. We currently generate
revenues primarily through our direct sales force. We also focus on working
with our indirect channel partners, as well as identifying new indirect channel
partners. We expense these costs as we incur them.

General and administrative expenses include our personnel and other costs
associated with management, finance, human resources and information services
activities. We are currently expanding our business and significantly
increasing the number of employees. We anticipate that we will continue this
expansion in the future, which will continue to place significant demands on
our management and operational resources. To manage our rapid growth and
increased demand, we must invest in and implement scalable operating systems,
procedures and controls. We expect future expansion to continue to challenge
our ability to hire, train, manage and retain qualified employees. We expense
these costs as we incur them.

Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our research and
development, sales and marketing and professional services departments and to
establish an administrative infrastructure. As a result, as of December 31,
2000, we had an accumulated deficit of $143.5 million, which includes
cumulative accretion of our redeemable convertible preferred stock of $106.4
million. We believe our success depends on rapidly increasing our customer
base, further developing XPS and introducing new product enhancements into the
marketplace. We intend to continue to invest heavily in research and
development and sales and marketing. We therefore expect to continue to incur
substantial operating losses for the foreseeable future.

Recent Developments

The Company, Citrix Systems, Inc. and Soundgarden Acquisition Corp. entered
into an Agreement and Plan of Merger dated as of March 20, 2001. The merger
agreement provides for a cash tender offer to acquire all of the outstanding
shares of the Companys common stock at a price of $5.64 per share. Holders of
a majority of the Companys common stock have agreed to tender their shares in
the tender offer. The obligations of Citrix and Soundgarden to accept shares
tendered in the offer is subject to certain regulatory approvals and other
customary closing conditions. The Company has granted to Soundgarden an option
to purchase up to a number of shares of common stock equal to 19.9% of the
number of shares issued and outstanding before giving effect to the exercise of
the option at a price of $5.64 per share. The option is exercisable if, after
giving effect to the exercise of the option and as a result of such exercise,
the number of shares then owned by Citrix and Soundgarden represents at least
90.1% of the Companys common stock outstanding on a fully diluted basis.
Under the merger agreement, the tender offer will be followed by a merger in
which any shares of the Companys common stock not purchased in the tender
offer will be converted into the right to receive $5.64 per share in cash,
without interest.

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Results of Operations

The following table sets forth consolidated statement of operations data
for each of the periods indicated as a percentage of total revenues:

|                          |                                  |                                   |     |                         |     |      |      |      |     |   |      |    |     | 
|------------------------- | -------------------------------- | --------------------------------- | --- | ----------------------- | --- | ---- | ---- | ---- | --- | - | ---- | -- | --- | 
|                          |                                  |                                   |     | Year Ended December 31,
|                          |                                  |                                   |     |                        
|                          |                                  |                                   |     | 1998                    |     | 1999 |      | 2000
|                          |                                  |                                   |     |                        
|Statements of Operations:
|                         
|                         
|                         
|                         
|Revenues:                
|                         
|                         
|                         
|                         
|                          | Licenses                         |                                   |     | 14                      | %   |      |      | 52   | %   |   |      | 82 | %  
|                         
|                         
|                         
|                         
|                          | Services and maintenance         |                                   |     | 61                      |     |      |      | 40   |     |   |      | 17 |    
|                         
|                         
|                         
|                         
|                          | Hardware                         |                                   |     | 25                      |     |      |      | 8    |     |   |      | 1  |    
|                          |                                  |                                   |     |                        
|                          |                                  | Total revenues                    |     |                         | 100 |      |      |      | 100 |   |      |    | 100 | 
|                         
|                         
|                         
|                         
|Cost of revenues:        
|                         
|                         
|                         
|                         
|                          | Cost of license                  |                                   |     | 4                       |     |      |      | 29   |     |   |      | 7  |    
|                         
|                         
|                         
|                         
|                          | Cost of services and maintenance |                                   |     | 47                      |     |      |      | 33   |     |   |      | 13 |    
|                         
|                         
|                         
|                         
|                          | Cost of hardware                 |                                   |     | 19                      |     |      |      | 11   |     |   |      | 1  |    
|                         
|                         
|                         
|                         
|                          | Write-off of inventory           |                                   |     |                        |     |      |      | 7    |     |   |      |   |    
|                          |                                  |                                   |     |                        
|                          |                                  | Total cost of revenues            |     |                         | 70  |      |      |      | 80  |   |      |    | 21  | 
|                          |                                  |                                   |     |                        
|Gross profit              |                                  |                                   | 30  |                         |     |      | 20   |      |     |   | 79   |   
|                         
|                         
|                         
|                         
|Operating expenses:      
|                         
|                         
|                         
|                         
|                          | Research and development         |                                   |     | 25                      |     |      |      | 43   |     |   |      | 37 |    
|                         
|                         
|                         
|                         
|                          | Sales and marketing              |                                   |     | 56                      |     |      |      | 81   |     |   |      | 97 |    
|                         
|                         
|                         
|                         
|                          | General and administrative       |                                   |     | 20                      |     |      |      | 33   |     |   |      | 27 |    
|                         
|                         
|                         
|                         
|                          | Stock compensation               |                                   |     |                        |     |      |      | 2    |     |   |      | 12 |    
|                         
|                         
|                         
|                         
|                          | Bad debt expense                 |                                   |     | 1                       |     |      |      | 8    |     |   |      | 11 |    
|                         
|                         
|                         
|                         
|                          | Impairment loss                  |                                   |     |                        |     |      |      |     |     |   |      | 5  |    
|                          |                                  |                                   |     |                        
|                          |                                  | Total operating expenses          |     |                         | 102 |      |      |      | 167 |   |      |    | 189 | 
|                          |                                  |                                   |     |                        
|Loss from operations      |                                  |                                   | (72 | )                       |     |      | (147 | )    |     |   | (110 | ) 
|                         
|                         
|                         
|                         
|Other income (expense):  
|                         
|                         
|                         
|                         
|                          | Interest expense                 |                                   |     | (2                      | )   |      |      | (6   | )   |   |      | (1 | )  
|                         
|                         
|                         
|                         
|                          | Interest and other income        |                                   |     |                        |     |      |      |     |     |   |      | 7  |    
|                          |                                  |                                   |     |                        
|                          |                                  | Total other income (expense), net |     |                         | (2  | )    |      |      | (6  | ) |      |    | 6   | 
|                          |                                  |                                   |     |                        
|Net loss                  |                                  |                                   | (74 | )%                      |     |      | (153 | )%   |     |   | (104 | )%
|                          |                                  |                                   |     |                        

Years Ended December 31, 2000 and 1999

Revenues. Total revenues increased 135% to $19.7 million in 2000 from
$8.4 million in 1999. We attribute the increase in revenues principally to an
increase in the number of new customers. We had 85 new customers in 2000,
accounting for $16.8 million or 85% of total revenues in 2000.

License revenues increased 271% to $16.1 million in 2000 from $4.3 million
in 1999. We attribute the increase in license revenues principally to the
growth in market acceptance of XPS. On June 19, 2000, we released XPS 3.0,
which added significant functionality and extended the marketability and life
of XPS. License revenues from the sale of XPS were $15.6 million in

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2000,
compared to $1.1 in 1999. In 2000, we added 70 new XPS customers generating
$15.1 million of license revenue, and had a follow on order of XPS from an
existing customer generating $514,000 of license revenue.

Services and maintenance revenues increased 2% to $3.4 million in 2000
from $3.3 million in 1999. We attribute the absence of change to a decrease
in professional service revenue to $1.9 million in 2000 from $2.9 million in
1999, offset by an increase in maintenance revenue to $1.5 million in 2000 from
$463,000 in 1999. The decrease in professional service revenue is due in part
to a shift from selling custom software development services in conjunction
with third-party software products to selling just our XPS product and related
implementation services. These sales of custom software development services
and related third-party software products were offered by Radian Systems. Our
service revenue from these sales decreased to $667,000 in 2000 from $1.3
million in 1999. Also, in 1999 we generated $1.1 million from two long-term
consulting and custom software development contracts. Both of these contracts
were complete by December 31, 1999. The increase in maintenance revenue in
2000 was due to an increase in support and maintenance fees generated by a
larger XPS installed base.

Hardware revenues decreased 66% to $241,000 in 2000 from $719,000 in 1999.
Historically, hardware was provided at the request of customers in conjunction
with long-term contracts to customize software. We do not expect hardware to
be a material component of our business model.

Cost of Revenues. Cost of license revenues decreased 43% to $1.4 million
in 2000 from $2.4 million in 1999. These costs as a percentage of license
revenues decreased to 9% for 2000 from 56% in 1999. We attribute these
decreases to our shift from selling third-party software and custom software
development to licensing our pre-packaged, XPS software.

The cost of services and maintenance revenues decreased 8% to $2.5 million
in 2000 from $2.7 million in 1999. These costs as a percentage of services and
maintenance revenues decreased to 74% for 2000 from 82% in 1999. These
decreases reflect fewer sales of custom software development services and more
sales of implementation and support and maintenance services related to XPS in
2000 as compared to 1999. Our implementation services offered to XPS customers
are usually completed in a short period of time and involve routine procedures
such as information gathering and analysis and minor configuration. Our
support and maintenance services offered to XPS customers involve principally
help desk support. Our costs of providing implementation and support and
maintenance services related to XPS is lower than the cost of providing custom
software development services which are customer defined and are usually
provided under long-term contracts that are subject to potential cost
estimation errors.

The cost of hardware revenues decreased 78% to $201,000 in 2000 from
$922,000 in 1999. We do not expect hardware to be a material component of our
business model.

Operating Expenses

Research and Development. Research and development expenses increased
102% to $7.3 million in 2000 from $3.6 million in 1999. We attribute the
increase to the addition of 43 personnel in our research and development
department and an increase in our use of contract software developers. We are
using these additional personnel to continue development of our XPS product.

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Sales and Marketing. Sales and marketing expenses increased 181% to $19.2
million in 2000 from $6.8 million in 1999. We attribute the increase to the
addition of 86 sales and marketing employees, as well as additional costs
associated with the sale and marketing of XPS.

General and Administrative. General and administrative expenses increased
96% to $5.3 million in 2000 from $2.7 million in 1999. We attribute the
increase to the addition of 18 administrative personnel, additional legal and
accounting fees, and an additional six months of intangible asset amortization
related to the July 1, 1999 acquisition of Radian Systems.

Stock Compensation. Stock compensation expense increased 1054% to $2.3
million in 2000 from $198,090 in 1999. During 2000, we granted options to
purchase approximately 900,000 shares of common stock at an exercise price of
$1.87 per share at a time when the estimated fair value of the underlying
common stock was $9.00 per share. We measure stock compensation as the
difference between the option exercise price and the fair value of our common
stock on the date of grant. The compensation is recognized as expense over the
vesting period of the respective options. The majority of our stock
compensation relates to grants to our directors and officers whose other costs
are included in general and administrative expense.

Bad Debt Expense. Bad debt expense increased 233% to $2.2 million in 2000
from $651,000 in 1999. We incurred $576,000 of bad debt expense in the first
quarter of 2000 as a result of a dispute with a customer for which we performed
software customization and modification services in 1999. This contract was
acquired as part of the Radian Systems acquisition. Also in 2000, we incurred
$1.1 million of bad debt expense related to specific customers that experienced
cash shortages as a result of deteriorated market conditions, and we also
increased our general reserve by $485,000. In 1999, our bad debt expense
resulted principally from a long-term subcontract arrangement to provide
software customization and related services.

Impairment Loss. In 2000, due to the recent deterioration in market
conditions, we performed an impairment review of our portfolio of
non-marketable securities. We noted during our reviews of certain investees a
series of operating losses and other factors indicating that a decrease in the
value of the investments occurred which was other than temporary and which
should be recognized. As a result, the Company recorded noncash impairment
losses aggregating $1 million to write certain of these securities down to net
realizable value.

Interest Expense. Interest expense decreased 54% to $231,000 in 2000 from
$508,000 in 1999. In 1999, our interest expense was higher as a result of
interest expense on debt related to the acquisition of Radian Systems and
interest on convertible demand promissory notes. In 2000, our interest expense
was related primarily to our loan arrangements with Silicon Valley bank.

Interest and Other Income. Interest and other income increased 7880% to
$1.3 million in 2000 from $17,000 in 1999. We attribute this increase to
interest income earned on the proceeds of our initial public offering.

Years Ended December 31, 1999 and 1998

Revenues. Total revenues increased 109% to $8.4 million in 1999 from $4.0
million in 1998. The increase in revenues was due primarily to an increase in
the number of new customers to 43

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##### Table of Contents



customers in 1999 from 13 customers in 1998,
accounting for $7.1 million or 85% of total revenues in 1999.

License revenues increased 653% to $4.3 million in 1999 from $575,000 in
1998. The increase in license revenues was due to the first full year of
commercial availability of XPS. License revenues from the sale of XPS were
$1.1 million in 1999. License revenues from the sale of a similar XML-based product were $200,000 in 1998. The remaining
increase in license revenues was due to the sale of third-party software that
we acquired from Radian Systems.

Services and maintenance revenues increased 38% to $3.3 million in 1999
from $2.4 million in 1998. The increase in services and maintenance revenues
was attributable primarily to an increase in services and support provided in
connection with increasing license sales and the growth of our customer base.

Hardware revenues decreased 29% to $719,000 in 1999, from $1.0 million in
1998. Historically, hardware was provided at the request of customers in
conjunction with long-term contracts to customize software.

Cost of Revenues. Cost of license revenues increased 1,291% to $2.4
million in 1999 from $173,000 in 1998 due to increased license revenues. Our
cost of license revenues increased at a faster rate than our license revenues
due to sales of licenses in 1999 acquired upon the acquisition of Radian
Systems. Margins on software products acquired from Radian Systems averaged
27% in 1999, while margins of XPS software averaged 87%. These lower margin
products include third-party software licenses, which reduce overall margins.

The cost of services and maintenance revenues increased 46% to $2.7
million in 1999 from $1.9 million in 1998. The increase was due primarily to
providing these services in conjunction with increasing license sales.

The cost of hardware revenues increased 21% to $922,000 in 1999 from
$762,000 in 1998. In 1999, we incurred a loss on the sale of hardware in
conjunction with a long-term contract.

During 1999, we wrote off $621,000 of software licenses purchased from
software vendors to be sold with their products. The charge was necessitated
by technological obsolescence of the product and changes in our product
offerings.

Operating Expenses

Research and Development. Research and development expenses increased
267% to $3.6 million in 1999 from $991,000 in 1998. The increase was
attributable primarily to the addition of 34 personnel in our research and
development department.

Sales and Marketing. Sales and marketing expenses increased 203% to $6.8
million in 1999 from $2.3 million in 1998. The increase was primarily
attributable to hiring 50 sales and marketing and customer support employees,
as well as costs associated with the sales and marketing of our products.

General and Administrative. General and administrative expenses increased
258% to $2.9 million in 1999 from $806,000 in 1998. The increase was due
primarily to hiring four

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##### Table of Contents



administrative personnel. We also recognized $636,000
of amortization expense related to intangible assets recorded in connection
with our acquisition of Radian Systems.

Bad Debt Expense. Bad debt expense increased 3,345% to $651,000 in 1999
from $19,000 in 1998. The increase in bad debt expense resulted principally
from bad debt expense in the amount of $434,000, which we recognized in
connection with a long-term subcontract arrangement to provide software
customization and related services.

Interest Expense. Interest expense increased 502% to $508,000 in 1999
from $84,000 in 1998. The increase in interest expense was due primarily to
increases in borrowings to finance our operations and to acquire Radian
Systems.

Quarterly Results

The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999.

|                                                                            |  |                                       |        |               |  |                |        |               |  |                    |        |     |  |     |         |          |  |          |          |               |  |                    |        |          |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------- |  | -------------- | ------ | ------------- |  | ------------------ | ------ | --- |  | --- | ------- | -------- |  | -------- | -------- | ------------- |  | ------------------ | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                                                            |  | Three Months Ended                   
|                                                                            |  |                                      
|                                                                            |  |                                       |        |               |  |                |        |               |  |                    |        |     |  |     |         |          |  | Restated |          | Restated      |  | Restated          
|                                                                            |  |                                       |        |               |  |                |        |               |  |                    |        |     |  |     |         |          |  |          |          |               |  |                    |        |         
|                                                                            |  |                                       |        |               |  |                |        |               |  |                    |        |     |  |     |         |          |  |          |          | June 30, 2000 |  | Sept. 30, 2000 (1) |        | Dec. 31,
|                                                                            |  | March 31, 1999                        |        | June 30, 1999 |  | Sept. 30, 1999 |        | Dec. 31, 1999 |  | March 31, 2000 (1) |        | (1) |  | (2) |         | 2000 (2) | 
|                                                                            |  |                                      
|                                                                            |  | (in thousands, except per share data)
|Total revenues                                                              |  | $                                     | 1,050  |               |  | $              | 1,045  |               |  | $                  | 2,919  |     |  | $   | 3,384   |          |  | $        | 4,040    |               |  | $                  | 4,331  |          |  | $ | 5,280  |   |  | $ | 6,078  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Gross profit                                                                |  |                                       | 492    |               |  |                | 633    |               |  |                    | 708    |     |  |     | (136    | )        |  |          | 2,821    |               |  |                    | 2,963  |          |  |   | 4,659  |   |  |   | 5,187  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |  |                                       | (1,177 | )             |  |                | (1,534 | )             |  |                    | (3,632 | )   |  |     | (6,449  | )        |  |          | (4,369   | )             |  |                    | (5,724 | )        |  |   | (4,273 | ) |  |   | (6,157 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss
attributable to
common stockholders                                |  |                                       | (1,307 | )             |  |                | (1,664 | )             |  |                    | (3,761 | )   |  |     | (14,574 | )        |  |          | (104,510 | )             |  |                    | (2,630 | )        |  |   | (4,273 | ) |  |   | (6,157 | )
|                                                                            |  |                                       |        |               |  |                |        |               |  |                    |        |     |  |     |         |          |  |          |          |               |  |                    |        |          |  |   |        |   |  |   |        |  
|Basic and diluted
loss per common
share attributable
to common
stockholders |  |                                       | (0.34  | )             |  |                | (0.43  | )             |  |                    | (0.63  | )   |  |     | (2.45   | )        |  |          | (15.99   | )             |  |                    | (0.13  | )        |  |   | (0.14  | ) |  |   | (0.20  | )
|                                                                            |  |                                       |        |               |  |                |        |               |  |                    |        |     |  |     |         |          |  |          |          |               |  |                    |        |          |  |   |        |   |  |   |        |  



---

(1)  
In the fourth quarter of 2000, we detected an error in the recognition
of compensation expense from stock option grants that affected the reported
results of operations in each of the three quarters in the period ending
September 30, 2000. The quarterly results of operations shown above have been
restated to reflect the proper amount of compensation expense. See note 19 to
the consolidated financial statements.

(2)  
In the third and fourth quarter of 2000, we recognized asset impairment
losses of $195 and $856, respectively, on our portfolio of non-marketable
securities. See note 18 to the consolidated financial statements.

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Historically, our quarterly operating results have varied in the past and
may vary significantly in the future depending on many factors including, among
others:



| |  |  | the size, timing and recognition of revenue from significant
orders;                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the rapidly evolving market for internet
infrastructure software    solutions;                         
|
| |  |  | overall demand for and market acceptance of our products,
services and future product enhancements;               
|
| |  |  | increases in operating expenses required for product development
and marketing;                                   
|
| |  |  | our success in attracting highly skilled employees, whether
related to technology, sales, marketing or management;
|
| |  |  | the mix of services provided and whether services are provided by
our own staff or third-party contractors; and   
|
| |  |  | cost related to possible acquisitions of technology or
businesses.                                                

Overall, we believe that the purchase of our products is discretionary and
generally involves a significant commitment of capital. As a result, purchases
of our product may be deferred or cancelled in the event of a downturn of our
customers businesses or the economy in general. As such, we believe that
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful and the results of any one quarter are not necessarily an indication
of future performance.

Future Assessment of Recoverability of Impairment of Intangible Assets

In connection with our acquisition of Radian Systems, we recorded goodwill
and covenants not to compete that are being amortized on a straight-line basis
over their estimated useful lives. At December 31, 2000, the unamortized
portion of these intangibles was $3.5 million, which represented 7.1% of total
assets and 8.5% of stockholders equity. We valued our acquired covenants not
to compete based on a independent appraisal. We are amortizing the two
contracts over a three and four year term. Goodwill represents the amount that
we paid for Radian Systems in excess of the fair value of the acquired tangible
and separately measurable intangible net assets. We have estimated the useful
life of our goodwill to be five years based upon several factors, the most
significant of which is the susceptibility of the business of Radian Systems to
change as result of the technological advances and the rapidly changing need of
its customers.

We periodically review the carrying value and recoverability of our
unamortized goodwill and other intangible assets for impairment. If the facts
and circumstances suggest that the goodwill or other intangible assets may be
impaired, the carrying value of this goodwill or these intangible assets will
be adjusted by an immediate charge against income during the period of the
adjustment. The length of the remaining amortization period may also be
shortened, which will result in an increase in the amount of goodwill or
intangible assets amortization during the period of adjustment and each period
thereafter until fully amortized. Once adjusted, there can be no assurance
that there will not be further adjustments for impairment and recoverability in
future periods. Of the various factors to be considered by us in determining
the existence of an impairment, the most significant will be changes in
forecasted operating results that may indicate that future cash flows will be
insufficient to recover recorded intangible assets.

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Income Taxes

We have incurred operating losses for all periods from September 30, 1996,
and therefore have not recorded income tax expense for those periods. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets. We cannot currently predict the realization of the deferred tax
assets.

As of December 31, 2000, we had net operating loss carryforwards of
approximately $35.7 million. These net operating loss carryforwards are
available to reduce future taxable income and begin to expire in 2011. Under
the provisions of the Internal Revenue Code, certain substantial changes in our
ownership may limit the amount of net operating loss carryforwards that could
be used in each year to offset future taxable income.

Liquidity and Capital Resources

Since inception, we have primarily financed our operations and capital
expenditures through sales of equity securities, through bank loans and through
equipment leases. We had $23.2 million of cash and cash equivalents and $29.9
million in working capital as of December 31, 2000.

Our net cash used in operating activities was $4.1 million in 1998, $11.1
million in 1999 and $25.1 million in 2000. The increase in cash used in
operating activities was due primarily to our net loss excluding non-cash items
and our working capital investments. Our non-cash items consist principally of
depreciation, amortization, non-cash sales, stock option compensation, and
impairment losses. Our working capital investments consist principally of
accounts receivable, inventory, prepaid expenses and unbilled revenue. Our
accounts receivable and unbilled revenue at the end of any period have
significantly fluctuated due principally to the significant dollar amount of
our individual software licensing arrangements and other software services and
the timing of the revenue recognition of these arrangements.

In 1999 and 2000 we sold $634,000 and $1.7 million, respectively, of XPS
to customers in exchange for non-marketable equity securities of our customers.
These securities were valued either by independent appraisals of the customers
issuing the securities, or by purchases of these same securities by independent
and accredited investors. These securities are illiquid and we may not be able
to sell them in the near term to provide needed cash for operations. In the
second half of 2000, as a result of a deteriorated market for the products and
services sold by these customers, we recorded non-cash impairment losses of $1
million from these securities.

In 2000, we sold $2.3 million of XPS to customers in exchange for
technology products that are to be sold as part of new products unrelated to
XPS or products to be used to manage our operations. We recorded these
exchanges at the fair value of the XPS software sold in the exchange.

At December 31, 2000, $1 million of our accounts receivable was due from
one customer acting as a general contractor to which we were engaged under a
subcontractor arrangement, which required delivery and significant modification
and customization of software. The amount owed to us by this customer is past
due as a result of a dispute that has not allowed the customer to collect fees
that will allow for the payment of our subcontract services. We are not a
party to the dispute. On July 13, 2000, we filed a Complaint for Damages
against the general contractor

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seeking a judgment in the amount of $1 million.
We expect to collect the amount owed. However, due to uncertainties
surrounding the resolution of the dispute and the resultant effect on the
general contractors ability to meet its obligations, it is reasonably possible
that our estimate of the recoverability of this account receivable may change
in the near term. We are currently unable to estimate the range of the
possible loss we may incur when this receivable is ultimately settled. In
August 2000, the general contractor filed a counterclaim seeking judgment
against us in the amount of $2.8 million. We believe, based on consultations
with our legal advisors, that the likelihood of a loss incurred as a result of
this counterclaim is remote.

At December 31, 2000, $539,000 of our accounts receivable was due from one
customer to which we sold consulting and third-party software and maintenance
services in 1999 and 2000. This contract was acquired as part of the Radian
Systems acquisition. The receivable is past due as a result of a dispute
between the customer and us. On November 16, 2000, the customer filed a
Complaint against us seeking monetary damages in excess of $75,000. We deny
the customers claim and have filed a counterclaim seeking damages in the
amount of $563,000. We expect, based on consultations with our legal advisors,
to successfully prevail against the customer on our counterclaim and the
customers claim against us. However, due to
the length of time it may take to resolve the dispute, it is reasonably
possible that our estimate of the recoverability of this account receivable may
change in the near term. We are currently unable to estimate the range of the
possible loss we may incur when this receivable is ultimately settled.

Net cash used in investing activities was $395,000 in 1998, $645,000 in
1999 and $5.5 million in 2000. Our net cash used investing activities
consisted primarily of capital expenditures and software development costs.
Our expenditures for property and equipment were $295,000 in 1998, $848,000 in
1999, and $3.7 million in 2000. These expenditures consisted of purchases of
assets to manage our operations, including computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
capital expenditures will continue to increase in the future. In 1998 we
capitalized $100,000 of software costs related to the development of XPS. In
2000, we capitalized an additional $1.7 million of software development costs
of which $575,000 related to the development of XPS 3.0, released on June 19,
2000, $402,000 related to the development of product upgrades to be released in
a future version of XPS, $710,000 related to the development of a Java version
of XPS, and $58,000 related to the development of products unrelated to XPS.

On July 1, 1999, we acquired all of the outstanding common stock of Radian
Systems for 1.4 million shares of our common stock, valued in an independent
appraisal at $1.4 million, and promissory notes of $3.5 million. We paid the
sellers the amounts due under the promissory notes in November 1999.

Our net cash provided by financing activities was $6.0 million in 1998,
$20.7 million in 1999 and $42.9 million in 2000. In 1998 and 1999, we issued
series B and series C redeemable convertible preferred stock that provided us
total cash proceeds of $29.6 million. Upon completion of our initial public
offering, all outstanding redeemable convertible preferred stock converted to
common stock. In May 2000, we completed an initial public offering of
4,200,000 shares of our common stock, which generated net proceeds of
approximately $29 million. Also in May 2000, warrants to purchase Series D
Redeemable Convertible Preferred Stock were exercised by their holders, which
generated aggregate proceeds of approximately $7.7 million. In June 2000, we
issued and sold 630,000 shares of common stock for net proceeds of

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approximately $4.7 million upon the exercise of an over-allotment option by our
underwriters. In 2000 we also generated $1.2 million of cash from the exercise
of stock options and warrants, and drew $802,000 from our two equipment lines
of credit with Silicon Valley Bank.

We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions of complementary
businesses, technologies or product lines. Further, we do not expect to
generate positive cash flows from operating activities until the third quarter
of 2002. Based on our current operating plan, we believe that our cash on hand
and availability under commercial credit facilities will be sufficient to meet
our cash requirements for the foreseeable future, including working capital
requirements and planned capital expenditures. We may require additional funds
for other purposes, and there can be no assurance that additional financing
sources will be available or that, if available, the financing will be
attainable on terms favorable to us.

In March 1999, we entered into a loan agreement with Silicon Valley Bank,
whereby Silicon Valley Bank will provide draws to us under a revolving line of
credit in an aggregate principal
amount of up to $1.0 million and an equipment line of credit in an aggregate
principal amount of up to $750,000. The loan agreement was amended on February
18, 2000 to increase the aggregate available borrowings to $3.5 million. On
May 25, 2000, we amended the loan agreement again to increase the revolving
line of credit to an aggregate principal amount of up to $5.0 million and to
add a second equipment line of credit in an aggregate principal amount of up to
$2.0 million. The revolving line of credit is to be used for working capital
purposes and the equipment lines of credit are to be used only to finance or
refinance the purchase of equipment. Together, the revolving line of credit
and the second equipment line of credit are subject to a borrowing base
limitation as defined by the loan agreement. To secure these loans, we have
granted Silicon Valley Bank a security interest in all of our assets.

The revolving line of credit matures on May 25, 2001. Interest on the
revolving line of credit is payable monthly and accrues at the prime rate as
announced by Silicon Valley Bank plus 0.75% per annum. At December 31, 2000,
we had $1 million outstanding under the revolving line of credit.

The first equipment line of credit is repayable monthly over a 36-month
term beginning March 5, 2000, in principal payments of $20,833 with interest at
the prime rate as announced by Silicon Valley Bank plus 1.25% per annum. At
December 31, 2000, we had $541,667 outstanding under this line. This line was
available for eligible equipment purchases through February 28, 2000.

The second equipment line of credit is available under three separate term
notes each with a principal limitation. Each note includes interest payable
monthly at the prime rate as announced by Silicon Valley Bank plus 1.25% per
annum. The unpaid principal for each of the three notes is payable in equal
consecutive monthly installments over a 36-month term beginning on September 5,
2000, March 5, 2001, and June 5, 2001, respectively. This line is available
for eligible equipment purchases through May 31, 2001. At December 31, 2000,
we had $620,957 outstanding under the first term note. Principal payments on
the outstanding balance of the first

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term note are due in monthly installments
of $18,817 with interest at the prime rate as announced by Silicon Valley Bank
plus 1.25% per annum.

We are prohibited from declaring and paying dividends under our loan
agreements with Silicon Valley Bank.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities,as
amended, which the Company is required to adopt effective January 1, 2001.
Because of the Companys minimal use of derivatives, the adoption of the new
Statement will not have a significant effect on earnings or the financial
position of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK




We are exposed to market risk from changes in interest rates that could
affect our future results of operations and financial condition. We manage our
exposure to these risks through our regular operating and financing activities.

The fair value of our cash and cash equivalents would not be significantly
impacted by a 10% change in interest rates due to the short-term nature of our
portfolio.

Our revolving credit facility and equipment term loans bear interest at
variable rates, and the fair values of these instruments are not significantly
affected by changes in market interest rates. A 10% change in interest rates
for one year would not significantly impact interest expense.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                               |  |      |  | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- |  | 
|                                                                                                               |  | Page
|                                                                                                               |  |     
|Report of Independent
Auditors                                                                                 |  | 44  
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Balance Sheets at December 31, 1999 and
2000                                                      |  | 45  
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and
2000                     |  | 47  
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Statements of Stockholders Equity (Deficit) for the years
ended December 31, 1998, 1999 and 2000 |  | 48  
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and
2000                     |  | 49  
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Notes to Consolidated Financial
Statements                                                                     |  | 50  

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Sequoia Software Corporation

We have audited the accompanying consolidated balance sheets of Sequoia
Software Corporation (the Company) as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2000. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sequoia
Software Corporation at December 31, 1999 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Baltimore, Maryland
January 31, 2001
except for Note 20, as to which the date is
March 21, 2001

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##### Table of Contents



Sequoia Software Corporation
Consolidated Balance Sheets

|                                                                                                     |                                                                                                      |   |              |            |      |   |            |            |  
|---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | - | ------------ | ---------- | ---- | - | ---------- | ---------- | -
|                                                                                                     |                                                                                                      |   | December 31,
|                                                                                                     |                                                                                                      |   | 1999         |            | 2000
|                                                                                                     |                                                                                                      |   |             
|Assets                                                                                              
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Current assets:                                                                                     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Cash and cash equivalents                                                                            |   | $            | 10,902,585 |      |   | $          | 23,222,470 |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accounts receivable, less allowance for doubtful accounts of $184,864 in 1999
and $1,047,300 in 2000 |   |              | 4,135,698  |      |   |            | 12,093,329 |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Unbilled revenue                                                                                     |   |              |           |      |   |            | 195,764    |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Inventory                                                                                            |   |              | 10,000     |      |   |            | 524,000    |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Prepaid expenses and other current assets                                                            |   |              | 475,533    |      |   |            | 1,194,722  |  
|                                                                                                     |                                                                                                      |   |             
|Total current assets                                                                                 |                                                                                                      |   | 15,523,816   |            |      |   | 37,230,285 |           
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Property and equipment:                                                                             
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Computers, office equipment and software                                                             |   |              | 1,272,017  |      |   |            | 4,762,306  |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Furniture and fixtures                                                                               |   |              | 252,914    |      |   |            | 773,361    |  
|                                                                                                     |                                                                                                      |   |             
|                                                                                                     |                                                                                                      |   | 1,524,931    |            |      |   | 5,535,667  |           
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accumulated depreciation and amortization                                                            |   |              | (522,238   | )    |   |            | (1,299,503 | )
|                                                                                                     |                                                                                                      |   |             
|                                                                                                     |                                                                                                      |   | 1,002,693    |            |      |   | 4,236,164  |           
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Software development costs, net of accumulated
amortization of $254,530 in 1999 and $598,333 in 2000 |                                                                                                      |   | 349,602      |            |      |   | 2,950,316  |           
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Intangible assets:                                                                                  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Goodwill                                                                                             |   |              | 3,128,133  |      |   |            | 3,128,133  |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Covenants not to compete                                                                             |   |              | 2,280,400  |      |   |            | 2,280,400  |  
|                                                                                                     |                                                                                                      |   |             
|                                                                                                     |                                                                                                      |   | 5,408,533    |            |      |   | 5,408,533  |           
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accumulated amortization                                                                             |   |              | (635,872   | )    |   |            | (1,907,620 | )
|                                                                                                     |                                                                                                      |   |             
|                                                                                                     |                                                                                                      |   | 4,772,661    |            |      |   | 3,500,913  |           
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Other assets                                                                                         |                                                                                                      |   | 634,000      |            |      |   | 1,291,200  |           
|                                                                                                     |                                                                                                      |   |             
|Total assets                                                                                         |                                                                                                      | $ | 22,282,772   |            |      | $ | 49,208,878 |           
|                                                                                                     |                                                                                                      |   |             

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|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |              |           |      |            |              |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------ | --------- | ---- | ---------- | ------------ | --------- | 
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             | December 31,
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             | 1999         |           | 2000
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             
|Liabilities and stockholders equity (deficit)                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Current liabilities:                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     | Accounts payable and accrued expenses      |             | $            | 1,971,649 |      |            | $            | 4,106,335 | 
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     | Accrued compensation and related costs     |             |              | 384,050   |      |            |              | 126,910   | 
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     | Deferred revenue                           |             |              | 1,196,970 |      |            |              | 1,510,694 | 
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     | Borrowings under revolving promissory note |             |              | 1,000,000 |      |            |              | 1,000,000 | 
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     | Current portion of long-term debt          |             |              | 316,802   |      |            |              | 517,006   | 
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             
|Total current liabilities                                                                                                                                                                                                                                                 |                                                                                                                                                     |                                            | 4,869,471   |              |           |      | 7,260,945  |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Long-term debt, less current portion                                                                                                                                                                                                                                      |                                                                                                                                                     |                                            | 473,592     |              |           |      | 721,022    |             
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             
|Total liabilities                                                                                                                                                                                                                                                         |                                                                                                                                                     |                                            | 5,343,063   |              |           |      | 7,981,967  |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Commitments and contingencies                                                                                                                                                                                                                                             |                                                                                                                                                     |                                            |            |              |           |      |           |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Series A redeemable convertible preferred stock,
$.001 par value; 8,064,877 shares authorized,
3,024,333 issued and outstanding in 1999 with an
aggregate liquidation preference of $2,511,123; no
shares authorized, issued and outstanding at
December 31, 2000         |                                                                                                                                                     |                                            | 8,065,000   |              |           |      |           |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Series B redeemable convertible preferred stock,
$.001 par value; 9,647,920 shares authorized,
3,617,978 issued and outstanding in 1999 with an
aggregate liquidation preference of $7,228,438; no
shares authorized, issued and outstanding at
December 31, 2000         |                                                                                                                                                     |                                            | 9,647,920   |              |           |      |           |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Series C redeemable convertible preferred stock,
$.001 par value, 26,092,770 shares authorized,
9,315,395 shares issued and outstanding in 1999
with an aggregate liquidation preference of
$25,765,854; no shares authorized, issued and
outstanding at December 31,2000 |                                                                                                                                                     |                                            | 25,765,854  |              |           |      |           |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Series D redeemable convertible preferred stock,
$.001 par value, 6,817,239 shares authorized in
1999; no shares issued and outstanding in 1999; no
shares authorized, issued and outstanding at
December 31, 2000                                                        |                                                                                                                                                     |                                            |            |              |           |      |           |             
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|Stockholders equity (deficit):                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          | Common stock, $.001 par value; 150,000,000
shares authorized; 5,940,800 and 30,818,506
shares issued and outstanding in 1999 and 2000,
respectively |                                            |             | 5,941        |           |      |            | 30,819       |          
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          | Additional paid-in capital                                                                                                                          |                                            |             |             |           |      |            | 184,697,119  |          
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          | Accumulated deficit                                                                                                                                 |                                            |             | (26,559,262  | )         |      |            | (143,514,327 | )        
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                          | Accumulated other comprehensive income                                                                                                              |                                            |             | 14,256       |           |      |            | 13,300       |          
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             
|Total stockholders equity (deficit)                                                                                                                                                                                                                                      |                                                                                                                                                     |                                            | (26,539,065 | )            |           |      | 41,226,911 |             
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                                                                      |                                                                                                                                                     | $                                          | 22,282,772  |              |           | $    | 49,208,878 |             
|                                                                                                                                                                                                                                                                          |                                                                                                                                                     |                                            |             |             

See accompanying notes.

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##### Table of Contents



Sequoia Software Corporation

Consolidated Statements of Operations

|                                                                                                                                       |                                  |   |                         |           |      |   |             |           |   |   |              |            |  
|-------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | - | ----------------------- | --------- | ---- | - | ----------- | --------- | - | - | ------------ | ---------- | -
|                                                                                                                                       |                                  |   | Year ended December 31,
|                                                                                                                                       |                                  |   | 1998                    |           | 1999 |   | 2000       
|                                                                                                                                       |                                  |   |                        
|Revenues:                                                                                                                             
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Licenses                         |   | $                       | 574,948   |      |   | $           | 4,331,804 |   |   | $            | 16,079,224 |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Services and maintenance         |   |                         | 2,422,811 |      |   |             | 3,346,589 |   |   |              | 3,408,701  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Hardware                         |   |                         | 1,013,684 |      |   |             | 719,295   |   |   |              | 241,170    |  
|                                                                                                                                       |                                  |   |                        
|                                                                                                                                       |                                  |   | 4,011,443               |           |      |   | 8,397,688   |           |   |   | 19,729,095   |           
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Cost of revenues:                                                                                                                     
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Cost of licenses                 |   |                         | 173,234   |      |   |             | 2,408,802 |   |   |              | 1,367,664  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Cost of services and maintenance |   |                         | 1,881,670 |      |   |             | 2,748,841 |   |   |              | 2,530,166  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Cost of hardware                 |   |                         | 761,972   |      |   |             | 922,007   |   |   |              | 200,789    |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Write-off of inventory           |   |                         |          |      |   |             | 621,144   |   |   |              |           |  
|                                                                                                                                       |                                  |   |                        
|                                                                                                                                       |                                  |   | 2,816,876               |           |      |   | 6,700,794   |           |   |   | 4,098,619    |           
|                                                                                                                                       |                                  |   |                        
|Gross profit                                                                                                                           |                                  |   | 1,194,567               |           |      |   | 1,696,894   |           |   |   | 15,630,476   |           
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Operating expenses:                                                                                                                   
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Research and development         |   |                         | 991,004   |      |   |             | 3,635,114 |   |   |              | 7,325,834  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Sales and marketing              |   |                         | 2,256,938 |      |   |             | 6,826,432 |   |   |              | 19,179,385 |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | General and administrative       |   |                         | 805,923   |      |   |             | 2,687,043 |   |   |              | 5,255,454  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Stock compensation               |   |                         |          |      |   |             | 198,090   |   |   |              | 2,286,225  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Bad debt expense                 |   |                         | 18,898    |      |   |             | 651,031   |   |   |              | 2,168,419  |  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Impairment loss                  |   |                         |          |      |   |             |          |   |   |              | 1,050,500  |  
|                                                                                                                                       |                                  |   |                        
|                                                                                                                                       |                                  |   | 4,072,763               |           |      |   | 13,997,710  |           |   |   | 37,265,817   |           
|                                                                                                                                       |                                  |   |                        
|Loss from operations                                                                                                                   |                                  |   | (2,878,196              | )         |      |   | (12,300,816 | )         |   |   | (21,635,341  | )         
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Other income (expense):                                                                                                               
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Interest expense                 |   |                         | (84,469   | )    |   |             | (508,106  | ) |   |              | (231,451   | )
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                       | Interest and other income        |   |                         | 5,126     |      |   |             | 16,838    |   |   |              | 1,343,754  |  
|                                                                                                                                       |                                  |   |                        
|Net loss                                                                                                                               |                                  |   | (2,957,539              | )         |      |   | (12,792,084 | )         |   |   | (20,523,038  | )         
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Accretion of Series A, Series B,
Series C, and Series D redeemable
convertible preferred stock to
estimated mandatory redemption
value |                                  |   | (3,569,351              | )         |      |   | (8,513,579  | )         |   |   | (97,046,339  | )         
|                                                                                                                                       |                                  |   |                        
|Net loss attributable to common
stockholders                                                                                           |                                  | $ | (6,526,890              | )         |      | $ | (21,305,663 | )         |   | $ | (117,569,377 | )         
|                                                                                                                                       |                                  |   |                        
|Basic and diluted loss per common
share attributable to common
stockholders                                                            |                                  | $ | (1.71                   | )         |      | $ | (4.36       | )         |   | $ | (5.34        | )         
|                                                                                                                                       |                                  |   |                        

See accompanying notes.

-47-



---



##### Table of Contents



Sequoia Software Corporation
Consolidated Statements of Stockholders Equity (Deficit)

|                                                                                                                                                                                                                       |  |              |            |            |  |         |        |         |  |             |             |               |  |   |              |   |  |   |        |   |  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ------- | ------ | ------- |  | ----------- | ----------- | ------------- |  | - | ------------ | - |  | - | ------ | - |  | - | ----------- | -
|                                                                                                                                                                                                                       |  | Common Stock |            |            |  |         |        |         |  |             |             | Accumulated  
|                                                                                                                                                                                                                       |  |              |            | Additional |  |         |        |         |  | Other      
|                                                                                                                                                                                                                       |  | Number       |            |            |  |         |        | Paid-In |  | Accumulated |             | Comprehensive
|                                                                                                                                                                                                                       |  | of Shares    |            | Amount     |  | Capital |        | Deficit |  | Income      |             | Total        
|                                                                                                                                                                                                                       |  |             
|Balance at January 1, 1998                                                                                                                                                                                             |  |              | 3,806,106  |            |  | $       | 3,806  |         |  | $           |            |               |  | $ | (1,040,352   | ) |  | $ |       |   |  | $ | (1,036,546  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Issuance of common stock for cash upon exercise of stock options                                                                                                                                                       |  |              | 23,440     |            |  |         | 24     |         |  |             | 1,538       |               |  |   |             |   |  |   |       |   |  |   | 1,562       |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series A redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             | (1,538      | )             |  |   | (3,261,699   | ) |  |   |       |   |  |   | (3,263,237  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series B redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (306,114     | ) |  |   |       |   |  |   | (306,114    | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Net loss for 1998                                                                                                                                                                                                      |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (2,957,539   | ) |  |   |        |   |  |   | (2,957,539  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Other comprehensive income  foreign currency translation adjustment                                                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   |             |   |  |   | 935    |   |  |   | 935         |  
|                                                                                                                                                                                                                       |  |              |            |            |  |         |        |         |  |             |             |               |  |   |              |   |  |   |        |   |  |   |             |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Comprehensive income (loss)                                                                                                                                                                                            |  |              |           |            |  |         |       |         |  |             |            |               |  |   |             |   |  |   |       |   |  |   | (2,956,604  | )
|                                                                                                                                                                                                                       |  |             
|Balance at December 31, 1998                                                                                                                                                                                           |  |              | 3,829,546  |            |  |         | 3,830  |         |  |             |            |               |  |   | (7,565,704   | ) |  |   | 935    |   |  |   | (7,560,939  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Issuance of common stock in connection with acquisition of Radian Systems, Inc.                                                                                                                                        |  |              | 2,100,002  |            |  |         | 2,100  |         |  |             | 1,376,740   |               |  |   |             |   |  |   |       |   |  |   | 1,378,840   |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Issuance of common stock for cash upon exercise of stock options                                                                                                                                                       |  |              | 11,252     |            |  |         | 11     |         |  |             | 458         |               |  |   |             |   |  |   |       |   |  |   | 469         |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Issuance of warrants to purchase 333,456 shares of common stock and 2,556,467
shares of Series D redeemable convertible preferred stock in connection with
issuance of Series C redeemable convertible preferred stock |  |              |           |            |  |         |       |         |  |             | 736,817     |               |  |   |             |   |  |   |       |   |  |   | 736,817     |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Stock compensation from stock option grants                                                                                                                                                                            |  |              |           |            |  |         |       |         |  |             | 198,090     |               |  |   |             |   |  |   |       |   |  |   | 198,090     |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series A redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             | (2,312,105  | )             |  |   | (298,535     | ) |  |   |       |   |  |   | (2,610,640  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series B redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (2,956,965   | ) |  |   |       |   |  |   | (2,956,965  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series C redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (2,945,974   | ) |  |   |       |   |  |   | (2,945,974  | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Net loss for 1999                                                                                                                                                                                                      |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (12,792,084  | ) |  |   |        |   |  |   | (12,792,084 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Other comprehensive income  foreign currency translation adjustment                                                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   |             |   |  |   | 13,321 |   |  |   | 13,321      |  
|                                                                                                                                                                                                                       |  |              |            |            |  |         |        |         |  |             |             |               |  |   |              |   |  |   |        |   |  |   |             |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Comprehensive income (loss)                                                                                                                                                                                            |  |              |           |            |  |         |       |         |  |             |            |               |  |   |             |   |  |   |       |   |  |   | (12,778,763 | )
|                                                                                                                                                                                                                       |  |             
|Balance at December 31, 1999                                                                                                                                                                                           |  |              | 5,940,800  |            |  |         | 5,941  |         |  |             |            |               |  |   | (26,559,262  | ) |  |   | 14,256 |   |  |   | (26,539,065 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Issuance of common stock for cash upon exercise of stock options and warrants                                                                                                                                          |  |              | 1,519,721  |            |  |         | 1,520  |         |  |             | 1,166,544   |               |  |   |             |   |  |   |       |   |  |   | 1,168,064   |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Stock compensation from stock option grants                                                                                                                                                                            |  |              |           |            |  |         |       |         |  |             | 2,286,225   |               |  |   |             |   |  |   |       |   |  |   | 2,286,225   |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series A redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             | (614,312    | )             |  |   | (15,515,352  | ) |  |   |       |   |  |   | (16,129,664 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series B redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (19,295,904  | ) |  |   |       |   |  |   | (19,295,904 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series C redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (48,829,933  | ) |  |   |       |   |  |   | (48,829,933 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Accretion of Series D redeemable convertible preferred stock to estimated
mandatory redemption value                                                                                                                   |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (12,790,838  | ) |  |   |       |   |  |   | (12,790,838 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Issuance of common stock in initial public offering, net of issuance costs
of $4,981,876                                                                                                                               |  |              | 4,830,000  |            |  |         | 4,830  |         |  |             | 33,653,294  |               |  |   |             |   |  |   |       |   |  |   | 33,658,124  |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Conversion of redeemable convertible preferred stock to common stock                                                                                                                                                   |  |              | 18,527,985 |            |  |         | 18,528 |         |  |             | 148,205,368 |               |  |   |             |   |  |   |       |   |  |   | 148,223,896 |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Net loss for 2000                                                                                                                                                                                                      |  |              |           |            |  |         |       |         |  |             |            |               |  |   | (20,523,038  | ) |  |   |       |   |  |   | (20,523,038 | )
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Other comprehensive income (loss) foreign currency translation adjustment                                                                                                                                             |  |              |           |            |  |         |       |         |  |             |            |               |  |   |             |   |  |   | (956   | ) |  |   | (956        | )
|                                                                                                                                                                                                                       |  |              |            |            |  |         |        |         |  |             |             |               |  |   |              |   |  |   |        |   |  |   |             |  
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|                                                                                                                                                                                                                      
|Comprehensive income (loss)                                                                                                                                                                                            |  |              |           |            |  |         |       |         |  |             |            |               |  |   |             |   |  |   |       |   |  |   | (20,523,994 | )
|                                                                                                                                                                                                                       |  |             
|Balance at December 31, 2000                                                                                                                                                                                           |  |              | 30,818,506 |            |  | $       | 30,819 |         |  | $           | 184,697,119 |               |  | $ | (143,514,327 | ) |  | $ | 13,300 |   |  | $ | 41,226,911  |  
|                                                                                                                                                                                                                       |  |             

See accompanying notes.

-48-



---



##### Table of Contents



Sequoia Software Corporation
Consolidated Statements of Cash Flows

|                                                                                                                          |                                                  |                                           |            |                         |          |      |             |          |            |   |             |            |            |  
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------------------------- | ---------- | ----------------------- | -------- | ---- | ----------- | -------- | ---------- | - | ----------- | ---------- | ---------- | -
|                                                                                                                          |                                                  |                                           |            | Year ended December 31,
|                                                                                                                          |                                                  |                                           |            | 1998                    |          | 1999 |             | 2000    
|                                                                                                                          |                                                  |                                           |            |                        
|Operating activities                                                                                                     
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Net loss                                                                                                                  |                                                  | $                                         | (2,957,539 | )                       |          | $    | (12,792,084 | )        |            | $ | (20,523,038 | )         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Adjustments to reconcile net loss to net cash used in
operating activities:                                              
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Depreciation                                     |                                           |            | 128,668                 |          |      |             | 278,231  |            |   |             | 838,483    |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Amortization of software development costs       |                                           |            | 92,462                  |          |      |             | 171,845  |            |   |             | 343,803    |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Amortization of intangible assets                |                                           |            |                        |          |      |             | 635,872  |            |   |             | 1,271,748  |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Non-cash sales of software licenses and services |                                           |            |                        |          |      |             | (634,000 | )          |   |             | (3,707,700 | )         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Non-cash compensation expense                    |                                           |            |                        |          |      |             | 198,090  |            |   |             | 2,286,225  |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Impairment loss                                  |                                           |            |                        |          |      |             |         |            |   |             | 1,050,500  |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Non-cash interest expense                        |                                           |            | 24,889                  |          |      |             | 150,200  |            |   |             |           |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Write-off of inventory                           |                                           |            |                        |          |      |             | 621,144  |            |   |             |           |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Changes in operating assets and liabilities:    
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Accounts receivable                       |            |                         | 162,371  |      |             |          | (2,290,217 | ) |             |            | (7,957,631 | )
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Unbilled revenue                          |            |                         | (943,407 | )    |             |          | 1,783,665  |   |             |            | (195,764   | )
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Inventory                                 |            |                         | (575,985 | )    |             |          | (10,000    | ) |             |            | (14,000    | )
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Prepaid expenses and other current assets |            |                         | (64,413  | )    |             |          | (115,185   | ) |             |            | (719,189   | )
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Accounts payable and accrued expenses     |            |                         | 265,871  |      |             |          | (7,083     | ) |             |            | 2,134,686  |  
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Accrued compensation and related costs    |            |                         | (226,829 | )    |             |          | 82,658     |   |             |            | (257,140   | )
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          |                                                  | Deferred revenue                          |            |                         | 26,720   |      |             |          | 840,149    |   |             |            | 313,724    |  
|                                                                                                                          |                                                  |                                           |            |                        
|Net cash used in operating activities                                                                                     |                                                  |                                           | (4,067,192 | )                       |          |      | (11,086,715 | )        |            |   | (25,135,293 | )         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Investing activities                                                                                                     
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Cash acquired upon acquisition of Radian    Systems,
Inc.                                                                 |                                                  |                                           |           |                         |          |      | 203,336     |          |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Purchases of property and equipment                                                                                       |                                                  |                                           | (294,880   | )                       |          |      | (848,141    | )        |            |   | (3,711,405  | )         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Capitalized software development costs                                                                                    |                                                  |                                           | (99,993    | )                       |          |      |            |          |            |   | (1,744,517  | )         
|                                                                                                                          |                                                  |                                           |            |                        
|Net cash used in investing activities                                                                                     |                                                  |                                           | (394,873   | )                       |          |      | (644,805    | )        |            |   | (5,455,922  | )         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Financing activities                                                                                                     
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from borrowings under long-term debt
arrangements                                                                |                                                  |                                           | 584,159    |                         |          |      | 624,984     |          |            |   | 802,424     |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Payments under long-term debt arrangements                                                                                |                                                  |                                           | (969,859   | )                       |          |      | (619,397    | )        |            |   | (415,339    | )         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Payments of notes payable                                                                                                 |                                                  |                                           |           |                         |          |      | (3,500,000  | )        |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from borrowings under revolving promissory note                                                                  |                                                  |                                           |           |                         |          |      | 1,000,000   |          |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from exercises of options and warrants to
purchase common stock                                                  |                                                  |                                           | 1,562      |                         |          |      | 469         |          |            |   | 1,168,064   |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from issuance of convertible demand promissory
notes payable, subsequently converted to Series B
preferred stock |                                                  |                                           | 1,000,000  |                         |          |      |            |          |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from issuance of Series B preferred stock, net
of offering expenses                                              |                                                  |                                           | 5,375,444  |                         |          |      | (15,492     | )        |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from issuance of convertible demand promissory
notes payable, subsequently converted to Series C
preferred stock |                                                  |                                           |           |                         |          |      | 5,000,000   |          |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from issuance of Series C preferred stock,
including attached warrants, net of offering expenses                 |                                                  |                                           |           |                         |          |      | 18,257,027  |          |            |   |            |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from exercise of warrants to purchase Series C
preferred stock                                                   |                                                  |                                           |           |                         |          |      |            |          |            |   | 37,885      |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from exercise of warrants to purchase Series D
preferred stock                                                   |                                                  |                                           |           |                         |          |      |            |          |            |   | 7,660,898   |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Proceeds from issuance of common stock, net of offering
expenses                                                          |                                                  |                                           |           |                         |          |      |            |          |            |   | 33,658,124  |           
|                                                                                                                          |                                                  |                                           |            |                        
|Net cash provided by financing activities                                                                                 |                                                  |                                           | 5,991,306  |                         |          |      | 20,747,591  |          |            |   | 42,912,056  |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Effect of exchange rate changes on cash                                                                                   |                                                  |                                           | 935        |                         |          |      | 13,321      |          |            |   | (956        | )         
|                                                                                                                          |                                                  |                                           |            |                        
|Net change in cash and cash equivalents                                                                                   |                                                  |                                           | 1,530,176  |                         |          |      | 9,029,392   |          |            |   | 12,319,885  |           
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Cash and cash equivalents at beginning of year                                                                            |                                                  |                                           | 343,017    |                         |          |      | 1,873,193   |          |            |   | 10,902,585  |           
|                                                                                                                          |                                                  |                                           |            |                        
|Cash and cash equivalents at end of year                                                                                  |                                                  | $                                         | 1,873,193  |                         |          | $    | 10,902,585  |          |            | $ | 23,222,470  |           
|                                                                                                                          |                                                  |                                           |            |                        

See accompanying notes.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements

December 31, 2000

1. Organization and Summary of Significant Accounting Policies

Organization

Sequoia Software Corporation (the Company) is a provider of portal software
solutions that harness Internet technology for e-business applications. The
Companys principal product, Sequoia XML Portal Server (XPS) introduced in
March 1999, is a portal software solution utilizing eXtensible Markup Language
technology (XML). XPS enables users to interact with information originating
from multiple applications. The Company also provides software engineering
services in conjunction with the license and installation of back office and
document management software products. The Companys customers are in various
industries and are principally located throughout the United States.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.

Use of Estimates

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

The Company has made estimates related to the collectibility of certain
accounts receivable balances at December 31, 2000. It is reasonably possible
that these estimates could materially change in the near term. See note 16 for
additional information.

Cash Equivalents

The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Unbilled Revenue

Unbilled revenue represents revenues recognized using the
percentage-of-completion method under long-term contracts. These amounts are
billable upon the achievement of milestones specified in each contract, which
are expected to occur within one year.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Inventory

Inventory consists principally of transferable software licenses purchased from
third-parties that are integrated into software products sold or licensed to
the Companys customers. Inventory is valued at the lower of cost or market
value. During 1999, the Company wrote-off $621,144 of software licenses
purchased from software vendors to be sold with its products. This charge was
necessitated by technological obsolescence of the purchased product and changes
in the Companys product offerings.

Property and Equipment

Property and equipment is stated at cost and depreciated using the
straight-line method based on estimated useful lives of between three and seven
years. Assets held under capital leases are stated at the lesser of the
present value of future minimum payments using the Companys incremental
borrowing rate at the inception of the lease or the fair value of the property
at the inception of the lease. The assets recorded under capital leases are
amortized over the lesser of the lease term or the estimated useful life of the
assets in a manner consistent with the Companys depreciation policy for owned
assets. Amortization of assets under capital leases is included in
depreciation expense.

Software Development Costs

Costs for the development of new software products and substantial enhancements
to existing software products are expensed as research and development costs as
incurred until technological feasibility has been established, at which time
any additional development costs are capitalized until the product is available
for general release to customers. The Company defines the establishment of
technological feasibility as the completion of a working model or a detailed
program design of the software product that has been tested to be consistent
with the product design specifications and that is free of any uncertainties
related to known high-risk development issues.

Amortization of software development costs begins upon general release of the
software. These costs are amortized on a product-by product basis using the
greater of: (i) the amount computed using the ratio that current gross
revenues for each product bear to the total of current and anticipated future
revenue for that product, or (ii) the amount computed using the straight-line
method over the estimated useful economic life of three or four years.
Amortization expense is included in cost of software licenses.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Revenue Recognition

The Company derives revenue from software licenses, maintenance (postcontract
customer support) and services. In addition, the Company for the convenience
of its customers has sold hardware purchased from third parties. Software
licenses for the Companys off-the-shelf software typically contain multiple
elements, including the product license, maintenance, and/or other services.
The Company allocates the total arrangement fee among each deliverable based on
the relative fair value of each of the deliverables determined based on
vendor-specific objective evidence. This objective evidence of fair value is
specific to the Company and consists either of prices derived from sales of
elements when they are sold separately, such as the renewal rate for the
maintenance element, or the price established by management for sale of
elements in the ordinary course of business.

Licenses

License fees include fees from the sale of third party software and software
developed and licensed by the Company. Certain software developed by the
Company is licensed under contractual arrangements that, in addition to the
delivery of software, require significant modification and customization of
software. These arrangements are accounted for using the percentage of
completion method, with progress to completion measured based on labor costs
incurred. Provisions for estimated losses under the percentage of completion
method are made for the entire loss in the period in which they become evident.

Off-the-shelf software and third party software sold by the Company is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, and the fee is fixed or determinable and probable of collection. The
Companys normal payment terms require payment within 90-days. The Company
considers all arrangements with payments terms extending beyond 90-days not to
have fees that are fixed or determinable. The entire fee under these
arrangements is recognized as payments from customers become due, assuming all
other revenue recognition criteria have been met.

Software license fees billed and not recognized as revenue are included in
deferred revenue.

Services and Maintenance

Services include installation, basic consulting, as well as software
customization and modification to meet specific customer needs. Professional
service fees that are provided under long-term contracts to install and
customize software developed by the Company or third parties is recognized
using the percentage of completion method. Progress to completion is measured
using costs incurred compared to estimated total costs, or contract milestones.
Provisions for

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

estimated losses under the percentage of completion method are made for the
entire loss in the period in which they become evident.

Maintenance fees include telephone support, bug fixes, and rights to upgrades
on a when-and-if-available basis associated with software licenses. These fees
are collected in advance and recognized ratably over the maintenance period.
Unrecognized maintenance fees are included in deferred revenue.

Hardware

The Company sells hardware purchased from third parties. These revenues are
recognized when the hardware is shipped.

Amortization of Intangible Assets

The Company amortizes goodwill on a straight-line basis over its estimated
useful life of five years. The Company amortizes covenants not to compete on a
straight-line basis over the term of the agreements, which are three or four
years.

Impairment of Long-Lived Assets

Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. If an impairment indicator is
present, the Company evaluates whether an impairment exists on the basis of
undiscounted expected future cash flows from operations for the remaining
amortization period. If an impairment exists, the asset is reduced by the
estimated shortfall of discounted cash flows.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $111,000, $629,000 and $1,295,000 in 1998, 1999 and 2000,
respectively.

Foreign Currency Translation

Financial statements of foreign subsidiaries with a functional currency other
than the U.S. dollar have been translated into U.S. dollars using the current
rate method. All balance sheet accounts are translated using the exchange
rates at the balance sheet date. Operating and cash flow

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Foreign Currency Translation (continued)

amounts have been translated using average exchange rates. Translation gains
or losses, resulting from the changes in exchange rates from year to year, are
reported as a component of other comprehensive income.

Income Taxes

The Company uses the liability method in accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

Stock Options Granted to Employees

The Company accounts for all stock-based compensation plans using the intrinsic
value method prescribed by APB Opinion 25, Accounting for Stock Issued to
Employees(APB 25). Under APB 25, if the exercise price of the employee
stock options equals the estimated fair value of the underlying stock on the
date of grant, no compensation expense is generally recognized.

The Financial Accounting Standards Board has issued FASB Statement No. 123,
Accounting for Stock-Based Compensation,(Statement 123) which encourages
companies to recognize expense for stock-based awards based on their estimated
fair value on the date of grant. Statement 123 does not require companies to
use fair value accounting for stock-based awards, but if the fair value method
is not adopted, pro forma income is required to be disclosed in a note to the
annual financial statements. The Company has supplementally disclosed in Note
12 the required pro forma information as if the fair value method had been
adopted.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity that result from
recognized transactions and other economic events of a period other than
transactions with owners in their capacity as owners. Certain non-owner
changes in equity, consisting of foreign currency translation adjustments, are
included in other comprehensive income. The Company reports comprehensive
income (loss) in the statement of stockholders equity and discloses the
accumulated total of other comprehensive income (loss) in the stockholders
equity section of the balance sheet.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Operating Segments

The Companys chief operating decision maker reviews the operations of the
Company on a consolidated basis in order to assess performance and make
operating decisions. In addition, the Companys software products consist
principally of XML-based products that are similar. Accordingly, the Company
currently does not have any reportable segments.

New Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which the Company is required to adopt effective January 1, 2001. Because of
the Companys minimal use of derivatives, the adoption of the new Statement
will not have a significant effect on earnings or the financial position of the
Company.

2. Acquisition of Radian Systems, Inc.

On July 1, 1999, the Company acquired all of the outstanding common stock of
Radian Systems, Inc. (Radian), a provider of software development and
information systems integration services to corporations, government agencies
and other institutions throughout the United States. The purchase price
consisted of 2,100,002 shares of common stock valued in an independent
appraisal at $1,400,000 and promissory notes of $3,500,000. The Company also
incurred direct acquisition costs of $50,000. The acquisition was accounted
for using the purchase method of accounting, and the results of operations of
Radian are included in the accompanying consolidated statements of operations
commencing July 1, 1999.

The total purchase price of $4,950,000 was allocated as follows:

|                         |  |   |            |  
|------------------------ |  | - | ---------- | -
|Current assets           |  | $ | 1,825,000  |  
|                        
|                        
|                        
|                        
|Fixed assets             |  |   | 128,000    |  
|                        
|                        
|                        
|                        
|Liabilities assumed      |  |   | (2,411,000 | )
|                        
|                        
|                        
|                        
|Goodwill                 |  |   | 3,128,000  |  
|                        
|                        
|                        
|                        
|Covenants not to compete |  |   | 2,280,000  |  
|                         |  |   |            |  
|                         |  | $ | 4,950,000  |  
|                         |  |   |            |  

In November 1999, the Company repaid the $3,500,000 of promissory notes issued
in connection with the acquisition, including accrued interest of $117,000.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

2. Acquisition of Radian Systems, Inc. (continued)

The following summarizes the unaudited pro forma consolidated results of
operations for 1998 and 1999 assuming the acquisition had occurred at the
beginning of each year. These results are not necessarily indicative of what
would have occurred had this transaction been consummated as of the beginning
of the year presented, or of future operations of the Company:

|                                                                            |  |                         |            |      |  |   |             |  
|--------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- |  | - | ----------- | -
|                                                                            |  | Year ended December 31,
|                                                                            |  | 1998                    |            | 1999
|                                                                            |  |                        
|Revenue                                                                     |  | $                       | 9,638,510  |      |  | $ | 11,717,026  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |  | $                       | (5,138,908 | )    |  | $ | (14,046,870 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss attributable to common stockholders                                |  | $                       | (8,708,259 | )    |  | $ | (22,560,449 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic and diluted loss per common share
attributable to common stockholders |  | $                       | (1.85      | )    |  | $ | (3.80       | )

3. Loss Per Share

The following table sets forth the computation of basic and diluted loss per
common share:

|                                        |                                                                            |   |                         |            |      |   |             |             |   |   |              |             |  
|--------------------------------------- | -------------------------------------------------------------------------- | - | ----------------------- | ---------- | ---- | - | ----------- | ----------- | - | - | ------------ | ----------- | -
|                                        |                                                                            |   | Year ended December 31,
|                                        |                                                                            |   | 1998                    |            | 1999 |   | 2000       
|                                        |                                                                            |   |                        
|Numerator:                             
|                                       
|                                       
|                                       
|                                       
|                                        | Net loss                                                                   |   | $                       | (2,957,539 | )    |   | $           | (12,792,084 | ) |   | $            | (20,523,038 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of Series A redeemable
convertible preferred stock to fair
value |   |                         | (3,263,237 | )    |   |             | (2,610,640  | ) |   |              | (16,129,664 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of Series B redeemable
convertible preferred stock to fair
value |   |                         | (306,114   | )    |   |             | (2,956,965  | ) |   |              | (19,295,904 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of Series C redeemable
convertible preferred stock to fair
value |   |                         |           |      |   |             | (2,945,974  | ) |   |              | (48,829,933 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of Series D redeemable
convertible preferred stock to fair
value |   |                         |           |      |   |             |            |   |   |              | (12,790,838 | )
|                                        |                                                                            |   |                        
|                                        |                                                                            | $ | (6,526,890              | )          |      | $ | (21,305,663 | )           |   | $ | (117,569,377 | )          
|                                        |                                                                            |   |                        
|Denominator:                           
|                                       
|                                       
|                                       
|                                       
|                                        | Weighted-average number of shares
of common stock outstanding              |   |                         | 3,807,890  |      |   |             | 4,890,039   |   |   |              | 22,007,575  |  
|                                        |                                                                            |   |                        
|Basic and diluted loss per common share |                                                                            | $ | (1.71                   | )          |      | $ | (4.36       | )           |   | $ | (5.34        | )          
|                                        |                                                                            |   |                        

Basic loss per share is based upon the average number of shares of common stock
outstanding during the period. Diluted loss per common share is equal to basic
loss per common share

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Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

3. Loss Per Share (continued)

because if potentially dilutive securities were included in the computation,
the result would be anti-dilutive. These potentially dilutive securities
consist of convertible preferred stocks, stock options and warrants.

4. Effect of Change in Estimate

In 1997, the Company entered into a $3.8 million contract with a customer to
provide software customization and licensing. Revenue for this contract was
recognized under the percentage-of-completion method, as described in Note 1.
As of December 31, 1997, this contract was determined to be 30% complete.
During 1998, as contract performance progressed, the Company incurred
unanticipated direct labor budget overruns under the contract. These overruns
were caused principally by the inherent subjectivity of the original estimates
of efforts required to complete the specified functionality as defined in the
contract, and employee turnover. As of December 31, 1998 the contract was
nearing completion, and the Company revised its estimates to complete the
contract. The revised estimates indicated that as of December 31, 1997 the
contract was actually 23% complete. Had the Company recognized revenue under
the contract using the updated estimates of actual costs to be incurred during
the period of contract performance, the reported net loss in 1998 would have
been approximately $255,000 lower. This change in estimate had a $0.07 per
share effect on loss per share in 1998.

5. Nonmonetary Transactions

During 1999 and 2000, the Company entered into nonmonetary transactions with
customers whereby the Company exchanged licenses of its software or its
consulting services for ownership interest or customer software. The software
received in the exchanges is for internal use or is sublicensed as a component
of the Companys software. These transactions resulted in $634,000 of software
license revenue in 1999, $3,574,700 of software license revenue in 2000, and
$133,000 of services revenue in 2000. In those instances where the Company
received ownership interests in the customer, the Company engaged an
independent appraiser to value the securities received in the exchange, and
recorded the investment at the lesser of the fair value of the securities
received at the date of the exchange or the fair value of its software and
services delivered, determined by reference to similar cash transactions. In
those instances where the Company received software of the customer in the
exchange, the Company recorded the transaction at the fair value of its
software delivered in the exchange, as determined by reference to evidence
specific to the Company.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

6. Supplemental Cash Flow Information

|                                                                                                                                                 |  |                         |           |      |  |      |           |  |  |   |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                                                                                                                 |  | Year ended December 31,
|                                                                                                                                                 |  | 1998                    |           | 1999 |  | 2000
|                                                                                                                                                 |  |                        
|Non-cash investing and financing activities:                                                                                                    
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Exchange of software licenses for software
products included in software development
costs                                                       |  | $                       |          |      |  | $    |          |  |  | $ | 1,200,000 | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Exchange of software licenses for property
and equipment                                                                                         |  |                         |          |      |  |      |          |  |  |   | 300,000   | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Conversion of notes payable and accrued
interest to Series B redeemable convertible
preferred stock                                              |  |                         | 1,024,889 |      |  |      |          |  |  |   |          | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Conversion of notes payable and accrued
interest to Series C redeemable convertible
preferred stock                                              |  |                         |          |      |  |      | 5,149,470 |  |  |   |          | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Issuance of 145,125 shares of Series C
redeemable convertible preferred stock as
compensation to investment adviser in
connection with financing |  |                         |          |      |  |      | 387,000   |  |  |   |          | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Issuance of common stock in connection with
acquisition of Radian Systems, Inc.                                                                  |  |                         |          |      |  |      | 1,400,000 |  |  |   |          | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Other cash flow information:                                                                                                                    
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Cash paid for interest                                                                                                                           |  |                         | 86,278    |      |  |      | 184,223   |  |  |   | 207,702   | 

7. Income Taxes

The significant components of the Companys deferred tax assets and liabilities
as of December 31 are as follows:

|                          |                                 |  |           |           |      |  |            |            | 
|------------------------- | ------------------------------- |  | --------- | --------- | ---- |  | ---------- | ---------- | 
|                          |                                 |  | 1999      |           | 2000
|                          |                                 |  |          
|Deferred tax assets:     
|                         
|                         
|                         
|                         
|                          | Net operating loss carryforward |  | $         | 6,011,955 |      |  | $          | 13,785,136 | 
|                         
|                         
|                         
|                         
|                          | Stock compensation expense      |  |           | 76,502    |      |  |            | 959,442    | 
|                         
|                         
|                         
|                         
|                          | Covenants not to compete        |  |           | 95,414    |      |  |            | 286,242    | 
|                         
|                         
|                         
|                         
|                          | Provision for bad debts         |  |           | 71,394    |      |  |            | 404,467    | 
|                         
|                         
|                         
|                         
|                          | Impairment loss                 |  |           |          |      |  |            | 405,703    | 
|                         
|                         
|                         
|                         
|                          | Other                           |  |           |          |      |  |            | 44,413     | 
|                          |                                 |  |          
|Total deferred tax assets |                                 |  | 6,255,265 |           |      |  | 15,885,403 |           

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Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

7. Income Taxes (continued)

|                                            |                            |   |            |         |  |   |             |           | 
|------------------------------------------- | -------------------------- | - | ---------- | ------- |  | - | ----------- | --------- | 
|                                           
|Deferred tax liabilities:                  
|                                           
|                                           
|                                           
|                                           
|                                            | Depreciation               |   | $          | 3,445   |  |   | $           | 32,806    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Software development costs |   |            | 107,124 |  |   |             | 1,139,412 | 
|                                            |                            |   |            |        
|Total deferred tax liabilities              |                            |   | 110,569    |         |  |   | 1,172,218   |          
|                                            |                            |   |            |        
|Net future income tax benefit               |                            |   | 6,144,696  |         |  |   | 14,713,185  |          
|Valuation allowance for deferred tax assets |                            |   | (6,144,696 | )       |  |   | (14,713,185 | )        
|                                            |                            |   |            |        
|Net deferred tax assets                     |                            | $ |           |         |  | $ |            |          
|                                            |                            |   |            |        

The Company has reported losses since inception. These losses have not
resulted in reported tax benefits because of increases in the valuation
allowance for deferred tax assets that result from the inability to determine
the realizability of the net operating loss carryforwards.

At December 31, 2000, the Company had net operating loss carryforwards of
approximately $35,694,000, which expire from 2011 to 2020 and are available to
offset future taxable income. The Companys taxable income from its Irish
subsidiary was insignificant. Income tax regulations contain provisions that
will limit the net operating loss carryforwards available to be used in any
given year.

The reconciliation of the reported income tax expense to the amount that would
be result by applying the U.S. federal statutory tax rate to net loss is as
follows:

|                                                                                    |  |      |            |      |  |      |            |   |  |   |            |  
|----------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                    |  | 1998 |            | 1999 |  | 2000
|                                                                                    |  |     
|Tax expense (benefit) at U.S. statutory rate                                        |  | $    | (1,005,563 | )    |  | $    | (4,349,308 | ) |  | $ | (6,977,833 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Effect of permanent differences                                                     |  |      | 5,374      |      |  |      | 130,978    |   |  |   | 252,589    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|State income taxes, net of federal benefit                                          |  |      | (136,638   | )    |  |      | (573,197   | ) |  |   | (1,017,459 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Increase in valuation allowance, excluding
change related to stock option exercises |  |      | 1,136,827  |      |  |      | 4,710,750  |   |  |   | 7,805,942  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Other                                                                               |  |      |           |      |  |      | 80,777     |   |  |   | (63,239    | )
|                                                                                    |  |     
|Total                                                                               |  | $    |           |      |  | $    |           |   |  | $ |           |  
|                                                                                    |  |     

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

8. Deferred Revenue

The components of deferred revenue consist of the following:

|                  |  |              |           |      |  |   |           | 
|----------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                  |  | December 31,
|                  |  | 1999         |           | 2000
|                  | 
|Software licenses |  | $            | 81,953    |      |  | $ | 205,945   | 
|                 
|                 
|                 
|                 
|Maintenance       |  |              | 1,115,017 |      |  |   | 1,304,749 | 
|                  | 
|                  |  | $            | 1,196,970 |      |  | $ | 1,510,694 | 
|                  | 

9. Borrowings Under Revolving Promissory Note

On March 26, 1999, the Company issued a $1,000,000 revolving promissory note to
a bank. In May 2000, the note was amended to increase the principal amount to
$5,000,000. Interest on borrowings under the revolving promissory note accrue
at the banks prime rate plus 0.75% per annum (10.25% at December 31, 2000),
and is payable monthly. During 2000, the average interest rate was 9.95%. The
unpaid principal plus accrued interest is due in full on May 25, 2001.
Borrowings under the revolving promissory note are secured by all tangible and
intangible assets of the Company, and are subject to a borrowing base
limitation as defined by the loan agreement. At December 31, 2000, borrowings
outstanding under this note totaled $1,000,000.

In connection with this revolving promissory note, the Company is required to
comply with certain financial and non-financial covenants and is restricted
from paying dividends. At December 31, 2000, the Company was in compliance
with the covenants.

10. Long-Term Debt

On March 26, 1999, the Company entered into a $750,000 equipment term note with
a bank. Borrowings under the equipment term note are repayable over a three
year term beginning March 5, 2000, in payments of $20,833 plus accrued interest
calculated at the banks prime rate plus 1.25% per annum (10.75% at December
31, 2000), and are secured by all tangible and intangible assets. The unpaid
principal plus accrued interest is due in full on February 5, 2003. At
December 31, 2000, borrowings outstanding under this equipment term note
totaled $541,667.

In May 2000, the Company added a second equipment line with an aggregate
principal amount of up to $2,000,000 with the same bank. Borrowings under this
equipment line are available under three separate term notes, each with
principal limitations, and are subject to a borrowing base limitation as
defined by the loan agreement. Each note accrues interest at the banks prime
rate plus 1.25% per annum (10.75% at December 31, 2000), is payable monthly,
and is secured by all tangible and intangible assets. Borrowings to finance
equipment purchases can continue until May 31, 2001. The unpaid principal for
each of the three notes is payable in equal monthly

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

10. Long-Term Debt (continued)

installments over a three year term beginning on September 5, 2000, March 5,
2001, and June 5, 2001, respectively. At December 31, 2000, borrowings
outstanding under this arrangement totaled $620,957.

In connection with these borrowing arrangements, the Company is required to
comply with certain financial and non-financial covenants and is restricted
from paying dividends. At December 31, 2000, the Company was in compliance
with the covenants.

The Company has also incurred other indebtedness totaling $75,404 at December
31, 2000, related to the acquisition of certain office and computer equipment.
Amounts due under these arrangements are due monthly through July 2003.

The aggregate maturities of long-term debt for the years ending December 31 are
as follows:

|     |  |   |           | 
|---- |  | - | --------- | 
|2001 |  | $ | 517,006   | 
|    
|    
|    
|    
|2002 |  |   | 496,769   | 
|    
|    
|    
|    
|2003 |  |   | 224,253   | 
|     |  |   |           | 
|     |  | $ | 1,238,028 | 
|     |  |   |           | 

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

11. Redeemable Convertible Preferred Stock

From 1996 through May 2000, the Company issued shares of redeemable convertible
preferred stock in four separate series. In May 2000, upon the closing of the
Companys initial public offering, all of the outstanding preferred stock was
converted into 18,527,985 shares of common stock.

The activity in the each series of redeemable convertible preferred stock
for the years ended December 31, 1998, 1999, and 2000 is as follows (amounts in
thousands):

|                                                                                                   |  |  |          |   |          |   |          |   |          |  |        |   |        |   |         |   |        |  |        |   |  |   |         |   |  |  |        |   |  |   |         |   | 
|-------------------------------------------------------------------------------------------------- |  |  | -------- | - | -------- | - | -------- | - | -------- |  | ------ | - | ------ | - | ------- | - | ------ |  | ------ | - |  | - | ------- | - |  |  | ------ | - |  | - | ------- | - | 
|                                                                                                   |  |  | Series A |   | Series B |   | Series C |   | Series D
|                                                                                                   |  |  |          |   |          |   |          |   |         
|                                                                                                   |  |  | Shares   |   | Amount   |   | Shares   |   | Amount   |  | Shares |   | Amount |   | Shares  |   | Amount
|                                                                                                   |  |  |          |   |          |   |          |   |          |  |        |   |        |   |         |   |       
|Balance at January 1, 1998                                                                         |  |  | 3,024    |   |          | $ | 2,191    |   |          |  |       |   |        | $ |        |   |        |  |       |   |  | $ |        |   |  |  |       |   |  | $ |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Conversion of convertible notes payable
to Series B                                                |  |  |         |   |          |   |         |   |          |  | 568    |   |        |   | 1,025   |   |        |  |       |   |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuance of Series B, net of issuance
costs of $125                                                |  |  |         |   |          |   |         |   |          |  | 3,050  |   |        |   | 5,375   |   |        |  |       |   |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Accretion to estimated mandatory
redemption value                                                  |  |  |         |   |          |   | 3,263    |   |          |  |       |   |        |   | 306     |   |        |  |       |   |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                   |  |  |          |  
|Balance at December 31, 1998                                                                       |  |  | 3,024    |   |          |   | 5,454    |   |          |  | 3,618  |   |        |   | 6,706   |   |        |  |       |   |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Additional issuance costs of Series B                                                              |  |  |         |   |          |   |         |   |          |  |       |   |        |   | (15     | ) |        |  |       |   |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuance of warrants to purchase Series
C in connection with convertible notes
payable             |  |  |         |   |          |   |         |   |          |  |       |   |        |   |        |   |        |  |       |   |  |   | 150     |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Conversion of convertible notes payable
to Series C                                                |  |  |         |   |          |   |         |   |          |  |       |   |        |   |        |   |        |  | 1,878  |   |  |   | 5,150   |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuance of Series C, net of issuance
costs of $2,138                                              |  |  |         |   |          |   |         |   |          |  |       |   |        |   |        |   |        |  | 7,437  |   |  |   | 18,249  |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Issuance of warrants to purchase common
stock and Series D in connection with
issuance of Series C |  |  |         |   |          |   |         |   |          |  |       |   |        |   |        |   |        |  |       |   |  |   | (729    | ) |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Accretion to estimated mandatory
redemption value                                                  |  |  |         |   |          |   | 2,611    |   |          |  |       |   |        |   | 2,957   |   |        |  |       |   |  |   | 2,946   |   |  |  |       |   |  |   |        |  
|                                                                                                   |  |  |         
|Balance at December 31, 1999                                                                       |  |  | 3,024    |   |          |   | 8,065    |   |          |  | 3,618  |   |        |   | 9,648   |   |        |  | 9,315  |   |  |   | 25,766  |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Exercise of warrants to purchase Series C                                                          |  |  |         |   |          |   |         |   |          |  |       |   |        |   |        |   |        |  | 14     |   |  |   | 38      |   |  |  |       |   |  |   |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Exercise of warrants to purchase Series D                                                          |  |  |         |   |          |   |         |   |          |  |       |   |        |   |        |   |        |  |       |   |  |   |        |   |  |  | 2,557  |   |  |   | 7,661   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Accretion to estimated mandatory
redemption value                                                  |  |  |         |   |          |   | 16,130   |   |          |  |       |   |        |   | 19,296  |   |        |  |       |   |  |   | 48,830  |   |  |  |       |   |  |   | 12,791  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Conversion of redeemable convertible
preferred stock to common stock                               |  |  | (3,024   | ) |          |   | (24,195  | ) |          |  | (3,618 | ) |        |   | (28,944 | ) |        |  | (9,329 | ) |  |   | (74,634 | ) |  |  | (2,557 | ) |  |   | (20,452 | )
|                                                                                                   |  |  |          |   |          |   |          |   |          |  |        |   |        |   |         |  
|Balance at December 31, 2000                                                                       |  |  |         |   |          | $ |         |   |          |  |       |   |        | $ |        |   |        |  |       |   |  | $ |        |   |  |  |       |   |  | $ |        |  
|                                                                                                   |  |  |          |   |          |   |          |   |          |  |        |   |        |   |         |  

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

12. Stock Options and Warrants

Stock options

The Board of Directors has authorized the grant of non-qualified options to
purchase up to 9,027,742 shares of common stock. A summary of stock option
activity and related information for the years ended December 31 follows:

|                                                                |  |         |           |                |  |                  |       |                |  |         |           |                  |  |   |       |  |  |                  |            |   |  |   |       | 
|--------------------------------------------------------------- |  | ------- | --------- | -------------- |  | ---------------- | ----- | -------------- |  | ------- | --------- | ---------------- |  | - | ----- |  |  | ---------------- | ---------- | - |  | - | ----- | 
|                                                                |  | 1998    |           | 1999           |  | 2000            
|                                                                |  |        
|                                                                |  |         |           |                |  | Weighted Average |       |                |  |         |           | Weighted Average |  |   |       |  |  | Weighted Average
|                                                                |  | Options |           | Exercise Price |  | Options          |       | Exercise Price |  | Options |           | Exercise Price  
|                                                                |  |        
|Outstanding 
beginning of year                                 |  |         | 1,335,006 |                |  | $                | 0.034 |                |  |         | 1,513,880 |                  |  | $ | 0.046 |  |  |                  | 2,471,511  |   |  | $ | 0.457 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Granted                                                         |  |         | 250,125   |                |  |                  | 0.117 |                |  |         | 1,115,199 |                  |  |   | 0.974 |  |  |                  | 3,051,150  |   |  |   | 2.556 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Exercised                                                       |  |         | (23,438   | )              |  |                  | 0.067 |                |  |         | (11,250   | )                |  |   | 0.040 |  |  |                  | (1,153,902 | ) |  |   | 0.069 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Forfeited                                                       |  |         | (47,813   | )              |  |                  | 0.067 |                |  |         | (146,318  | )                |  |   | 0.179 |  |  |                  | (240,595   | ) |  |   | 2.164 | 
|                                                                |  |        
|Outstanding  end
of year                                       |  |         | 1,513,880 |                |  | $                | 0.046 |                |  |         | 2,471,511 |                  |  | $ | 0.457 |  |  |                  | 4,128,164  |   |  | $ | 2.017 | 
|                                                                |  |        
|Exercisable at end
of year                                      |  |         | 869,063   |                |  | $                | 0.029 |                |  |         | 1,509,094 |                  |  | $ | 0.232 |  |  |                  | 921,124    |   |  | $ | 1.174 | 
|                                                                |  |        
|Weighted-average
fair value of
options granted
during the year: |  |         |           |                |  | $                | 0.038 |                |  |         |           |                  |  | $ | 0.757 |  |  |                  |            |   |  | $ | 3.836 | 
|                                                                |  |         |           |                |  |                  |       |                |  |         |           |                  |  |   |       |  |  |                  |            |   |  |   |       | 

All options granted to date are exercisable at, or below the estimated fair
value of the Companys common stock at the date of grant, and are subject to
vesting provisions, as determined by the Board of Directors. Options granted
to date vest in varying percentages through 2004. In estimating the fair value
of the Companys common stock at the grant date, the Board of Directors
considered either independent appraisals of the value of the common stock,
significant transactions with investors in the Company, or after the completion
of the Companys initial public offering, the quoted price of the common stock
at the close of market of the previous day.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

12. Stock Options and Warrants (Continued)

Certain options granted during 1999 and 2000 were granted with exercise prices
that were below the estimated fair value of the common stock on the date of
grant. Accordingly, the Company has recorded compensation expense of $198,090
and $2,286,225 for the years ended December 31, 1999 and 2000, respectively,
and will record an additional $4.5 million of compensation expense through 2004
as a result of these grants.

Exercise prices for options outstanding as of December 31, 2000 ranged from
$0.027 to $17.125 as follows:

|                  |         |             |           |             |                     |             |                    |                  |  |  |              |                    |  |  |  |         |   |  |  |   |       |   |  |  | 
|----------------- | ------- | ----------- | --------- | ----------- | ------------------- | ----------- | ------------------ | ---------------- |  |  | ------------ | ------------------ |  |  |  | ------- | - |  |  | - | ----- | - |  |  | 
|                  |         |             |           |             |                     |             | Weighted Average   | Weighted Average |  |  |              | Weighted Average  
|                  |         |             |           |             |                     |             | Exercise Prices of | Remaining        |  |  |              | Exercise Prices of
|Range of Exercise |         | Outstanding |           | Outstanding | Contractual Life of | Exercisable | Exercisable       
|Prices            |         | Options     |           | Options     | Outstanding Options | Options     | Options           
|                 
|$0.027 - $0.067   |         |             | 252,368   |             |                     | $           | 0.044              |                  |  |  | 72.8 months  |                    |  |  |  | 229,281 |   |  |  | $ | 0.042 |  
|                 
|                 
|                 
|                 
|$0.187 - $0.347   |         |             | 526,017   |             |                     |             | 0.327              |                  |  |  | 98.6 months  |                    |  |  |  | 288,414 |   |  |  |   | 0.324 |  
|                 
|                 
|                 
|                 
|$1.867 - $3.156   |         |             | 3,025,379 |             |                     |             | 2.008              |                  |  |  | 114.9 months |                    |  |  |  | 341,441 |   |  |  |   | 1.867 |  
|                 
|                 
|                 
|                 
|$5.500 - $6.468   |         |             | 299,950   |             |                     |             | 5.618              |                  |  |  | 117.3 months |                    |  |  |  | 61,988  |   |  |  |   | 5.500 |  
|                 
|                 
|                 
|                 
|$9.125 - $10.000  |         |             | 19,575    |             |                     |             | 9.592              |                  |  |  | 115.5 months |                    |  |  |  |        |   |  |  |   |      |  
|                 
|                 
|                 
|                 
|                  | $17.125 |             |           | 4,875       |                     |             |                    | 17.125           |  |  |              | 114.0 months       |  |  |  |         |  |  |  |   |       |  | 

Pro Forma Loss and Loss Per Common Share

Pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model subsequent to the Companys May 2000 initial
public offering with the following weighted-average assumptions: risk-free
interest rate of 5.50%; volatility factors of the expected market price of the
Companys common stock ranging from 1.30 to 1.90; weighted-average expected
life of the options of four years; and dividend yield of 0%.

Prior to the Companys initial public offering of common stock in May 2000, the
Company calculated pro forma information required by Statement 123 using the
minimum value method.

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

12. Stock Options and Warrants (Continued)

The minimum value method calculates the fair value of options as the excess of
the estimated fair value of the underlying stock at the date of grant over the
present value of both the exercise price and the expected dividend payments,
each discounted at the risk-free rate, over the expected life of the option.
In determining the estimated fair value of granted stock options under the
minimum value method, the risk-free interest rate was assumed to be 5.50%, the
expected life of granted options was assumed to range from two to seven years,
and the dividend yield was estimated to be 0%.

Because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion, the fair value methods prescribed
by Statement 123 do not necessarily provide a single measure of the fair value
of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The Companys pro
forma net loss attributable to common stockholders and basic and diluted loss
per share attributable to common stockholders is $118 million and $(5.36),
respectively, for the year ended December 31, 2000. The Company has determined
that the pro forma compensation has an immaterial effect on the reported net
loss attributable to common stockholders and no effect on basic and diluted
loss per share attributable to common stockholders in 1998 and 1999.

Warrants

In connection with the issuance of convertible notes payable during 1999, the
Company issued warrants to purchase 469,434 shares of Series C Redeemable
Convertible Preferred Stock for $2.74 per share and expiring four years from
the date of issuance. Upon the closing of the Companys initial public
offering in May 2000, these warrants were converted into warrants to purchase
common stock for $2.74 per share. During 2000, 46,175 warrants were exercised
and 423,259 remain outstanding at December 31, 2000.

13. Shares Reserved for Future Issuance

As of December 31, 2000, the Company has reserved shares of common stock for
issuance as follows:

|                                                                           |  |  |           | 
|-------------------------------------------------------------------------- |  |  | --------- | 
|Exercise of outstanding common stock warrants                              |  |  | 423,259   | 
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Exercise of outstanding common stock options                               |  |  | 4,128,164 | 
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Stock options available for granting as reserved by the Board of Directors |  |  | 4,899,578 | 
|                                                                           |  |  |           | 
|                                                                           |  |  | 9,451,001 | 
|                                                                           |  |  |           | 

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##### Table of Contents



Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

14. Leases

The Company leases office space in Columbia, Maryland and in Seattle,
Washington under non-cancelable operating lease agreements expiring between
July 2002 and January 2006. The Company can extend the Maryland office lease
for two additional five-year periods at the fair market rental in effect at the
time of extension. In conjunction with the Maryland office lease, the Company
obtained a lease bond in favor of the Landlord in the amount of $1,300,000 and
pledged all assets to the bonding company.

The Company also leases certain equipment and vehicles under non-cancelable
operating lease agreements expiring between August 2002 and February 2004.

Future minimum payments under non-cancelable operating leases consisted of the
following at December 31, 2000:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2001       |  | $ | 1,881,496 | 
|          
|          
|          
|          
|2002       |  |   | 1,867,298 | 
|          
|          
|          
|          
|2003       |  |   | 1,600,984 | 
|          
|          
|          
|          
|2004       |  |   | 1,575,555 | 
|          
|          
|          
|          
|2005       |  |   | 1,609,547 | 
|          
|          
|          
|          
|Thereafter |  |   | 134,400   | 
|           |  |   |           | 
|           |  | $ | 8,669,280 | 
|           |  |   |           | 

Rent expense under all operating leases for the years ended December 31, 1998,
1999 and 2000 was $292,801, $394,687, and $1,221,933, respectively.

15. Significant Customers and Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral.

For the years ended December 31, the percentage of revenue from significant
customers was as follows:

|           |  |  |      |   |  |  |      |   |  |  |      |  
|---------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|           |  |  | 1998 |   |  |  | 1999 |   |  |  | 2000 |  
|           |  |  |     
|Customer A |  |  | 56   | % |  |  |     |   |  |  |     |  
|          
|          
|          
|          
|Customer B |  |  | 27   | % |  |  |     |   |  |  |     |  
|          
|          
|          
|          
|Customer D |  |  |     |   |  |  | 24   | % |  |  |     |  
|          
|          
|          
|          
|Customer E |  |  |     |   |  |  | 12   | % |  |  |     |  
|          
|          
|          
|          
|Customer G |  |  |     |   |  |  |     |   |  |  | 11   | %

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Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

15. Significant Customers and Concentrations of Credit Risk (continued)

As of December 31, the percentage of accounts receivable from significant
customers was as follows:

|           |  |      |    |      |  |      |    |   |  |  |   |  
|---------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | - | -
|           |  | 1998 |    | 1999 |  | 2000
|           |  |     
|Customer A |  |      | 80 | %    |  |      | 25 | % |  |  |  |  
|          
|          
|          
|          
|Customer B |  |      | 5  | %    |  |      |   |   |  |  |  |  
|          
|          
|          
|          
|Customer C |  |      | 10 | %    |  |      |   |   |  |  |  |  
|          
|          
|          
|          
|Customer D |  |      |   |      |  |      | 17 | % |  |  |  |  
|          
|          
|          
|          
|Customer E |  |      |   |      |  |      | 14 | % |  |  |  |  
|          
|          
|          
|          
|Customer F |  |      |   |      |  |      | 13 | % |  |  |  |  
|          
|          
|          
|          
|Customer G |  |      |   |      |  |      |   |   |  |  | 9 | %

16. Contingencies

Accounts receivable at December 31, 2000 includes $1.0 million due from a
customer under a subcontract arrangement. The Company performed software
modification, customization and related services under this subcontract in
1997, 1998 and 1999. At December 31, 2000, the amount owed to the Company is
past due as a result of a dispute between the general contractor and the
general contractors customer that has not currently allowed the general
contractor to collect certain fees billed. The Company is not a party to the
dispute. On July 13, 2000, the Company filed a Complaint for Damages against
the general contractor seeking a judgment in the amount of $1.0 million.
Management believes that the Company will prevail in this action and expects
that it will collect the amount owed. However, due to uncertainties
surrounding the resolution of the dispute and the resultant effect on the
general contractors ability to meet its obligations, it is reasonably possible
that managements estimate of the recoverability of this account receivable may
change in the near term. Management is unable at the current time to make an
estimate of the range of the possible loss that may be incurred when this
receivable is ultimately settled. In August 2000, the general contractor filed
a counterclaim seeking judgment against the Company in the amount of $2.8
million. Management, based on consultations with its legal advisors, believes
that the likelihood of a loss incurred as a result of this counterclaim is
remote.

Accounts receivable at December 31, 2000 also includes $539,000 due from a
customer for consulting and third-party software and maintenance services sold
to the customer in 1999 and 2000. The receivable is past due as a result of a
dispute between the customer and the Company. On November 16, 2000, the
customer filed a complaint against the Company seeking monetary damages in
excess of $75,000. The Company denies the customers claim and has filed a
counterclaim seeking damages in the amount of $563,000. Management, based on
consultations
with its legal advisors, believes that the Company will prevail against the
customer in the counterclaim and in the customers claim against the Company.
However, due to the length of

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Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

16. Contingencies (continued)

time it may take to resolve the dispute, it is reasonably possible that
managements estimate of
the recoverability of this receivable may change in the near term. Management
is unable at the current time to estimate the range of the possible loss that
may be incurred when this receivable is ultimately settled.

17. Employee Benefit Plan

Effective April 1, 1998, the Company established the Sequoia Software
Corporation Employee Savings and Retirement Plan (the Plan), which is
eligible to all employees who are at least eighteen years old. Under the Plan
agreement, participants may elect to defer annually up to 20% of their salary,
not to exceed $10,500 in 2000. In addition, the Company may make a
discretionary matching contribution of up to 6% of compensation, based on each
eligible participants elective deferrals. Participant contributions and
employer contributions vest immediately. The Company elected not to make any
contributions to the Plan for the years ended December 31, 1998, 1999 and 2000.

18. Impairment Loss

During the third and fourth quarters of 2000, the Company determined that
certain investments in equity securities of technology companies accounted for
under the cost method of accounting were permanently impaired. This
determination was based on continuing devaluations of the companies in the
technology sectors, and for many early stage companies, the sudden difficulty
in obtaining needed capital to implement business plans that, absent such
capital, would significantly impair the ability of the company to achieve its
forecasts or even meet its obligations in the normal course of business. The
Company performed a review of each of its investments by obtaining an
understanding of the current market conditions in which these companies
operate, and ascertained the likelihood that the company would achieve the
business plan upon which valuations performed at the date of acquisition were
based.

Based on this evaluation, the Company recorded an impairment charge of
$1,050,500 in 2000 to state these investments at this estimated net realizable
value.

19. Correction of Quarterly Results of Operations (unaudited)

In the fourth quarter of 2000, the Company detected an error in the recognition
of compensation expense from stock option grants that affected the reported
results of operations in each of the three quarters in the period ended
September 30, 2000. The effect of the error on the quarterly

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Sequoia Software Corporation

Notes to Consolidated Financial Statements (continued)

19. Correction of Quarterly Results of Operations (unaudited)

net loss attributable to common stockholders and loss per common share
attributable to common stockholders is as follows (amounts in thousands, except
per share data):

|                                                                                  |  |                    |          |                    |  |                    |          |            |  |          |        |          |  |            |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------ | -------- | ------------------ |  | ------------------ | -------- | ---------- |  | -------- | ------ | -------- |  | ---------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                  |  | Three months ended |          | Three months ended |  | Three months ended
|                                                                                  |  | March 31, 2000     |          | June 30, 2000      |  | September 30, 2000
|                                                                                  |  |                    |          |                    |  |                   
|                                                                                  |  | Originally         |          |                    |  |                    |          | Originally |  |          |        |          |  | Originally
|                                                                                  |  | Reported           |          | Restated           |  | Reported           |          | Restated   |  | Reported |        | Restated
|                                                                                  |  |                    |          |                    |  |                    |          |            |  |          |        |         
|Net loss attributable to
common    stockholders                                   |  | $                  | (104,573 | )                  |  | $                  | (104,510 | )          |  | $        | (1,963 | )        |  | $          | (2,630 | ) |  | $ | (4,197 | ) |  | $ | (4,273 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Basic and diluted loss per common
   share attributable to common
   stockholders |  | $                  | (16.00   | )                  |  | $                  | (15.99   | )          |  | $        | (0.10  | )        |  | $          | (0.13  | ) |  | $ | (0.14  | ) |  | $ | (0.14  | )

20. Subsequent Event

On March 21, 2001, Citrix Systems, Inc. and the Company announced that their
boards of directors had approved an Agreement and Plan of Merger dated as of
March 20, 2001. The merger agreement provides for a cash tender offer to
acquire all of the outstanding shares of the Companys common stock at a price
of $5.64 per share. Holders of a majority of the Companys common stock have
agreed to tender their shares in the tender offer. The obligations of Citrix
to accept shares tendered in the offer is subject to certain regulatory
approvals and other customary closing conditions. The Company has granted to
Citrix an option to purchase up to a number of shares of common stock equal to
19.9% of the number of shares issued and outstanding before giving effect to
the exercise of the option at a price of $5.64 per share. The option is
exercisable if, after giving effect to the exercise of the option and as a
result of such exercise, the number of shares then owned by Citrix represents
at least 90.1% of the Companys common stock outstanding on a fully diluted
basis. Under the merger agreement, the tender offer will be followed by a
merger, in which any shares of the Companys common stock not purchased in the
tender offer will be converted into the right to receive $5.64 per share in
cash, without interest.

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Schedule II  Valuation and Qualifying Accounts

Sequoia Software Corporation

|                               |                                |                                 |  |            |         |            |  |            |           |             |  |            |  |               |  |            |            |   |  |  |    |   |  |   |           | 
|------------------------------ | ------------------------------ | ------------------------------- |  | ---------- | ------- | ---------- |  | ---------- | --------- | ----------- |  | ---------- |  | ------------- |  | ---------- | ---------- | - |  |  | -- | - |  | - | --------- | 
|                              
|Column A                       |                                | Column B                        |  | Column C   |         | Column D   |  | Column E  
|                              
|                               |                                |                                 |  |            |         |            |  | Additions 
|                               |                                |                                 |  |            |         |            |  |           
|                               |                                |                                 |  |            |         |            |  |            |           |             |  | Charged to
|                               |                                |                                 |  | Balance at |         | Charged to |  | Other     
|                               |                                |                                 |  | Beginning  |         | And Costs  |  | Accounts - |           | Deductions- |  |            |  |               |  | Balance at
|Description                    |                                | of Period                       |  | Expenses   |         | Describe   |  | Describe   |           |             |  |            |  | End of Period
|                              
|Year Ended December, 31, 2000:
|                              
|                              
|                              
|                              
|                               | Deducted from assets accounts:
|                              
|                              
|                              
|                              
|                               |                                | Allowance for doubtful accounts |  | $          | 184,864 |            |  | $          | 2,168,419 |             |  | $          |  |               |  | $          | (1,305,983 | ) |  |  | (1 | ) |  | $ | 1,047,300 | 
|                               |                                |                                 |  |            |         |            |  |            |           |             |  |            |  |               |  |            |            |   |  |  |    |   |  |   |           | 
|Year Ended December, 31, 1999:
|                              
|                              
|                              
|                              
|                               | Deducted from assets accounts:
|                              
|                              
|                              
|                              
|                               |                                | Allowance for doubtful accounts |  | $          |        |            |  | $          | 651,031   |             |  | $          |  |               |  | $          | (466,167   | ) |  |  | (1 | ) |  | $ | 184,864   | 
|                               |                                |                                 |  |            |         |            |  |            |           |             |  |            |  |               |  |            |            |   |  |  |    |   |  |   |           | 
|Year Ended December, 31, 1998:
|                              
|                              
|                              
|                              
|                               | Deducted from assets accounts:
|                              
|                              
|                              
|                              
|                               |                                | Allowance for doubtful accounts |  | $          |        |            |  | $          | 18,898    |             |  | $          |  |               |  | $          | (18,898    | ) |  |  | (1 | ) |  | $ |          | 
|                               |                                |                                 |  |            |         |            |  |            |           |             |  |            |  |               |  |            |            |   |  |  |    |   |  |   |           | 

(1) Uncollectible accounts written off, net of recoveries.

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




Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT




CURRENT EXECUTIVE OFFICERS AND DIRECTORS OF SEQUOIA

The table below presents information about Sequoias current directors.
None of the directors has any family relationship to any executive officer or
to any other director of Sequoia. Ages are as of March 19, 2001.

|                          |  |     |    |                      |  |                                                            
|------------------------- |  | --- | -- | -------------------- |  | -----------------------------------------------------------
|Name                      |  | Age |    | Principal Occupation
|                          |  |     |    |                     
|Richard C. Faint, Jr.     |  |     | 49 |                      |  | Chairman of the Board, Chief Executive Officer
and Director
|                         
|                         
|                         
|                         
|Mark A. Wesker            |  |     | 39 |                      |  | President, Chief Operating Officer and Director            
|                         
|                         
|                         
|                         
|Gregory C. Heard          |  |     | 36 |                      |  | Chief Financial Officer                                    
|                         
|                         
|                         
|                         
|Paul Martin               |  |     | 29 |                      |  | Chief Technology Officer                                   
|                         
|                         
|                         
|                         
|William Brennan           |  |     | 38 |                      |  | Executive Vice President, Corporate Development            
|                         
|                         
|                         
|                         
|Marvin W. Adams (1)       |  |     | 43 |                      |  | Director                                                   
|                         
|                         
|                         
|                         
|Lawrence A. Bettino (2)   |  |     | 40 |                      |  | Director                                                   
|                         
|                         
|                         
|                         
|Andrew J. Filipowski      |  |     | 50 |                      |  | Director                                                   
|                         
|                         
|                         
|                         
|Jonathan I. Grabel (1)(2) |  |     | 32 |                      |  | Director                                                   
|                         
|                         
|                         
|                         
|William M. Gust II (1)(2) |  |     | 58 |                      |  | Director                                                   
|                         
|                         
|                         
|                         
|Richard R. Roscitt        |  |     | 49 |                      |  | Director                                                   

(1)   Member of the Audit Committee

(2)   Member of the Compensation Committee

Richard C. Faint, Jr.has been a director since July 1996. Mr. Faint is
Chairman of the Board and Chief Executive Officer of Sequoia. Mr. Faint served
as Chief Financial Officer of Mergent Technologies from September 1995 to July
1996. Previously, from January 1995 to September 1995, Mr. Faint was the Chief
Financial Officer of Performance Learning Group which merged with Mergent
Technologies in September 1995. From December 1984 to January 1995, Mr. Faint
served as Chief Financial Officer of PersonaCare, a company that he co-founded.
PersonaCare was acquired by TheraTx, which later completed its initial public
offering. Mr. Faint received his B.S. in Accounting and Finance from Towson
University and his J.D. and M.B.A. from The University of Baltimore.

Mark A. Weskerhas been a director since November 1992. Mr. Wesker is
President and Chief Operating Officer of Sequoia. From May 1986 to November
1992, prior to starting Sequoia, Mr. Wesker was a senior associate and
litigator at Miles & Stockbridge, where he practiced technology, health care
and corporate law. Mr. Wesker earned his Bachelor of Arts degree from the
George Washington University and his J.D. from The University of Baltimore
School of Law.

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Gregory G. Heardhas been Chief Financial Officer and Vice President of
Sequoia since he joined the company in January 2000 and is currently the
Treasurer and Assistant Secretary of Sequoia. From November 1994 to January
2000, Mr. Heard was Managing Director of Equity Research at Corbyn Investment
Management and the Greenspring Fund. Prior to that, from September 1991 to
October 1994, Mr. Heard was Manager, Financial Advisory Services Group at
Coopers & Lybrand. Mr. Heard received his B.S. in Accounting and his M.B.A.
from Lehigh University. Mr. Heard is a Certified Management Accountant.

Paul Martinjoined Sequoia in 1997 and served as Vice President of Product
Development before assuming his current position as Chief Technology Officer in
August 2000. Prior to joining Sequoia, from May 1993 to February 1997, Mr.
Martin was senior software applications developer for the PDI Division of
Bird-Johnson Corporation. He holds a B.S. in Computer Engineering from
Virginia Polytechnic Institute and State University.

William S. Brennanjoined Sequoia in December 2000 as Executive Vice
President for Corporate Development. Prior to joining Sequoia, from November
1995 to June 2000, Mr. Brennan was a senior technology analyst at Pacific
Growth Equities in San Francisco, California. After founding Griffin Ventures,
a merchant banking and research firm, in August 1995, Mr. Brennan served as its
president and managing director until June 2000. Previously, he served as
Senior Vice President of Pennsylvania Merchant Group from February 1994 to
August 1995 and as a financial advisory services manager at Coopers & Lybrand
from February 1992 to February 1994. Mr. Brennan holds undergraduate degrees
in Mechanical Engineering and Biology from Lehigh University, an M.S. in
Biomedical and Mechanical Engineering from Colorado State University, and an
M.B.A. with a concentration in Finance from Villanova.

Marvin W. Adamshas been a director since February 2000. Mr. Adams is the
Vice President and Chief Information Officer of Ford Motor Company. Mr. Adams
has held this position since December 2000. Prior to that, Mr. Adams was the
Executive Vice President and Chief Technology Officer of Bank One Corporation,
positions he held from December 1998 and October 1998, respectively, to
December 2000. From February 1997 to October 1998, Mr. Adams served as Chief
Technology and Information Officer of Banc One Corporation. From June 1996 to
February 1997, Mr. Adams served as Chief Information Officer of Frontier
Communications Corporation. From April 1994 to June 1996, Mr. Adams served as
President of Financial Card Services of Banc One Corporation. Mr. Adams
received his B.S. in Electrical Engineering from Michigan State University.

Lawrence A. Bettinohas been a director since November 1999. Mr. Bettino
is a founding member of Baker Capital Partners, LLC, the general partner of
Baker Communications Fund, L.P., a communications-focused private equity fund,
a position he has held since May 1996. From July 1989 to April 1996, Mr.
Bettino worked for Dillon Read Venture Capital. Mr. Bettino is currently a
director of Connected Corporation, Curl Corporation, NetOps Corporation,
NextPoint Networks, Inc. and S2 Systems, Inc. Mr. Bettino received his B.S.
degree in Electrical Engineering from Renssalaer Polytechnic Institute and his
M.B.A. from Harvard Business School.

Andrew J. Filipowskihas been a director since November 1999. Mr.
Filipowski has been Chairman of the Board of Directors and Chief Executive
Officer of divine, inc. since its

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inception and was President from its inception until October 1999. He has
also been Chairman and Chief Executive Officer of Platinum Venture Partners,
Inc., the previous general partner of the Platinum Venture Partners limited
partnerships. Mr. Filipowski was a founder of PLATINUM Technology
International Inc. and served as the Chairman of its Board of Directors, Chief
Executive Officer and President from its inception in 1987 until it was
acquired by Computer Associates in June 1999. Mr. Filipowski is currently a
director of eShare Communications, Inc.

Jonathan I. Grabelhas been a director since November 1999. Mr. Grabel is
a partner with Baker Communications Fund, L.P., a communications-focused
private equity fund. From August 1996 to August 1998, Mr. Grabel was an
investment banker with Nomura Securities International, Inc. and Warburg Dillon
Read LLC. Mr. Grabel is currently a director of S2 Systems, Inc. Mr. Grabel
received his B.S. in Economics from the Wharton School of the University of
Pennsylvania and his M.B.A. from The University of Chicago. Mr. Grabel is a
Certified Public Accountant.

William M. Gust IIhas been a director since November 1996. Since
September 1994, Mr. Gust has been President of Mariner Management, Inc., the
management company for Anthem Capital L.P., a venture capital partnership, of
which he has been a Managing General Partner since September 1994. Mr. Gust is
currently a director of CyberSystem Technologies, Inc., Mensana Diagnostics
Corp. and WisdomWare, Inc. Mr. Gust received his B.A. in Creative Writing and
English Literature from Northwestern University.

Richard R. Roscitthas been a director since April 2000. Mr. Roscitt is
Chairman and Chief Executive Officer of ADC Telecommunications, Inc., a
position he has held since January 2001. Prior to that, Mr. Roscitt served as
President and Chief Executive Officer of AT&T Solutions, a position he held
from September 1997 to January 2001. From January 1992 to September 1997, Mr.
Roscitt served as Vice President of AT&T Business Long Distance Services. Mr.
Roscitt received his B.S. in Engineering from Stevens Institute of Technology
and his M.B.A. in Management from the Sloan School of M.I.T.

COMPLIANCE UNDER SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Exchange Act requires Sequoias directors and
executive officers, and persons who own more than 10% of a registered class of
Sequoias equity securities (collectively, Insiders), to file initial reports
of ownership and reports of changes in ownership with the Commission. The
Commission regulations also require Insiders to furnish Sequoia with copies of
all Section 16(a) forms they file. Based solely on its review of the copies of
the forms furnished to Sequoia and written representations from directors and
executive officers, Sequoia believes that its Insiders complied with all
applicable Section 16(a) filing requirements for 2000, except with respect to
the filing of a late Form 3 to report the addition of Messrs. Brennan and
Martin as Section 16 officers.

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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION




Summary Compensation Table

The following table presents information about the compensation awarded
to, earned by or paid to (i) the Chief Executive Officer and (ii) the other
executive officers as of December 31, 2000 whose salary and bonus for 2000 was
more than $100,000. Sequoia does not grant stock appreciation rights and does
not have any long-term compensation benefits other than stock options.

|                                      |  |      |      |        |  |                     |         |                               |  |                    |        |  |  |              |       |            |  |  |         |    
|------------------------------------- |  | ---- | ---- | ------ |  | ------------------- | ------- | ----------------------------- |  | ------------------ | ------ |  |  | ------------ | ----- | ---------- |  |  | ------- | ---
|                                      |  |      |      |        |  | Annual Compensation |         | Long-Term Compensation Awards
|                                      |  |      |      |        |  |                     |         |                              
|                                      |  |      |      |        |  |                     |         |                               |  |                    |        |  |  | Other Annual |       | Securities
|Name and Principal Positions          |  | Year |      | Salary |  | Bonus               |         | Compensation                  |  | Underlying Options
|                                      |  |      |      |        |  |                     |         |                               |  |                   
|Richard C. Faint, Jr.                 |  |      | 1999 |        |  | $                   | 160,000 |                               |  | $                  | 17,500 |  |  | $            | 9,500 | (1)        |  |  | 93,750  | (2)
|                                     
|                                     
|                                     
|                                     
|                                      |  |      |      |        |  |                     |         |                               |  |                    |        |  |  |              |       |            |  |  | 18,750  | (3)
|                                     
|                                     
|                                     
|                                     
|Chief Executive Officer               |  |      | 2000 |        |  | $                   | 194,000 |                               |  | $                  | 0      |  |  | $            | 9,500 | (1)        |  |  | 300,000 | (4)
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|Mark A. Wesker                        |  |      | 1999 |        |  | $                   | 135,000 |                               |  | $                  | 17,500 |  |  | $            | 5,500 | (5)        |  |  | 75,000  | (2)
|                                     
|                                     
|                                     
|                                     
|                                      |  |      | 2000 |        |  | $                   | 169,000 |                               |  | $                  | 0      |  |  | $            | 5,600 | (5)        |  |  | 150,000 | (4)
|                                     
|                                     
|                                     
|                                     
|President and Chief Operating
Officer
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|Gregory G. Heard (6)                  |  |      | 1999 |        |  | $                   |        |                               |  | $                  |       |  |  | $            |      |            |  |  |        |    
|                                     
|                                     
|                                     
|                                     
|                                      |  |      | 2000 |        |  | $                   | 110,300 |                               |  | $                  | 10,000 |  |  | $            | 100   |            |  |  | 37,500  | (4)
|                                     
|                                     
|                                     
|                                     
|Chief Financial Officer               |  |      |      |        |  |                     |         |                               |  |                    |        |  |  |              |       |            |  |  | 37,500  | (4)
|                                     
|                                     
|                                     
|                                     
|                                      |  |      |      |        |  |                     |         |                               |  |                    |        |  |  |              |       |            |  |  | 10,000  | (7)
|                                     
|                                     
|                                     
|                                     
|                                      |  |      |      |        |  |                     |         |                               |  |                    |        |  |  |              |       |            |  |  | 175,000 | (4)
|                                     
|                                     
|                                     
|                                     
|Paul Martin                           |  |      | 1999 |        |  | $                   | 80,000  |                               |  | $                  | 5,000  |  |  | $            | 0     |            |  |  | 33,750  | (4)
|                                     
|                                     
|                                     
|                                     
|                                      |  |      | 2000 |        |  | $                   | 112,500 |                               |  | $                  | 5,000  |  |  | $            | 100   |            |  |  | 5,000   | (7)
|                                     
|                                     
|                                     
|                                     
|Chief Technology Officer              |  |      |      |        |  |                     |         |                               |  |                    |        |  |  |              |       |            |  |  | 198,125 | (4)



---

|(1) |  | Includes vehicle lease payments of $9,300                                                                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(2) |  | Options vest according to the following schedule: 50% of the options
vest immediately and the remaining 50% of the options vest ratably on each
of the two anniversaries following the date of grant. Options expire on
the tenth anniversary of the date of grant.
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(3) |  | Options vest immediately and expire on the tenth anniversary of the date
of grant.                                                                                                                                                                                 
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(4) |  | Options vest at a rate of 25% on the first anniversary of the date of
grant and 6.25% per quarter thereafter, and become 100% vested on the
fourth anniversary of the date of grant. Options expire on the tenth
anniversary of the date of grant.                 
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(5) |  | Includes vehicle lease payments of $5,400.                                                                                                                                                                                                                         
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(6) |  | Mr. Heard joined Sequoia in January 2000.                                                                                                                                                                                                                          
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(7) |  | Options vest at a rate of 25% on the date of grant, 25% on January 1,
2001, and 25% per each six-month period thereafter, and become 100% vested
on January 1, 2002. Options expire on the tenth anniversary of the date
of grant.                                 

Stock Option Grants

The following table presents information about each grant of stock options
made during 2000 to the executive officers named in the Summary Compensation
Table.

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##### Table of Contents



Option Grants in 2000

|                      |  |                  |         |                    |  |                    |  |                     |  |  |      |   |  |  |  |  |  |   |       |  |  |  |          |  | 
|--------------------- |  | ---------------- | ------- | ------------------ |  | ------------------ |  | ------------------- |  |  | ---- | - |  |  |  |  |  | - | ----- |  |  |  | -------- |  | 
|                      |  |                  |         |                    |  | Percent of Total   |  |                     |  |  |      |   |  |  |  |  |  |   |      
|                      |  | Number of Shares |         | Options Granted to |  |                    |  |                     |  |  |      |   |  |  |  |  | 
|                      |  | Underlying       |         | Employees in 2000  |  | Exercise Price Per |  |                     |  |  |     
|Name                  |  | Options Granted  |         | (1)                |  | Share              |  | Expiration Date (2) | 
|                      |  |                  |         |                    |  |                    |  |                     | 
|                      |  |                  |         |                    |  |                    |  |                     |  |  |      |   |  |  |  |  |  |   |       |  |  |  |          |  | 
|                      |  |                  |         |                    |  |                    |  |                     |  |  |      |   |  |  |  |  |  |   |       |  |  |  |          |  | 
|Richard C. Faint, Jr. |  |                  | 300,000 |                    |  |                    |  |                     |  |  | 9.83 | % |  |  |  |  |  | $ | 1.867 |  |  |  | 2/1/10   |  | 
|                     
|                     
|                     
|                     
|Mark A. Wesker        |  |                  | 150,000 |                    |  |                    |  |                     |  |  | 4.92 | % |  |  |  |  |  | $ | 1.867 |  |  |  | 2/1/10   |  | 
|                     
|                     
|                     
|                     
|Gregory G. Heard      |  |                  | 37,500  |                    |  |                    |  |                     |  |  | 1.23 | % |  |  |  |  |  | $ | 1.867 |  |  |  | 1/24/10  |  | 
|                     
|                     
|                     
|                     
|                      |  |                  | 37,500  |                    |  |                    |  |                     |  |  | 1.23 | % |  |  |  |  |  | $ | 1.867 |  |  |  | 2/1/10   |  | 
|                     
|                     
|                     
|                     
|                      |  |                  | 10,000  |                    |  |                    |  |                     |  |  | 0.33 | % |  |  |  |  |  | $ | 5.500 |  |  |  | 10/6/10  |  | 
|                     
|                     
|                     
|                     
|                      |  |                  | 175,000 |                    |  |                    |  |                     |  |  | 5.74 | % |  |  |  |  |  | $ | 2.125 |  |  |  | 11/30/10 |  | 
|                     
|                     
|                     
|                     
|Paul Martin           |  |                  | 5,000   |                    |  |                    |  |                     |  |  | 0.16 | % |  |  |  |  |  | $ | 5.500 |  |  |  | 10/6/10  |  | 
|                     
|                     
|                     
|                     
|                      |  |                  | 198,125 |                    |  |                    |  |                     |  |  | 6.49 | % |  |  |  |  |  | $ | 2.125 |  |  |  | 11/30/10 |  | 

|                      |  |                                  |           |    |  |     |           |  |  |   |           | 
|--------------------- |  | -------------------------------- | --------- | -- |  | --- | --------- |  |  | - | --------- | 
|                      |  | Potential Realizable            
|                      |  | Value at Assumed Annual         
|                      |  | Rates of Stock Price            
|Name                  |  | Appreciation for Option Term (3)
|                      |  |                                 
|                      |  | 0%                               |           | 5% |  | 10%
|                      |  |                                  |           |    |  |    
|Richard C. Faint, Jr. |  | $                                | 2,140,000 |    |  | $   | 3,837,900 |  |  | $ | 6,443,100 | 
|                     
|                     
|                     
|                     
|Mark A. Wesker        |  | $                                | 1,070,000 |    |  | $   | 1,918,950 |  |  | $ | 3,221,550 | 
|                     
|                     
|                     
|                     
|Gregory G. Heard      |  | $                                | 267,500   |    |  | $   | 479,738   |  |  | $ | 805,388   | 
|                     
|                     
|                     
|                     
|                      |  | $                                | 267,500   |    |  | $   | 479,738   |  |  | $ | 805,388   | 
|                     
|                     
|                     
|                     
|                      |  | $                                | 0         |    |  | $   | 34,590    |  |  | $ | 87,660    | 
|                     
|                     
|                     
|                     
|                      |  | $                                | 0         |    |  | $   | 233,800   |  |  | $ | 592,725   | 
|                     
|                     
|                     
|                     
|Paul Martin           |  | $                                | 0         |    |  | $   | 17,295    |  |  | $ | 43,830    | 
|                     
|                     
|                     
|                     
|                      |  | $                                | 0         |    |  | $   | 264,695   |  |  | $ | 671,049   | 



---

|(1) |  | Based on options to purchase 3,051,152 shares of Common Stock granted to
employees in 2000.                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|   
|   
|   
|   
|(2) |  | The options were granted at or below fair market value and have ten-year
terms, subject to earlier termination upon death, disability or
termination of employment. Options vest at a rate of 25% on the first
anniversary of the date of grant and 6.25% per quarter thereafter, and
become 100% vested on the fourth anniversary of the date of grant with
exceptions as follows:



| |  |  |  | Options for Mr. Heard dated October 6, 2000 with an expiration date
of October 6, 2010 in the amount of 10,000 shares vest at a rate of 25%
on the date of grant, 25% on January 1, 2001, and 25% per each
six-month period thereafter, and become 100% vested on January 1, 2002.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | Options for Mr. Martin dated October 6, 2000 with an expiration
date of October 6, 2010 in the amount of 5,000 shares vest at a rate of
25% on the date of grant, 25% on January 1, 2001, and 25% per each
six-month period thereafter, and become 100% vested on January 1, 2002.



|(3) |  | Potential realizable values are calculated by:
|--- |  | ----------------------------------------------



| |  |  |  | multiplying the number of shares of Common Stock subject to a given
option by the market price per share of the Common Stock on the date of
grant;               
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | assuming that the amount derived from that calculation compounds at
the annual 5% or 10% rates shown in the table for the entire ten-year
term of the option; and
|
| |  |  |  | subtracting from that result the total option exercise price.                                                                                                    

The 5% and 10% assumed annual rates of stock price appreciation are
required by the rules of the Commission and do not reflect Sequoias estimate
or projection of future Common Stock prices.

Option Exercises in 2000

The following table presents the number of shares acquired and the value
realized upon exercise of stock options during 2000 by the executive officers
named in the Summary Compensation Table. The table includes the number of
shares covered by both exercisable and unexercisable stock options as of
December 31, 2000. Also reported are values of in-the-money options that
represent the positive difference between the exercise price of the outstanding
stock option and the fair market value of the shares subject to the option at
fiscal year end. The fair market value is based on $1.906 per share, which was
the closing price of the Common Stock as

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reported on the Nasdaq National Market on December 29, 2000, the last day
of trading for 2000. These values, unlike the amounts in the column entitled
Value Realized, have not been, and may never be, realized.

Aggregated Option Exercises in Fiscal 2000 and Fiscal Year-End Values

|                      |  |             |         |          |  |                     |           |                        |  |                      |        |                      |  |  |         |  |  |   |        |  |  |   |        | 
|--------------------- |  | ----------- | ------- | -------- |  | ------------------- | --------- | ---------------------- |  | -------------------- | ------ | -------------------- |  |  | ------- |  |  | - | ------ |  |  | - | ------ | 
|                      |  |             |         |          |  |                     |           |                        |  | Number of Securities |        | Value of Unexercised
|                      |  |             |         |          |  |                     |           | Underlying Unexercised |  | In-the-Money Options
|                      |  | Shares      |         |          |  | Options at Year-End |           | at Year-End           
|                      |  | Acquired on |         | Value    |  |                     |           |                       
|Name                  |  | Exercise    |         | Realized |  | Exercisable         |           | Unexercisable          |  | Exercisable          |        | Unexercisable       
|                      |  |             |         |          |  |                     |           |                        |  |                      |        |                     
|Richard C. Faint, Jr. |  |             | 375,000 |          |  | $                   | 3,364,875 |                        |  |                      | 89,063 |                      |  |  | 323,438 |  |  | $ | 31,973 |  |  | $ | 12,614 | 
|                     
|                     
|                     
|                     
|Mark A. Wesker        |  |             |        |          |  |                     |          |                        |  |                      | 56,250 |                      |  |  | 168,750 |  |  | $ | 2,194  |  |  | $ | 6,581  | 
|                     
|                     
|                     
|                     
|Gregory G. Heard      |  |             |        |          |  |                     |          |                        |  |                      | 2,500  |                      |  |  | 257,500 |  |  |   |       |  |  | $ | 2,925  | 
|                     
|                     
|                     
|                     
|Paul Martin           |  |             | 21,563  |          |  | $                   | 190,260   |                        |  |                      | 7,578  |                      |  |  | 220,859 |  |  | $ | 9,866  |  |  | $ | 29,596 | 

Director Compensation

The directors do not receive compensation for serving on the Board.
Sequoia reimburses the directors for reasonable expenses they incur to attend
Board meetings and committee meetings.

Pursuant to Sequoias 2000 Stock Incentive Plan, non-employee directors
are eligible to receive grants of options to purchase Common Stock. In
February 2000, Sequoia granted to Mr. Adams options to purchase 37,500 shares
of Common Stock at an exercise price of $1.867 per share. In April 2000,
Sequoia granted to Messrs. Roscitt, Adams, Grabel, Bettino and Gust options to
purchase 75,000, 37,500, 25,000, 25,000 and 25,000 shares, respectively, of
Common Stock at an exercise price of $1.867 per share.

Employment Agreements

On January 1, 2000, Mr. Faint and Mr. Wesker each entered into an amended
and restated two-year employment agreement with Sequoia. On January 24, 2000
and June 1, 2000, respectively, Mr. Heard and Mr. Martin each entered into a
two-year employment agreement with terms similar to the agreements previously
signed by Messrs. Faint and Wesker (the Existing Employment Agreements).
Unless employment is terminated earlier, each Existing Employment Agreement
provides for two years of employment with automatic renewal for consecutive
one-year terms until either party gives notice of termination at least 180 days
before the end of the then current term.

The Existing Employment Agreements provide for base salaries of $175,000,
$150,000, $115,000 and $130,000 per year, respectively, for Messrs. Faint,
Wesker, Heard and Martin. The Board must review these base salaries at least
annually and may grant increases in its sole discretion. In addition, each of
Messrs. Faint, Wesker, Heard and Martin is eligible to participate in Sequoias
stock plans and welfare benefit plans. Each of Messrs. Faint, Wesker, Heard
and Martin is also entitled to paid vacation and perquisites provided by
Sequoia to employees of similar level.

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Sequoia may terminate any of Messrs. Faint, Wesker, Heard and Martin with
or without cause. If terminated without cause, the employee will be entitled
to continuation in payment of his base salary, at the rate in effect
immediately before the date of his termination. Such payment will be for a
period equal to the greater of (i) the period from the day after the employees
last day of employment through the last day of the term of such employees
Existing Employment Agreement and (ii) one year (the Termination Payment).
Sequoia is not obligated to make the Termination Payment unless the employee
who has been terminated without cause honors certain restrictive covenants and
executes a release of all claims arising from his employment by Sequoia. Each
of Messrs. Faint, Wesker, Heard and Martin may voluntarily terminate his
employment at any time.

On December 7, 2000, Mr. Brennan entered into an employment offer letter
with Sequoia (the Offer Letter). The Offer Letter provides for a base salary
of $150,000 per year and participation in a commission plan whereby Mr. Brennan
is eligible to receive a bonus of 0.5% of the gross sales generated by his
department within Sequoia. In addition, Mr. Brennan was granted options to
purchase 150,000 shares of Common Stock and is eligible to participate in
Sequoias welfare benefit plans. If terminated without cause during the term
of an employment agreement to be entered into with Sequoia, Mr. Brennan will be
entitled to receive his base salary for one year as severance pay.

At the effective time of the proposed merger between Sequoia and
Soundgarden Acquisition Corp. (the Merger), whereby Sequoia will become a
wholly-owned subsidiary of Citrix Systems, Inc., the Existing Employment
Agreements of each of Messrs. Faint, Wesker and Martin (each, an Executive)
will be replaced by new employment agreements with Citrix. (each, a New
Employment Agreement and collectively, the New Employment Agreements).
Employment under the New Employment Agreements commences on the completion of
the Merger and continues for two years thereafter (the Employment Term).
Upon expiration of the New Employment Agreements, each Executive may continue
his employment with Citrix on an at-will basis if such Executive and Citrix
mutually agree.

The New Employment Agreements provide for base salaries of $200,000,
$200,000 and $150,000 per year, respectively, for Messrs. Faint, Wesker and
Martin. Each Executive is also eligible to participate in Citrixs standard
benefit plans, accrue paid vacation time and receive an annual target-based
bonus and additional bonus based upon mutually agreed upon performance goals.
Subject to the approval of the Compensation Committee of Citrixs Board of
Directors, each Executive will be granted options to purchase shares of Citrix
common stock in the following amounts: 150,000 shares for Mr. Faint; 200,000
shares for Mr. Wesker; and 100,000 shares for Mr. Martin. Each option granted
will have an exercise price equal to the fair market value of Citrix common
stock as of the date of grant and will be subject to a four-year vesting
schedule.

Citrix may terminate any of the Executives with or without cause. If
terminated without cause during the Employment Term, the terminated Executive
will be entitled to a continuation in payment of his base salary for the
remainder of the Employment Term (the Severance Payment). In addition, an
Executive is entitled to the Severance Payment if he terminates his employment
during the Employment Term because Citrix has materially breached the terms of
his New Employment Agreement (and has not cured such breach within 30 days
after the

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Executive has provided Citrix with written notice of the breach). Citrix
will only be obligated to make the Severance Payment to a terminated Executive
if such Executive executes a release of claims.

As a condition of employment with Citrix, each Executive has also agreed
to execute Citrixs standard Non-Solicitation, Non-Competition, Confidentiality
and Non-Disclosure Agreement.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee currently consists of Messrs. Bettino, Grabel
and Gust, none of whom has any interlocking relationships as defined by the
Commission.

REPORT ON EXECUTIVE COMPENSATION

This report on executive compensation is required by the Commission. This
report shall not be deemed to be incorporated by reference into any filing
under the Securities Act or under the Exchange Act by any general statement of
incorporation by reference, but shall only be deemed to be incorporated by
reference if Sequoia specifically incorporates the information by reference.
In addition, this report shall not otherwise be deemed soliciting material or
filed under these Acts.

The Compensation Committee of the Board makes decisions regarding
executive compensation and stock option grants to executives. The committee is
composed of three independent non-employee directors, none of whom has any
interlocking relationships as defined by the Commission. Although the Chief
Executive Officer and the Chief Financial Officer attend some of the meetings
of the committee, they do not participate in deliberations relating to their
own compensation.

General Compensation Policy

The Compensation Committee acts on behalf of the Board to establish the
general compensation policy for all of Sequoias employees. The committee
typically reviews salary levels and bonuses for the Chief Executive Officer
(CEO) and other executive officers and key employees. The committee also
makes all grants of stock options to all employees, including executive
officers. The committee also administers Sequoias 2000 Stock Incentive Plan.

The committees compensation philosophy for executive officers, including
the CEO, is to advance Sequoias annual and long-term performance goals and
reward corporate performance, while providing a total compensation package that
is competitive and enables Sequoia to attract, motivate, reward and retain key
executives and employees. Consistent with this policy, each executive officers
compensation package may, in one or more years, be comprised of the following
three elements:



| | base salary that is designed primarily to be competitive with base
salary levels in effect at comparable high technology companies with
which Sequoia competes for executive personnel;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | annual variable performance awards, such as bonuses, payable in cash, tied
to the achievement of performance goals, financial or otherwise,
established by the Compensation Committee; and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | long-term equity incentives to strengthen the mutuality of interests between
Sequoias executive officers and its stockholders.
| | -------------------------------------------------------------------------------------------------------------------------------

The committee reviews compensation with the CEO for each executive level
position and within the committee as to the CEO. In addition, the committee
reviews each executive officers performance for the last year and objectives
for the next year, together with the executive officers responsibility level
and Sequoias fiscal performance compared to objectives for the last year and
its performance targets for the next year.

2000 Executive Compensation

Base Compensation.Salaries for executive officers for 2000 were
generally determined on an individual basis by evaluating each executives
scope of responsibility, performance, prior experience and salary history, as
well as the salaries for similar positions at comparable companies.

Incentive Compensation.Cash bonuses are not generally awarded except
under circumstances which cause the Compensation Committee to believe that the
base compensation and equity incentive package do not adequately compensate
Sequoias executives. The committee, in its discretion, determines the actual
bonus payments.

Stock Options.Stock options are an essential element of Sequoias
executive compensation package. The committee believes that equity-based
compensation in the form of stock options links the interests of management and
stockholders by focusing employees and management on increasing stockholder
value. The actual value of the equity-based compensation depends entirely on
appreciation of Common Stock. Stock options have value for the executive only
if the price of the Common Stock increases above the fair market value on the
date of grant and the executive remains in Sequoias employ for the period
required for the options or shares to vest. Substantially all of Sequoias
full-time employees are granted employee stock options.

In 2000, Sequoia granted stock options to executive officers to aid in the
retention of executive officers and to align their interests with those of the
stockholders. Sequoia also granted stock options to new executive officers at
the time they first joined Sequoia. The number of shares subject to each stock
option granted is within the discretion of the committee and is based on
anticipated future contribution and ability to impact corporate results or on
consistency within the executives peer group. The stock options are currently
granted at a price that is equal to the fair market value of the Common Stock
on the date of grant; however Sequoia has, in the past, granted stock options
at an exercise price below fair market value. The options granted to
executives in 2000 generally vest and become exercisable over either a two- or
four- year period. The committee may grant additional stock options to
executives in connection with a significant change in responsibilities, to
achieve equity within a peer group or for other reasons. In the discretion of
the committee, executive officers may also be granted stock options

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to provide greater incentives to continue their employment with Sequoia
and to strive to increase the value of the Common Stock. In 2000, as part of
an annual review of the stock options held by executive officers, the committee
considered these factors and granted additional stock options to all of the
executive officers.

Chief Executive Officer Compensation

The board ratified the committees decision for Mr. Faints cash
compensation for 2000. Effective in May 2000, Mr. Faints base salary was
increased to $200,000. He did not receive a cash bonus in 2000. The committee
awarded Mr. Faint additional equity-based compensation for 2000. Sequoia also
provides Mr. Faint with a leased vehicle.

Compliance with Section 162(m) of the Internal Revenue Code

Having considered the requirements of Section 162(m), the committee
believes that grants made under the 2000 Stock Incentive Plan meet the
requirements for performance-based grants as defined in Section 162(m).

Compensation Committee:

Lawrence A. Bettino
Jonathan I. Grabel
William M. Gust II

STOCK PRICE PERFORMANCE

The stock price performance graph below is required by the Commission. It
shall not be deemed to be incorporated by reference into any filing under the
Securities Act or under the Exchange Act by any general statement of
incorporation by reference, but shall only be deemed to be incorporated by
reference if Sequoia specifically incorporates it by reference. In addition,
this stock price performance graph shall not otherwise be deemed soliciting
material or filed under these Acts.

The graph below compares the cumulative total stockholder return on the
Common Stock with the cumulative total return on the Nasdaq Stock Market (U.S.)
Index and the S&P Computers (Software & Services) Index. The graph assumes
that $100 was invested in the Common Stock, the Nasdaq Stock Market (U.S.)
Index and the S&P Computers (Software & Services) Index on May 12, 2000, the
date of Sequoias initial public offering, and calculates the annual return
through December 31, 2000. The stock price performance shown in the graph
below is based on historical data and does not necessarily indicate future
stock price performance.



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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




The following table presents information as to the beneficial ownership of
Common Stock as of March 19, 2001 by:



| |  |  | each stockholder known by Sequoia to be the beneficial owner
of more than 5% of the Common Stock;
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | each director of Sequoia;                                                                        
|
| |  |  | each named executive officer of Sequoia; and                                                     
|
| |  |  | all of Sequoias directors and executive officers as a group.                                    

Beneficial ownership is determined under the rules of the Commission and
generally includes voting or investment power with respect to securities.
Unless indicated below, to Sequoias knowledge, the persons and entities named
in the table have sole voting and sole investment power with respect to all
shares of Common Stock beneficially owned, subject to community property laws
where applicable. Shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of March 19, 2001 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of any other person. Unless
indicated below, the address for each listed stockholder is c/o Sequoia
Software Corporation, 8890 McGaw Road, Columbia, Maryland 21045.

The percentage of Common Stock outstanding as of March 29, 2001 is based
on 31,032,070 shares of Common Stock outstanding on that date.

|                                                             |  |                    |            |                      |  |  |      | 
|------------------------------------------------------------ |  | ------------------ | ---------- | -------------------- |  |  | ---- | 
|                                                             |  | Number of Shares  
|Name of Beneficial Owner                                     |  | Beneficially Owned |            | Percent of Ownership
|                                                             |  |                    |            |                     
|Lawrence A. Bettino (1)(3)(17)                               |  |                    | 7,405,550  |                      |  |  | 23.8 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Jonathan I. Grabel (2)(3)(17)                                |  |                    | 7,405,550  |                      |  |  | 23.8 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Baker Communications Fund, L.P. (3)(17)                      |  |                    | 7,386,800  |                      |  |  | 23.8 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Andrew J. Filipowski (4)(5)                                  |  |                    | 2,543,337  |                      |  |  | 8.2  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Divine, inc. (5)                                             |  |                    | 2,335,770  |                      |  |  | 7.5  | 
|                                                            
|                                                            
|                                                            
|                                                            
|William M. Gust II (6)(7)(17)                                |  |                    | 2,240,426  |                      |  |  | 7.2  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Anthem Capital, L.P. (7)(17)                                 |  |                    | 2,227,926  |                      |  |  | 7.2  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Philip Vermeulen (8)(9)(17)                                  |  |                    | 1,993,156  |                      |  |  | 6.4  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Flanders Language Valley Fund, C.V.A. (9)(17)                |  |                    | 1,983,781  |                      |  |  | 6.4  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Richard C. Faint, Jr. (10)(17)                               |  |                    | 1,050,032  |                      |  |  | 3.4  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Mark A. Wesker (11)(17)                                      |  |                    | 1,893,750  |                      |  |  | 6.1  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Rick Roscitt (12)                                            |  |                    | 56,250     |                      |  |  |     | 
|                                                            
|                                                            
|                                                            
|                                                            
|Marvin W. Adams (13)                                         |  |                    | 56,250     |                      |  |  |     | 
|                                                            
|                                                            
|                                                            
|                                                            
|Gregory G. Heard (14)(17)                                    |  |                    | 29,750     |                      |  |  |     | 
|                                                            
|                                                            
|                                                            
|                                                            
|Paul Martin (15)                                             |  |                    | 32,900     |                      |  |  |     | 
|                                                            
|                                                            
|                                                            
|                                                            
|Anil Sethi (16)(17)                                          |  |                    | 1,525,630  |                      |  |  | 4.9  | 
|                                                            
|                                                            
|                                                            
|                                                            
|All executive officers and directors as a
group (10 persons) |  |                    | 15,326,995 |                      |  |  | 48.4 | 

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---

|    |  | Represents beneficial ownership of less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|    
|    
|    
|    
|(1)  |  | Includes 7,386,800 shares held by Baker Communications Fund, L.P. Mr.
Bettino, a director, is a founding member of Baker Capital Partners, LLC,
and the general partner of Baker Communications Fund, L.P. Mr. Bettino
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in this entity. Also includes 18,750 shares subject to
options that are vested and exercisable and held by Mr. Bettino. Mr.
Bettinos address is c/o Baker Communications Fund, L.P., 540 Madison
Avenue, New York, NY 10022.                                                                                                                                                                                   
|    
|    
|    
|    
|    
|    
|    
|    
|(2)  |  | Includes 7,386,800 shares held by Baker Communications Fund, L.P. Mr.
Grabel, a director, is a partner of Baker Communications Fund, L.P. Mr.
Grabel disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest in this entity. Also includes 18,750 shares
subject to options that are vested and exercisable and held by Mr. Grabel.
Mr. Grabels address is c/o Baker Communications Fund, L.P., 540 Madison
Avenue, New York, NY 10022.                                                                                                                                                                                                                                                       
|    
|    
|    
|    
|    
|    
|    
|    
|(3)  |  | The address of Baker Communications Fund, L.P. is 540 Madison Avenue, New
York, NY 10022.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|    
|    
|    
|    
|(4)  |  | Includes 2,335,770 shares held by divine, inc. Mr. Filipowski, a
director, is chairman of the board of directors and chief executive
officer of divine, inc. Mr. Filipowski shares voting and dispositive
control over these shares. A total of ten other directors of divine, inc.
share voting and dispositive control over these shares. Mr. Filipowski
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in this entity. Also includes 41,514 shares issuable
upon exercise of warrants held by Mr. Filipowski. Mr. Filipowskis
address is c/o divine, inc., 4225 Naperville Road, Suite 400, Lisle, IL
60532.                                                                      
|    
|    
|    
|    
|    
|    
|    
|    
|(5)  |  | The address of divine, inc. is 4225 Naperville Road, Suite 400, Lisle, IL
60532.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|    
|    
|    
|    
|    
|    
|    
|(6)  |  | Includes 2,149,531 shares, 40,895 shares issuable upon exercise of
warrants held by Anthem Capital, L.P. and 37,500 shares issuable upon
exercise of options held by Anthem Capital, L.P. Mr. Gust, a director, is
the managing general partner of Anthem Capital, L.P. Mr. Gust shares
voting and dispositive control over these shares with two other general
partners of Anthem Capital. Mr. Gust disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in this
entity. Also includes 12,500 shares subject to options that are vested
and exercisable and held by Mr. Gust. Mr. Gusts address is c/o Anthem
Capital, L.P., 16 South Calvert Street, Suite 800, Baltimore, MD
21202-1305.
|    
|    
|    
|    
|    
|    
|    
|    
|(7)  |  | Includes 2,149,531 shares, 40,895 shares issuable upon exercise of
warrants held by Anthem Capital, L.P. and 37,500 shares issuable upon
exercise of options held by Anthem Capital, L.P. The address of Anthem
Capital, L.P. is 16 South Calvert Street, Suite 800, Baltimore, MD
21202-1305.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|    
|    
|    
|    
|    
|    
|    
|(8)  |  | Includes 1,936,418 shares and 47,363 shares issuable upon exercise of
warrants held by Flanders Language Valley Fund, C.V.A. Mr. Vermeulen is
the managing director of Flanders Language Valley Fund, C.V.A. Mr.
Vermeulen shares voting and dispositive control over these shares. Mr.
Vermeulen disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in this entity. Also includes 9,375
shares subject to options that are vested and exercisable and held by Mr.
Vermeulen. Mr. Vermeulens address is c/o Flanders Valley Fund, C.V.A.,
B-8900 IEPER, Belgium.                                                                                                                         
|    
|    
|    
|    
|    
|    
|    
|    
|(9)  |  | The address of Flanders Valley Fund, C.V.A. is B-8900 IEPER, Belgium.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|    
|    
|    
|    
|    
|    
|    
|(10) |  | Includes 164,063 shares subject to options that are vested and
exercisable and 38,231 shares issuable upon exercise of warrants held by
Mr. Faint. Also includes 100,000 shares held by Faint Family 2001 CRUT
and 150,000 shares held by Faint Family Trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|    
|    
|    
|    
|(11) |  | Includes 93,750 shares subject to options that are vested and exercisable
and held by Mr. Wesker. Also includes 225,000 shares held by a grantor
retained annuity trust organized for the benefit of Mr. Wesker, 150,000
shares held by a grantor retained annuity trust organized for the benefit
of Natasha Wesker, Mr. Weskers wife, 16,725 shares held in an irrevocable
trust for the benefit of Natasha Wesker, for which Natasha Wesker is
trustee, 7,500 shares held in an irrevocable trust for the benefit of
Tania Sethi, for which Natasha                                                                                                                                                                              

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|     |  | Wesker is trustee, 15,000 shares held in an irrevocable trust for the
benefit of Charlotte Lawrence, for which Lawrence Wesker, Mr. Weskers
brother, is trustee, 15,000 shares held in an irrevocable trust for the
benefit of Laura Albert, for which Lawrence Wesker, Mr. Weskers brother, is
trustee, 7,500 shares held in an irrevocable trust for the benefit of
Lawrence Wesker, for which Lawrence Wesker, Mr. Weskers brother, is
trustee, 15,000 shares held in an irrevocable trust for the benefit of
Balram and Sudesh Sethi, for which Balram and Sudesh Sethi, Mr. Weskers
father-in-law and mother-in-law, and Natasha Wesker, Mr. Weskers wife, are
trustees, and 7,500 shares held in an irrevocable trust for the benefit of
Barry Wesker, for which Barry Wesker, Mr. Weskers father, is trustee. Mr.
Wesker disclaims beneficial ownership of the shares held in the irrevocable
trusts and the grantor retained annuity trust organized for Natasha Wesker.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(12) |  | Includes 56,250 shares subject to options that are vested and exercisable
and held by Mr. Roscitt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|    
|    
|    
|    
|    
|    
|    
|(13) |  | Includes 56,250 shares subject to options that are vested and exercisable
and held by Mr. Adams.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|    
|    
|    
|    
|    
|    
|    
|(14) |  | Includes 23,750 shares subject to options that are vested and exercisable
and held by Mr. Heard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|    
|    
|    
|    
|    
|    
|    
|(15) |  | Includes 10,938 shares subject to options that are vested and exercisable
and held by Mr. Martin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|    
|    
|    
|    
|    
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|    
|(16) |  | Includes 975,826 shares held by Sethi Family, L.L.C., of which Mr. Sethi
is managing partner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
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|    
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|    
|(17) |  | Pursuant to a stockholders agreement dated March 20, 2001, this
shareholder entered into a stockholders agreement with Sequoia, Citrix
Systems, Inc., Soundgarden Acquisition Corp. and certain other
stockholders of Sequoia. Pursuant to this agreement, those stockholders
have, among other things, agreed to validly tender and not withdraw their
stock into the tender offer held by Citrix Systems and Soundgarden
Acquisition and to vote the stock held by them in favor of a merger of
Sequoia with Soundgarden Acquisition. The Stockholders have also granted
a proxy to Citrix Systems with respect to their stock, which permits
Citrix Systems to vote the stock at any meeting held for the purpose of
voting on the merger and as further set forth in the Stockholders
Agreement. This agreement is likely to cause a change in control of
Sequoia in the second quarter of 2001.                                                                                 

Sequoia entered into an Agreement and Plan of Merger dated as of March 20,
2001 (the Merger Agreement) with Citrix Systems, Inc. and Soundgarden
Acquisition Corp. The Merger Agreement provides for the commencement by
Soundgarden Acquisition of a tender offer to purchase all the outstanding
shares of Sequoias common stock at a per share price of $5.64. If Soundgarden
Acquisition is able to purchase enough shares of Sequoias common stock, and
subject to the terms and conditions set forth in the Merger Agreement,
Soundgarden Acquisition will be merged with and into Sequoia, which will
continue as the surviving corporation and a wholly owned subsidiary of Citrix
Systems. The Merger Agreement and the tender offer are more fully described in
the Offer to Purchase filed by Citrix Systems and Soundgarden Acquisition and
the Schedule 14D-9 filed by Sequoia, each on March 28, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




Other than the stockholders agreement and the merger agreement described
in Item 12 and the transactions described below, since January 1, 2000, there
has not been, nor is there currently proposed, any transaction or series of
similar transactions to which Sequoia was or will be a party in which the
amount involved exceeds $60,000 and in which any beneficial owner of more than
5% of the Common Stock, director or executive officer had or will have a direct
or indirect material interest.

The following bonuses, which are to be paid at the closing of the merger
between Sequoia and Soundgarden Acquisition Corp., whereby Sequoia will become
a wholly owned

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subsidiary of Citrix Systems, Inc., were unanimously approved by all
disinterested members of the Board. Mr. Gust, who is a member of the Board,
will receive a cash bonus in recognition of his service to Sequoia over the
years in the amount of $94,575. Mr. Heard will receive a cash transition bonus
of $350,000 at the closing of the Merger.

PART IV.

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




(a) the following documents are filed as part of this report:

1. Consolidated Financial Statements included in Item 8 of this document

2. Financial Statement Schedules included in Item 8 of this
document: Schedule II Valuation and Qualifying
          Accounts. All other
schedules for which provision is made in the applicable accounting
regulations of the
          Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
          therefore have been omitted.

3. Employment Agreement between Sequoia and Paul Martin dated as of June
1, 2000.

4. Consent of Independent Auditors

5. Power of Attorney (included on signature page to this report)

(b) Reports on Form 8-K

None.

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##### Table of Contents



SIGNATURES




Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Columbia, Maryland on the 29th day of March, 2001.

|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|    | Sequoia Software Corporation
(Registrant)                                                           
|   
|By: | /s/Gregory G. Heard

                                                            
|    | Gregory G.  HeardVice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)

We, the undersigned officers and directors of Sequoia Software Corporation,
hereby severally constitute and appoint Gregory G. Heard and Mark A. Wesker,
and each of them individually, with full powers of substitution and
resubstitution, our true and lawful attorneys, with full power to them, to sign
for us in our names in the capacities indicated below, amendments to this
report, and general to do all things in our names and on our behalf in such
capacities to enable Sequoia Software Corporation to comply with the provisions
of the Securities Exchange Act of 1934, as amended, and call requirements of
the Securities and Exchange Commission.

|                                               |  |                                              |  |               
|---------------------------------------------- |  | -------------------------------------------- |  | --------------
|Signature                                      |  | Title                                        |  | Date          
|                                               |  |                                              |  |               
|/s/Richard C. Faint, Jr.
Richard C. Faint, Jr. |  | Chief Executive Officer
Director             |  | March 29, 2001
|                                              
|/s/Mark A. Wesker
Mark A. Wesker               |  | President, Chief Operating
Officer, Director |  | March 29, 2001
|                                              
|/s/William M. Gust
William M. Gust, II         |  | Director                                     |  | March 29, 2001
|                                              
|/s/Jonathan Grabel
Jonathan Grabel             |  | Director                                     |  | March 29, 2001
|                                              
|/s/ Lawrence Bettino
Lawrence Bettino          |  | Director                                     |  | March 29, 2001
|                                              
|Andrew J. Filipowski                           |  | Director                                     |  | March 29, 2001
|                                              
|Richard Roscitt                                |  | Director                                     |  | March 29, 2001
|                                              
|Marvin Adams                                   |  | Director                                     |  | March 29, 2001

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|              |  |                                                                                                                                                                                                                                       |  |  |  | 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Index
|             
|3.1          |  | Second Articles of Amendment and Restatement, effective May 17, 2000                                                                                                                                                                 
|             
|             
|             
|             
|3.2          |  | Amended and Restated By-laws, dated as of March 17, 2001                                                                                                                                                                             
|             
|             
|             
|             
|10.1         |  | Investor Rights Agreement dated November 23, 1999, by and among Sequoia and the
investors and stockholders named therein                                                                                                             
|             
|             
|             
|             
|10.1.1       |  | Amendment No. 1 to Investor Rights Agreement dated April 19, 2000 by and among
Sequoia and the investors and stockholders named therein.                                                                                             
|             
|             
|             
|             
|10.2         |  | Lease Agreement dated August 18, 1995, by and between Principal Mutual Life
Insurance Company and Sequoia                                                                                                                            
|             
|             
|             
|             
|10.2.1       |  | First Amendment to Lease dated October 24, 1997, by and between Principal Mutual
Life Insurance Company and Sequoia                                                                                                                  
|             
|             
|             
|             
|10.2.2       |  | Second Amendment to Lease dated November 9, 1998, by and between Principal
Mutual Life Insurance Company and Sequoia                                                                                                                 
|             
|             
|             
|             
|10.2.3       |  | Third Amendment to Lease dated June 8, 1999, by and between Principal Mutual Life
Insurance Company and Sequoia                                                                                                                      
|             
|             
|             
|             
|10.3         |  | Lease Agreement between Lernout & Hauspie (Ireland) Limited and Redwood
Software Europe Limited (d/b/a Sequoia Software Europe)                                                                                                      
|             
|             
|             
|             
|10.4         |  | Employment Agreement between Sequoia and Richard C. Faint, Jr., dated January 1,
2000                                                                                                                                                
|             
|             
|             
|             
|10.5         |  | Employment Agreement between Sequoia and Mark A. Wesker, dated January 1,
2000                                                                                                                                                       
|             
|             
|             
|             
|10.6         |  | Employment Agreement between Sequoia and Gregory G. Heard, dated January 24,
2000                                                                                                                                                    
|             
|             
|             
|             
|10.7          |  | Employment Agreement between Sequoia and Paul Martin, dated as of June 1, 2000                                                                                                                                                       
|             
|             
|             
|             
|10.8         |  | 2000 Stock Incentive Plan                                                                                                                                                                                                            
|             
|             
|             
|             
|10.9         |  | Series B Redeemable Convertible Preferred Stock Purchase Agreement dated July 28,
1998, by and among Sequoia and the investors named therein Agreement dated
September 28, 1998, by and among Sequoia and the investors named therein
|             
|             
|             
|             
|10.10        |  | Convertible Promissory Note and Warrant Purchase Agreement dated as of May 10,
1999, by and among Sequoia and the purchasers named therein                                                                                           
|             
|             
|             
|             
|10.11        |  | Amendment to Convertible Promissory Note and Warrant Purchase Agreement and
Preferred Stock Purchase Warrant dated March 1, 2000, by and among Sequoia and
the purchasers named therein                                              
|             
|             
|             
|             
|10.12        |  | Stock Purchase Agreement dated July 1, 1999, by and among Sequoia, Radian
Systems, Inc., Radian, Inc., Timothy B. Fleischer and Kenneth E. Tighe                                                                                     
|             
|             
|             
|             
|10.13        |  | Series C Redeemable Convertible Preferred Stock and Warrant Purchase Agreement
and divine interVentures, inc.                                                                                                                        
|             
|             
|             
|             
|10.14        |  | Lease Agreement dated March 17, 2000, between Merritt CCP V, LLC and Sequoia                                                                                                                                                        
|             
|             
|             
|             
|10.15        |  | Amended and Restated Registration Rights Agreement dated November 23, 1999 by
and among Sequoia and the individuals listed on the schedules thereto, as amended.                                                                     
|             
|             
|             
|             
|10.16        |  | Third Amended and Restated Stockholders Agreement dated November 23, 1999 by
and among Sequoia and the individuals listed on the schedules thereto, as amended.                                                                     
|             
|             
|             
|             
|*10.17        |  | Agreement and Plan of Merger by and among Sequoia, Soundgarden Acquisition and
Citrix Systems, Inc. dated as of March 20, 2001                                                                                                       
|             
|             
|             
|             
|*10.18        |  | Transaction Option Agreement, dated as of March 20, 2001 between Sequoia and
Citrix                                                                                                                                                  
|             
|             
|             
|             
|*10.19        |  | Form of Stockholders Agreement among Citrix, Soundgarden, Sequoia and certain
stockholders of Sequoia                                                                                                                                
|             
|             
|             
|             
|21.1         |  | Subsidiaries of Sequoia                                                                                                                                                                                                              
|             
|             
|             
|             
|23            |  | Consent of Independent Auditors                                                                                                                                                                                                      
|             
|             
|             
|             
|24.1          |  | Power of Attorney (included in signature pages)                                                                                                                                                                                      
|             
|             
|             
|             
|**99.1        |  | Employment Agreement between Citrix and Richard C. Faint, Jr.                                                                                                                                                                        
|             
|             
|             
|             
|**99.2        |  | Employment Agreement between Citrix and Mark Wesker                                                                                                                                                                                  
|             
|             
|             
|             
|**99.3        |  | Employment Agreement between Citrix and Paul Martin                                                                                                                                                                                  

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|        |  |                                         |  |  |  | 
|------- |  | --------------------------------------- |  |  |  | 
|       
|       
|       
|       
|***99.4 |  | Offer to Purchase, dated March 28, 2001



---

|   |  | incorporated by reference to Sequoias initial registration statement on
Form S-1, SEC File Number 333-96421                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|*   |  | incorporated by reference to exhibits 2-4 to the Schedule 13D filed
March 28, 2001 by Citrix Systems, Inc. and Soundgarden Acquisition Corp.
|   
|   
|   
|   
|**  |  | incorporated by reference to exhibits e(4)-3(6) to Sequoias 14D-9 filed
on March 28, 2001                                                  
|   
|   
|   
|   
|*** |  | incorporated by reference to the Schedule TO of Soundgarden Acquisition
Corp. filed on March 28, 2001.                                      

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