<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

    FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

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

                         Commission file number 0-22667

                             MERCATOR SOFTWARE, INC.
             (Exact name of registrant as specified in its charter)

                Delaware                                    06-1132156
      (State or other jurisdiction                       (I.R.S. Employer
   of incorporation or organization)                    Identification No.)

      45 Danbury Road, Wilton, CT                              06897
(Address of principal executive offices)                     (Zip Code)


               Registrant's telephone number, including area code:
                                  203-761-8600
        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 $.01 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.

                                 Yes [_] No [_]

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 8, 2002 was approximately
$184,662,245 based upon $5.46 per share, the last reported sale price of the
Common Stock on the Nasdaq National Market on that date. As of March 8, 2002
there were 33,820,924 shares of the Registrant's Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.

<PAGE>

                             MERCATOR SOFTWARE, INC.

                           Annual Report on Form 10-K
                   For the Fiscal Year Ended December 31, 2001

                                TABLE OF CONTENTS
<TABLE>
<S>         <C>                                                                                                 <C>

PART I                                                                                                               Page
                                                                                                                     ----
Item 1.        Business                                                                                                3
Item 2.        Properties                                                                                             11
Item 3.        Legal Proceedings                                                                                      11
Item 4.        Submission of Matters to a Vote of Security Holders                                                    12

PART II

Item 5.        Market of Registrant's Common Equity and Related Stockholder Matters                                   13
Item 6.        Selected Financial Data                                                                                15
Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations                  16
Item 7A.       Quantitative and Qualitative Disclosures About Market Risk                                             36
Item 8.        Financial Statements and Supplementary Data                                                            38
Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                   38

PART III

Item 10.       Directors and Executive Officers of the Registrant                                                     39
Item 11.       Executive Compensation                                                                                 42
Item 12.       Security Ownership of Certain Beneficial Owners and Management                                         46
Item 13.       Certain Relationships and Related Transactions                                                         48

PART IV

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K                                        49

Signatures                                                                                                            50

</TABLE>


Mercator Software, the Mercator Software logo, Mercator, Trading Partner, OnCall
and KEY/MASTER are registered trademarks, and Mercator for R/3, Trading Partner
PC, Trading Partner PC/32 and OnCall*EDI are trademarks of Mercator Software,
Inc. This Report also contains trademarks and trade names of other companies.


                                       2

<PAGE>

                                     PART I

Forward-Looking Information

     We make statements in this report and the documents we incorporate by
reference that are considered forward-looking within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Sometimes these
statements will contain words such as "believes," "expects," "intends," "plans"
and other similar words. We intend those forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995 and are including this
statement for purposes of complying with these safe harbor provisions. These
forward-looking statements reflect our current views which are based on the
information currently available to us and on assumptions we have made. Although
we believe that our plans, intentions and expectations as reflected in or
suggested by those forward-looking statements are reasonable, we can give no
assurance that the plans, intentions or expectations will be achieved. We have
listed below and have discussed elsewhere in this report some important risks,
uncertainties and contingencies which could cause our actual results,
performances or achievements to be materially different from the forward-looking
statements we make in this report. These risks, uncertainties and contingencies
include, but are not limited to, the following:

          o    our inability in developing and releasing new products or product
               enhancements;
          o    seasonal fluctuations in our revenues or results of operations;
          o    general economic conditions;
          o    competition from others;
          o    risks in expanding international operations; and
          o    other risk factors set forth under "Risk Factors."

     We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the Securities and Exchange Commission, and you
should not rely on those statements.

ITEM 1.  BUSINESS

Overview

     Mercator Software, Inc., provides business integration software solutions
to global enterprises. Our business integration solutions help customers link
technologies and transactions throughout the extended enterprise and with
external business partners in order to achieve improved speed, flexibility,
efficiency, and return on investment in existing technology. Our solutions allow
our customers to integrate disparate enterprise technologies, such as Enterprise
Resource Planning ("ERP"), Customer Relations Management ("CRM"), and supply
chain management ("SCM") applications, to allow for efficient transactions of
business information in the form of electronic data within an enterprise and
externally among its customers, suppliers and business partners.

     We have organized our business around three geographic regions: the
Americas; Asia Pacific ("APAC"); and Europe, the Middle East and Africa
("EMEA"). Beginning in the second half of 2001, we began targeting customers in
the financial services, healthcare, and manufacturing, retail and distribution
industries by focusing our direct sales force on identified accounts within each
of these vertical markets, in which we have a record of domain expertise. We
also distribute our software solutions through strategic business partnerships,
including global systems integrators, value-added resellers and other technology
companies. In 2001, approximately 27% of our license revenues were generated
through these strategic business partnerships. We estimate that since 1993 we
have provided integration software to over 7,000 customers, with over 1,100 of
those customers investing in enterprise-wide software and services.

     We were originally incorporated in Connecticut in 1985 as TSI International
Software Ltd. and reincorporated in Delaware in 1993. Effective April 3, 2000,
we changed our name to Mercator Software, Inc. Our principal executive offices
are located at 45 Danbury Road, Wilton, Connecticut 06897, and the telephone
number is (203) 761-8600.

     From inception through 1996 we operated primarily as a private domestic
software company with limited direct sales activities in the United Kingdom and
Canada. In 1997 we completed our initial public offering, which raised $25
million. In 1998 we completed a second public offering, which raised $22
million.


                                       3

<PAGE>

Acquisitions

     In November 1998, we acquired certain assets of Software Consulting
Partners, a consulting firm with expertise in the implementation of ERP systems,
for $5.9 million in Common Stock, assumed liabilities and acquisition costs.

     In March 1999, we acquired the Braid Group Limited ("Braid"), a provider of
integration software products for straight-through processing of financial
transactions in the international banking and securities markets. Braid was
acquired for $30 million in cash, approximately $75.7 million in Common Stock
and options, excluding approximately $20 million in contingent consideration to
be paid upon the achievement of certain revenue goals, and approximately $4.5
million in acquisition costs. Braid is based in the United Kingdom, with
operations in the Asia Pacific area.

     The acquisition of Braid gave us domain expertise and an established
customer base in the financial services market to accelerate opportunities for
our Mercator enterprise application integration ("EAI") software. Braid's
strength in the financial services market provided us with a significant
opportunity to sell our Mercator products to Braid customers and, in turn,
provided us with the opportunity to use the Braid brand name and products to
extend our reach into the financial services markets in the United States. In
addition, Braid extended our distribution capabilities in Europe and Asia
Pacific.

     Shortly after the March 1999 acquisition of Braid, the joint Mercator and
Braid research and development teams focused on the development and delivery of
a product that combined the Braid Messenger technology with the Mercator
integration product. That product, Mercator FS, was delivered in June 1999 and
began to be licensed in the third quarter of 1999. By the fourth quarter of
1999, the strategy of combining Messenger with the Mercator integration product
proved to be a success as revenues grew, with approximately half of the license
revenue to financial services customers being generated by Mercator-based
products. Licensing of the acquired Braid products continued, mostly in
previously penetrated Braid geographic markets. The success of this strategy,
which continued during the first half of 2000, allowed Braid to achieve license
revenues (including revenues for both Mercator and Braid products), which
exceeded the operating targets established at the date of acquisition.
Accordingly, the contingent consideration referred to above was paid in April
2000 by the issuance of 218,302 shares of Common Stock, valued at $15.6 million.
In October 2000, an additional cash payment of $1.7 million was made to the
Braid shareholders as the final component of contingent consideration.

     Early in 2000, we introduced Mercator Commerce Broker, which was licensed
to financial services customers with an add-on module, FS Manager. This was the
next generation of the Mercator FS product. Licensing of this product continued
until the third quarter of 2001 when Mercator GSS for straight-through
processing was released. During the year 2000, while the sale of Mercator
Commerce Broker with the FS Manager add-on continued, revenue from certain other
acquired Braid products did not materialize. After our decline in licensing
revenues in the third quarter of 2000, and management changes in the fourth
quarter, it was necessary for us to evaluate allocation of resources to products
that were not generating significant revenue streams. During the fourth quarter
we re-evaluated the opportunity for the Braid Nimbus and Freeway products and
elected to discontinue support of these products to focus on the core Mercator
products. The continued joint development of the core Mercator products and our
significant ongoing focus on the financial services market are discussed further
below.

     In September 1999, we acquired Novera Software Inc. ("Novera"), a developer
of Web application integration solutions based on an application server
platform. We purchased all of the outstanding shares of capital stock of Novera
for approximately $58.2 million, which included the issuance of 1,789,916 shares
of our Common Stock, the issuance of 369,142 stock options and acquisition costs
of approximately $2.0 million.

     The acquisition of Novera gave us the ability to combine Mercator's EAI
software with Novera's web-based application server technology to deliver a
web-based integration software product. The Novera acquisition also provided us
with an office based in Burlington, MA including an experienced research and
development team of Java programmers, as well as a sales and marketing force.

     Novera's operations were integrated into Mercator's operations upon
completion of the acquisition and its sales and marketing force was combined
with Mercator's to market and sell the entire Mercator and Novera product lines.
Novera technology was added to Mercator's integration software and marketed
under the name Web Broker. This new product was available for customer purchase
in January 2000 and resulted in revenues of approximately $0.1 million in 2000.
Revenues of the stand-alone Novera application software were approximately $0.2
million in fiscal 2000.

     In the second quarter of 2000, we began developing a new product (Web
Integrator) with functionality similar to Web Broker, but with technology that
did not include the Novera technology. The purpose of Web Integrator was to
permit customers to integrate their existing Web application server technology
with Mercator's Broker products rather than using Web Broker, which contained
what could be considered as redundant Web application server technology in the
form of the Novera technology. Web Integrator was tested and we began licensing
to customers in the third quarter of 2000.


                                       4

<PAGE>

     In October 2000, the Company announced a plan to reduce office space and
costs by consolidating research efforts into our Boca Raton, FL facility
effective December 31, 2000. Burlington research and development personnel were
invited to apply for open positions in Boca Raton and were also given incentives
to complete in-process projects by December 31, 2000. The existing Burlington
lease expired in November 2000 and a 14-month lease was signed for smaller space
for the sales and marketing personnel. All research and development personnel
from Novera left the Company by December 2000 and accumulated Novera
documentation was transferred to Boca Raton. Concurrent with the departure of
Burlington research and development personnel, we determined that Web Broker,
which bundled the original Novera product and its proprietary application server
technology, would be discontinued and we began contacting Web Broker customers
in December 2000 to inform them of migration plans to Web Integrator. By
December 31, 2000 no significant portion of Novera technology was incorporated
into our product portfolio. In January 2001, our new management team confirmed
the decision made in the fourth quarter of 2000 to discontinue further
development of Novera technology.

Industry Background

     Customer demand for integration software and solutions exists across a
broad range of businesses and within specific vertical industries with the
following requirements:

          o    Integration of core business systems and processes with
               business-to-business transactions, including Web-based
               transactions; connection to electronic marketplaces and
               exchanges; electronic data interchange over private networks and
               proprietary e-commerce connections to major partners for a
               completely integrated supply chain.

          o    Integration of customer-facing business applications with core
               business systems, including Web-based consumer-to-business
               applications; Web servers; and client applications based on Web
               standards.

          o    Integration of core business systems throughout the enterprise,
               including packaged applications, legacy systems, databases and
               data warehouses.

     To meet these requirements, integration software must enable rapid,
efficient and flexible implementation of scalable, high-performance business
solutions in complex technology environments. At the same time, these solutions
must leverage the significant investments made in existing information
technology architectures. Additional essential capabilities of integration
software include:

          o    Support for tasks associated with creating end-to-end integration
               solutions, from integration workflow design to solution
               deployment and management.

          o    High levels of automation that generate reductions in information
               technology resources needed to implement end-to-end integration
               solutions.

          o    Elimination of custom programming for integrating business
               content across application boundaries.

          o    Graphical specifications of integration rules and business logic
               to speed implementation and enable rapid response to changes in
               business objectives and technology.

          o    Support for Web-based and traditional e-business application and
               transaction standards.

          o    Seamless integration with and message routing across systems for
               message and data transport including message software,
               transaction monitors, and public and private networks.

          o    Comprehensive management of the run-time integration environment,
               including real-time and event-driven transaction management.

     Mercator Integration Broker technology identifies, comprehends and codifies
data transactions in any technology environment, and is able to automate without
custom programming by resolving differences in the syntax, structure and
semantic meaning of content being routed between applications that support
different data.

Strategy

     Our objective is to establish Mercator as a premier provider of enterprise-
wide integration software and solutions. Our major strategies for doing this
are:


                                       5

<PAGE>

Provide enterprise-wide integration software and solutions

     We have directed our software technology and product development strategies
toward deploying enterprise-wide business integration and specific industry
solutions in select verticals. Despite the recent economic downturn, we believe
that enterprise-wide business integration solutions continue to be in demand.
This downturn has led companies to rationalize information technology spending
and to seek to maximize return from existing information technology investments.
Our products and technology focus on solutions directed toward the enterprise
and meet short and longer term needs. Solutions deployed at the enterprise level
of an organization require more complex functionality and greater product scope.
We believe that enterprise-level deployments command premium pricing and involve
relationships with more senior client decision-makers. We expect to realize
higher average sales prices for the sale of strategic solutions, particularly
industry-specific solutions targeted toward our select vertical markets.
Importantly, enterprise-wide deployment of business integration solutions places
our software products in close proximity to the most strategic components of a
customer's systems architecture. Such positioning enables us to offer customers
increased performance, profitability and return on investment of information
technology systems. We believe that the capability to deliver mission-critical
information will lead to further customer penetration and increased pricing for
our value-added services.

Target vertical markets in which we have domain expertise

     We have aligned our products, technology, sales, marketing, and operations
with select vertical markets in which we have significant industry expertise and
established customer relationships. We have developed vertical integration
software packages for our targeted industry sectors. Domain expertise enables us
to provide solutions that address industry-specific integration issues. To
support our vertical solutions, we have aligned our direct sales force by
targeting identified accounts within selected industry verticals within each
geographic region. By offering business integration solutions that help
customers realize competitive advantage and return on investment, we believe we
can command higher average sales prices for our solutions.

     In financial services, global banking institutions, brokerage houses and
mutual fund companies use our software for application-to-application
integration and straight-through processing of transactions between financial
institutions processed over both the Internet and private financial networks. We
address a wide range of application integration requirements, including
transaction validation, reporting and management to facilitate straight through
processing and integration with all major financial networks such as SWIFT,
providing a competitive advantage in international banking and brokerage
markets.

     In manufacturing, retail and distribution ("MRD"), we help coordinate ERP
systems by integrating purchase order applications and inventory systems; CRM
applications that handle critical information and transactions, fulfillment and
billing requirements, and SCM products and services used to achieve faster
distribution of goods and supplies.

     In healthcare, the United States government has mandated that health plans,
health care providers, health care clearing houses/intermediaries, and
self-insured employers comply with new regulations associated with the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA
establishes a broad set of regulations that lays out requirements for
maintaining and exchanging patient healthcare data. Our software makes it
possible for healthcare companies to achieve compliance by managing
communications between organizations that must exchange HIPAA-compliant
transactions, validating information to ensure compliance, transforming HIPAA
transactions to and from legacy applications and data stores, and ensuring the
confidentiality of patient data in accordance with HIPAA regulations.

Expand strategic alliances with business partners

     We intend to expand our current relationships with business partners to
penetrate select vertical markets and generate additional revenue. We intend to
augment our direct sales force and professional services operations through
building and strengthening relationships with systems integrators, professional
services firms and other technology partners, such as Compaq Computer
Corporation, Lawson Software, Inc., KPMG Consulting, Inc., IBM Global Services,
Mitsui & Co., Ltd., and TCA Consulting, among others. Systems integrators
maintain relationships with senior decision makers that facilitate access to
strategic projects within global enterprises. Leveraging the software deployment
expertise and industry knowledge of systems integrators to secure sales should
shorten the implementation time of projects and foster customer relationships
with senior level decision makers. Our global partnership strategy complements
our vertical market focus by presenting us to potential business partners as a
more complete solution for specific vertical markets. We believe merging
Mercator's industry solutions into the product portfolios of strategic business
partners broadens our customer base among leading global industries. It
strategically places us within enterprise-wide information systems, establishes
valuable relationships with senior management, strengthens brand identity, and
creates opportunity for deeper customer penetration.

Enhance enterprise solutions through technology partnerships

     We have been recognized by the Gartner Group, Current Analysis, and other
research firms as a technology leader in the integration software industry. To
ensure that our solutions remain technologically superior and that our products
continue to offer


                                       6

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best-of-breed functionality, we intend to form external technology partnerships
with companies whose products add complementary capabilities to our solutions.
Such technology partnerships broaden our suite of product offerings and increase
the flexibility and agility of customer systems through an enhanced Mercator
solution. As an example of this strategy, we announced in June 2001 an agreement
with Versata, Inc. to incorporate Versata, Inc.'s Interaction Server business
process integration technology into our Integration Broker suite of software
products. In addition, during 2001, we enhanced our industry leading data
transformation offering with MQ Series messaging technology from IBM
Corporation.

Leverage our large base of enterprise customers

     Our software products and services are used by over 1,100 enterprise-class
customers worldwide in all major industries to achieve speed, flexibility and
efficiency, while maximizing return on investment from existing IT
infrastructure. With our products and services, customers can integrate internal
applications in support of e-business initiatives, integrate packaged
applications such as ERP systems with legacy systems, best-of-breed applications
and databases to extend their reach within the enterprise, integrate financial
transaction processing with back-office systems in banking and brokerage, and
integrate existing systems with e-commerce transactions from customers and
suppliers. As these customers adapt to changing business conditions, whether in
the shape of expanding markets or merger and acquisition activity, the demand
for integration products and services is expected to rise. We intend to leverage
this opportunity by selling to existing customers across multiple departments
and to both technical and business executives throughout their organizations.

Extend our technology leadership

     We are an established technology leader, having pioneered the market for
application integration with the release of the very first version of our
Mercator Integration Broker in 1993. We were the first company to introduce an
integration product with graphical templates for defining and managing
transaction workflows in event-driven environments, the first product certified
by SAP(TM) for integration of its ERP software with non-SAP applications, and
the first enterprise application integration software to support double-byte
character sets for the Asian market.

     Going forward we will continue to strive to understand the needs of our
customers and develop and bring to market the products and services they require
for full enterprise-wide integration on a global scale. Research and development
resources will be maximized and new capabilities will be developed within the
Mercator Integration Broker suite of software products. In addition, we will
look for key external technology partners whose products add complementary
capabilities to our product.

Products

     At the core of our solution is technology known as Mercator Integration
Broker software, which addresses application integration requirements across a
customer's enterprise and with its external trading partners.

     Customers, partners, and Mercator consultants create Mercator integration
solutions by graphically specifying logical interface relationships and high
level rules ("maps") that govern the way interface data is transformed and
routed between applications and under what conditions. Maps execute under the
Mercator engine, which runs on many popular computer platforms and operating
systems including Windows NT/2000, Sun, and HP. The Mercator engine is the core
runtime component of the Mercator Integration Broker, which can operate in batch
or real-time mode. The Mercator Integration Broker can operate under an
application server as well; or it can be embedded within an application.
Complementing this core architecture, a broad selection of adapters connects
Mercator-based integration solutions to applications (SAP R3, PeopleSoft, Inc.,
Siebel Systems, Inc., and others), resources (files, databases, directories,
etc.), and services (message queue managers, transports, utilities, etc.).

     Mercator's packaged functionality can reduce time, cost and complexity in
implementing and maintaining information technology interfaces. The architecture
provides flexibility in adapting to changing market dynamics and competitive
environments and responding to changes in the technology landscape and enables
companies to extend the life and functionality of information systems, thus
increasing the return on investment in existing technology investments.
Integration modeling is completely contained and executed within the
architecture without reliance on procedural programming. Reduced or eliminated
reliance on programming increases speed of implementation and reduces costly
ongoing manual maintenance. Mercator Integration Broker software is highly
scaleable and supports the most popular operating environments. Maintaining
integration models independent of deployment-specific information results in a
high rate of reusability that improves the speed and efficiency of deployments
across diverse global enterprises. Also, flexibility and efficiency are enhanced
by Mercator technology, allowing for multiple deployment options for any
integration model. The Mercator Integration Broker product suite enables
customers to deploy a single, standards-based architecture for end-to-end
business integration and management.

     Mercator Integration Broker software provides a single, model-based and
event-driven integration platform for designing, implementing and managing
application-to-application ("A2A") and business-to-business ("B2B") interfaces
across all commerce touch points. From a B2B perspective, it integrates complex
business processes that cross organizational or corporate boundaries,


                                       7

<PAGE>

reducing the time, cost and effort to implement and maintain various interfaces.
Mercator Integration Broker software provides capabilities for managing and
controlling the business-to-business operational environment, with comprehensive
support for defining and managing partner relationships, establishing routing
priorities, creating a secure internal messaging environment, and archiving and
auditing transactions.

     For interactions that take place over the Web, Mercator Integration Broker
software provides embedded security based on Internet standards, dynamic
monitoring of extended business processes, and the ability to scale integration
solutions across diverse, distributed computing environments. For A2A business
requirements, Mercator Integration Broker software creates durable, easily
maintained application-to-application interfaces to support any integration
requirement. It delivers technology for integrating packaged applications,
legacy systems, databases and data warehouses across the enterprise. It provides
advanced capabilities for automating the complex and time-consuming tasks of
application integration in diverse business settings, particularly in
environments where scalability, high-performance and interface maintainability
are critical issues. Mercator Integration Broker software provides an
architecture that can be extended to a wide variety of business integration
solution requirements.

     Mercator Integration Broker software combines a number of key technologies
into a comprehensive and flexible platform for designing, deploying and managing
comprehensive business integration solutions. Mercator's data transformation
capabilities allow management of complex structured and unstructured data. The
Mercator graphical business data modeling environment is unique in allowing
users to map and manage complex data flows involving one-to-one, one-to-many,
many-to-one or many-to-many relationships. Adapters, packaged within
industry-specific Mercator solution offerings, provide far more functionality
than simple interfaces provided in other solutions. Adapters support data
exchange between Mercator and leading enterprise applications such as SAP,
Siebel and PeopleSoft as well as databases, messaging environments, file systems
and the Web. The Mercator Integration Broker software is available as a Software
Development Kit ("SDK") that enables customers to embed integration
functionality within their own applications or commercial software products. The
SDK includes a complete set of C++ and Java APIs, and a Web Integration tool kit
that enables customers to develop integration solutions for deployment on
separate Web servers or application servers.

     Consistent with its strategic vertical alignment, we have developed new
vertical integration packages unique to specific industries in which we have
expertise and an established customer base.

     For financial services, in September 2001 we introduced Mercator GSS for
GSTPA, a new strategic product offering to the global securities services
industry providing an integration package for Global Straight Through Processing
("GSTP"). An outgrowth of combining Braid and Mercator connectivity products for
financial institutions, such as Mercator FS Manager, Mercator GSS Manager for
GSTPA is designed to substantially reduce the time, cost, and effort required to
integrate financial transactions with both front office and back office
applications across the GSTP landscape.

     In the case of our vertical focus on manufacturing, retail, and
distribution ("MRD"), we provide powerful supply chain integration/B2B solutions
including support for electronic data interchange ("EDI") and processes that
support trading partner management, as well as integration solutions for
connecting SAP, Siebel, PeopleSoft and other leading applications.

     We have delivered an integration solution package for healthcare
organizations affected by HIPAA. The goal of the legislation is to reduce
administrative costs within the healthcare industry by providing for speed,
accuracy, security and privacy of healthcare related data. Major healthcare
organizations must comply by implementing nine standard electronic healthcare
related transactions by October 2002, including healthcare claims and claim
status, eligibility and referral requests, benefit enrollments and premium
payments. Mercator's HIPAA Solution Package facilitates HIPAA compliance by
providing the necessary software and services for health plans, providers, and
intermediaries to exchange standard HIPAA transactions and completely integrate
these transactions with new and existing enterprise applications and data.

     Companies from various industry verticals around the world use the Mercator
Integration Broker business integration platform to address complex business
integration challenges. Financial services customers include ABN AMRO, Bank One
and Credit Suisse Group. MRD customers include Amazon.com, Australia Post, Coca
Cola Amatil, Deere & Company and Nestle. Healthcare customers include Anthem,
Group Health Cooperative, Premera Blue Cross, and Safeco.

Services

     Mercator Professional Services - Our professional service teams assist
customers either directly or with partners in implementing our integration
products and solutions. By providing strategic and technology consulting
services, we are able to accelerate the delivery of Mercator-based integration
solutions and promote our customers' success in their integration and e-business
initiatives.

     Training - To ensure that our customers are successful using our products,
we provide training in five training centers globally and at customer locations.
We offer a number of courses ranging from two to five days in length with
educational content including basic to advanced levels of product functionality
and hands-on use of products. We recommend that our customers attend a basic


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<PAGE>

three-day training course and believe that a majority of our customers elect to
participate in such training. In addition, in 2000 we instituted a Partner
Certification Program that provides testing to identify, qualify and certify
consultants, systems engineers and support analysts as Mercator Certified
Consultants. Once three or more of a partner's consultants are certified, that
partner becomes a Mercator Certified Partner.

Maintenance

     We believe that a high level of customer service and support is important
to our success, and we provide a range of support services to our customers. We
maintain product and technology experts on call at all times and have support
call centers located at offices in the United States and in the United Kingdom.
We have also implemented an automated Company-wide help desk system to augment
our customer support efforts. This system allows for the optimization of our
resources and knowledge base at all locations and offers the customer improved
service through a single point of contact.

Customers

     As of December 31, 2001, we had directly licensed our Mercator Integration
software products to approximately 7,000 customers worldwide including over
1,100 customers investing in our enterprise-wide software and services. Numerous
others have licensed our products through value-added resellers, independent
software vendors, systems integrators or other third parties who distribute
their products to business partners to facilitate the integration of their
respective business applications. We do not have any customer that accounted for
more than 10% of our revenues in 2001, 2000 or 1999.

Sales and Marketing

     Sales - We license and service our products both directly and through
strategic partners. Our goal is to achieve broad market penetration by pursuing
multiple channels of distribution.

     Our direct sales force focuses on selling the Mercator Integration Broker
suite of products and industry solutions to the world's largest 2000 companies
(the "Global 2000") within vertical industries such as financial services;
manufacturing, retail, and distribution; and healthcare. We also maintain a
telesales organization, which targets mid-market opportunities. Finally, our
Industry Solutions and Services group ("ISS"), consisting of consultants,
trainers and systems engineers, assists with both pre- and post-sales
activities.

     An important part of our sales strategy is to continue to develop indirect
distribution channels such as value-added resellers, independent software
vendors and software integrators. As of December 31, 2001, approximately 40
third parties had agreements with us to resell, embed or otherwise bundle our
products with their offerings in the United States.

     We market our products and services outside of North America through sales
offices located in the United Kingdom, Sweden, Germany, Netherlands, France,
Spain, Switzerland, Australia, Singapore, Hong Kong and Japan as well as through
indirect channels. A majority of the international employees are located in the
United Kingdom. Revenues from international sales offices were approximately 37%
of our total revenues during 2001 and 2000. The international market is very
important to our long-term growth, and we intend to continue to expand our sales
and marketing efforts outside the Americas by adding sales staff and
distributors.

     Marketing - We utilize a wide variety of marketing programs, which are
intended to attract potential customers and to promote Mercator Software and its
brand names. We use a mix of market research, analyst updates, seminars, direct
mail, print advertising, trade shows, speaking engagements, public relations,
customer newsletters and Web-site marketing in order to achieve these goals. We
host conferences for our customers and partners, and provide a range of
marketing programs, incentives and support plans as part of our Mercator World
alliance program.

Product Development

     Since inception, we have made substantial investments in research and
development through both internal development and technology acquisition. In an
effort to speed time to market, we will evaluate buy, build or align strategies
to bring new products to market, but we expect that most of our new products and
enhancements to existing products will be developed internally. Where
appropriate, we will evaluate externally developed technologies for integration
into our product lines. We expect that a substantial majority of our research
and development activities will be related to developing enhancements and
extensions to our Mercator Integration Broker suite of products and industry
solutions.

     The following is a brief history of the development of our product line:
after the introduction of the original Mercator integration broker software,
product development was driven by demand for additional data mapping
functionality and support for more execution platforms. The focus of our
development then shifted to automating Mercator support for specific sources and
destinations through an expanded set of adapters and importers, as well as
developing additional pre-packaged solutions for specific markets, and adding to
Mercator's core capabilities a graphical management tool for cross-application
process workflow. In 1999, we enhanced the


                                       9

<PAGE>

Mercator product family through the acquisition of Braid's technology. In 2000,
we marketed our products as a suite of integration brokers called "Mercator
Commerce Broker," "Mercator Enterprise Broker" and "Mercator Web Broker,"
respectively. In 2001, we consolidated these brokers into a single broker, which
we now market as Mercator Integration Broker. We also focused on completing an
accompanying suite of solutions, adapters and other products as well as
providing support for additional application environments and web-based
technology. These product development activities included the announced
completion of the following new products: Mercator Integration Broker versions
6.0 and 6.5; Mercator Process Integrator Version 1.0 for business process
integration; and Mercator GSS Version 1.0 for straight through processing.

     Our product development expenditures for 2001, 2000 and 1999 were $19.7
million, $21.2 million and $15.3 million, respectively. We expect that we will
continue to commit significant resources to enhancement and development of our
Mercator Integration Broker technology as well as specific solutions for
financial services, MRD and healthcare in the future. To date, all product
development expenditures have been expensed as incurred.

Competition

     The market for application integration products is extremely competitive
and subject to rapid change. Due to the relatively low barriers to entry in the
software market, we will continue to encounter competition from other
established and emerging companies. The factors pertaining to our competitive
position include comprehensiveness of product functionality and features; return
on investment ("ROI") in new and existing technology; industry solutions that
meet specific business needs; an open architecture that allows our technology to
work with an indefinite number of applications, systems and technologies,
including our competitors'; the ability to rapidly process large transaction
volumes; quality of professional services offerings; product quality,
performance and price; ease of product implementation; quality of customer
support services; customer training and documentation; and vendor and product
reputation. The relative importance of each of these factors depends upon the
specific customer environment.

     Although to our knowledge none of our competitors or other companies
currently produce a solution that is completely identical to our solution, we
are subject to competition from several different types of companies: large
multi-product software companies, EDI software companies, vendors of proprietary
messaging technology and other application integration software vendors. Our
Mercator Integration Broker suite of products and industry solutions also
competes against technology developed internally by individual businesses to
meet their specific business integration requirements. While there are
approximately forty companies that offer a product or solution that delivers one
or more of the components necessary for application integration, the competition
we usually face generally consists of one or more of five companies, as well as
the customer's internal development staff. In most cases, the specific
competitor(s) we face varies from situation to situation depending on customer
requirements, and generally no one vendor dominates in the industry.

     Many current packaged e-business integration offerings address only a
portion of customers' integration requirements. We provide technology that
resolves complex differences in application content and semantics, while also
providing, on a common architecture, the other key elements of e-business
integration. As a result, we must educate prospective customers regarding the
advantages of our products and services over internally developed solutions from
a cost perspective as well as a long-term maintenance perspective. In addition,
we must be able to adequately educate potential customers about the quantitative
and qualitative benefits provided by our products and services both with respect
to internally developed solutions and as to those offered by our competitors.

Proprietary Technology

     Our success depends upon our proprietary software technology. We do not
have patent protection on our products and rely principally on trade secret,
copyright and trademark laws, nondisclosure and other contractual agreements and
technical measures to protect our technology. We also believe that factors such
as the technological and creative skills of our personnel, product enhancements
and new product developments are essential to establishing and maintaining a
technology leadership position. We enter into confidentiality and/or license
agreements with our customers, and limit access to and distribution of our
software documentation and other proprietary information.

Employees

     As of December 31, 2001, we had 614 employees, including 115 in sales, 26
in marketing, 99 in research and development, 202 in professional services, 72
in customer support, and 100 in general administration; 338 of these employees
are in the Americas (including Corporate), 237 are in EMEA and 39 are in APAC.
Other than Roy King, our Chairman, Chief Executive Officer and President, all
employees are employed on an at-will basis and we have no fixed-term employment
agreements with our employees, although certain officers have agreements
relating to benefits in the event of termination without cause and also in the
event of a change in control. Our employees are not represented by any union. We
believe that our relations with employees are good.


                                       10

<PAGE>

ITEM 2. PROPERTIES

     Our principal executive offices are located in Wilton, Connecticut, and
consist of approximately 25,000 square feet under a lease expiring January 31,
2004. In June 2000, we entered into a lease for approximately 58,000 square feet
of new office space in Wilton, Connecticut commencing September 21, 2001 and
expiring on January 31, 2014. This new space is unoccupied and we are seeking to
sublet this space to third parties or to negotiate an early termination of the
lease.

     We also lease office space of approximately 37,000 square feet in Boca
Raton, Florida, under a lease expiring January 31, 2006, which is used primarily
for research and development activities; approximately 18,000 square feet in
Bannockburn, Illinois, under a lease expiring October 11, 2010, which is used
primarily for tele-sales, technical support and production activities;
approximately 11,000 square feet in Reston, Virginia, under a lease expiring
February 28, 2007, which is used primarily for research and development and
sales activities; and approximately 27,000 square feet in the United Kingdom,
under a lease expiring June 23, 2015, which is used for customer support, sales
activities and research and development activities.

     In addition, we lease smaller sales/customer support offices in various
locations in the United States, Canada, Europe, Australia and Asia.

ITEM 3. LEGAL PROCEEDINGS

     The Company has certain significant legal contingencies, discussed below,
and other litigation of a nature considered normal to its business which are
pending against the Company.

     On or about February 1, 2000, Mercator was named as a defendant and served
with a complaint in an action entitled Carpet Co-Op of America Association,
Inc., and FloorLINK, L.L.C. v. TSI International Software, Ltd., Civil Action
No. 00CC- 0231, in the Circuit Court of St. Louis County, Missouri. The
complaint includes counts for breach of contract, fraud and negligent
misrepresentation in connection with certain software implementation work
provided under contract by Mercator. Mercator counter-sued in the United States
District Court for the District of Connecticut on March 30, 2000 for copyright
infringement, trademark infringement, unfair competition, misappropriation of
trade secrets, breach of contract, fraud, unjust enrichment and violation of the
Connecticut Unfair Trade Practices Act. On January 30, 2002, Mercator entered
into a settlement agreement with respect to these actions, which resolves these
actions in their entirety. The settlement includes payment by Mercator of $0.5
million after insurance proceeds. The amount to be paid by the Company was
accrued as of December 31, 2001 in our consolidated balance sheet.

     Between August 23, 2000 and September 21, 2000 a series of fourteen
purported securities class action lawsuits was filed in the United States
District Court for the District of Connecticut, naming as defendants Mercator,
Constance Galley and Ira Gerard. Kevin McKay was also named as a defendant in
nine of these complaints. On or about November 24, 2000, these lawsuits were
consolidated into one lawsuit captioned: In re Mercator Software, Inc.
Securities Litigation, Master File No. 3:00-CV-1610 (GLG). The lead plaintiffs
purport to represent a class of all persons who purchased Mercator's Common
Stock from April 20, 2000 through and including August 21, 2000. Each complaint
in the consolidated action alleges violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, through alleged material
misrepresentations and omissions and seeks an unspecified award of damages. On
January 26, 2001, the lead plaintiffs filed an amended complaint in the
consolidated matter with substantially the same allegations. Named as defendants
in the amended complaint are Mercator, Constance Galley and Ira Gerard. The
amended complaint in the consolidated action alleges violations of Section 10(b)
and Rule 10b-5 through alleged material misrepresentations and omissions and
seeks an unspecified award of damages. Mercator filed a motion to dismiss the
amended complaint on March 12, 2001. The lead plaintiffs filed an opposition to
Mercator's motion to dismiss on or about April 18, 2001, and Mercator filed its
reply brief on May 7, 2001. The Court heard oral argument on the motion to
dismiss on July 6, 2001. On September 13, 2001, the Court denied Mercator's
motion to dismiss. Mercator believes that the allegations in the amended
complaint are without merit and intends to contest them vigorously. We believe
that this securities class action lawsuit is covered by insurance. Mercator
notified its directors' and officers' liability insurance companies of this
matter. The insurance carriers have reserved their rights in this matter. There
can be no guarantee as to the ultimate outcome of this proceeding or whether the
ultimate outcome, after considering liabilities already accrued in the Company's
December 31, 2001 consolidated balance sheet and insurance recoveries, may have
a material adverse effect on the Company's consolidated financial position or
consolidated results of operations.

     The Company has been named as a defendant in an action filed on August 3,
2001 in the United States District Court for the Eastern District of
Pennsylvania, entitled Ulrich Neubert v. Mercator Software, Inc., f/k/a TSI
International Software, Ltd., Civil Action No. 01-CV-3961. The complaint alleges
claims of breach of contract, breach of the implied covenant of good faith and
fair dealing, breach of fiduciary duty, and fraud in connection with the
Company's acquisition of Software Consulting Partners ("SCP") in November 1998.
Neubert, who was the sole shareholder of SCP prior to November 1998, seeks
purported damages of up to approximately $7.5 million, plus punitive damages and
attorney's fees. The complaint was served on the Company on November 21, 2001.
The Company filed a motion to dismiss the complaint on January 10, 2002, which
is still pending. The Company believes that


                                       11

<PAGE>

the allegations in the complaint are without merit and intends to contest the
lawsuit vigorously. Mercator has notified its insurance carrier of this matter,
but has not yet received any coverage position from them. The ultimate legal and
financial liability of the Company in respect to this claim cannot be estimated
with any certainty. However, the ultimate outcome of this proceeding, after
considering liabilities already accrued in the Company's December 31, 2001
consolidated balance sheet, is not expected to have a material adverse effect on
its consolidated financial position, but could possibly be material to the
consolidated results of operations of any quarter.

     In addition, the Company and a third party are currently disputing the
break-up fee provisions with respect to a proposed investment in the Company.

     As of December 31, 2001, the Company has accrued approximately $3.7
million, after considering any insurance recoveries, for the aggregate amount of
the contingencies described above.

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

     No matters were submitted to a vote of our shareholders during the fourth
quarter ended December 31, 2001.


                                       12

<PAGE>

                                     PART II

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

     Our Common Stock is listed for trading on the Nasdaq National Market
(Symbol: MCTR). Prior to February 7, 2000 our stock traded on the Nasdaq System
under the symbol "TSFW". Our Common Stock began trading on the Nasdaq National
Market on July 2, 1997. Prior to that time, there was no public market for our
Common Stock. The following table sets forth, for the fiscal periods indicated,
the high and low reported sale prices for our Common Stock as reported by the
Nasdaq National Market. The stock prices have been adjusted to reflect a
two-for-one stock split on April 5, 1999.

                                                      Reported Sale Price
                                                ------------------------------
                                                    High              Low
                                                -------------     ------------
1999

First Quarter ..................................    32.00            20.50
Second Quarter .................................    28.875           14.00
Third Quarter ..................................    28.00            16.875
Fourth Quarter .................................    66.75            22.00

2000

First Quarter ..................................   149.875           47.00
Second Quarter .................................    84.00            26.75
Third Quarter ..................................    70.375           13.438
Fourth Quarter .................................    16.188            2.81

2001

First Quarter ..................................    12.188            3.25
Second Quarter .................................     3.75             1.40
Third Quarter ..................................     2.47             0.95
Fourth Quarter .................................     9.44             1.09

2002

First Quarter (through March 8, 2002) ..........    10.15             3.91


     The closing price for the Common Stock on the Nasdaq National Market on
March 8, 2002 was $5.46.

     There were 212 holders of record of our Common Stock as of March 8, 2002,
although we believe that the number of beneficial owners of our Common Stock
exceeds this number.

     We have never paid cash dividends on our Common Stock and do not anticipate
the payment of cash dividends in the foreseeable future. We currently anticipate
that any future earnings will be retained to finance our operations.

Recent Sales of Unregistered Securities

     On January 17, 2001, the Company sold for fair market value 228,180 shares
of its Common Stock to Mitsui & Co., Ltd. for $2.0 million in cash in a private
placement. We paid a fee of $365,000 to MAST Services LLC for advice in
connection with the structuring and negotiation of the transaction. The Company
relied on an exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended ("Securities Act") as a transaction by an
issuer not involving a public offering. Mitsui & Co., Ltd. is an accredited
investor as defined in Regulation D promulgated under the Securities Act and
received or had access to adequate information about Mercator. Mitsui & Co.,
Ltd. agreed, as a condition of the sale, not to transfer or distribute the
shares except pursuant to a registration statement or an exemption from
registration under the Securities Act.

     On December 11, 2001, the Company sold an aggregate of 2,228,412 shares of
Common Stock to a group of institutional investors at $7.18 per share, for an
aggregate of $16.0 million in cash in a private placement. The Company is
obligated to issue additional shares of Common Stock to the investors in the
event of a sale of additional equity at a price of less than $7.18 per share to
any other investors before December 11, 2002. The investors were also issued
seven-year warrants to purchase 557,104 shares at a price of $8.98 per share.
The warrants expire in December 2008. The warrants contain anti-dilution
provisions pursuant to which the exercise price and number of shares issuable
upon exercise will be adjusted in the event of a stock split, stock dividend,
re-


                                       13

<PAGE>

capitalization, reorganization or similar transaction or a future sale of
additional equity to other investors at less than $8.98 per share while the
warrants are outstanding. The Company paid a commission in cash in the amount of
$960,000 to William Blair & Co., L.L.C. for services in connection with this
sale. The Company relied on an exemption from registration pursuant to Section
4(2) of the Securities Act and Regulation D promulgated thereunder as a
transaction by an issuer not involving a public offer. Each of the purchasers is
an accredited investor as defined in Regulation D, and agreed, as a condition of
the sale, not to transfer or distribute the shares except pursuant to a
registration statement or an exemption from registration under the Securities
Act.

     On December 11, 2001, the Company issued to the private placement agent,
William Blair & Company, L.L.C., for services in connection with the private
sale of 2,228,412 shares of Common Stock, a warrant to purchase 44,568 shares of
Common Stock at an exercise price of $7.18 per share. The warrant is subject to
anti-dilution adjustments and is exercisable for a term of five years from the
date of grant. The Company relied on an exemption from registration pursuant to
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. William Blair & Company, L.L.C. is an accredited investor as
defined in Regulation D and received or had access to adequate information about
Mercator. William Blair & Company, L.L.C. agreed, as a condition of the
issuance, not to transfer or distribute the warrant or the shares except
pursuant to a registration statement or an exemption from registration under the
Securities Act.

     On June 22, 2001, in connection with a secured credit facility, the Company
issued a warrant to Silicon Valley Bank to purchase 220,000 shares of Common
Stock at $4.00 per share. The number of shares that may be purchased upon
exercise of this warrant and the exercise price were subject to adjustment based
on certain anti-dilution provisions in the warrant agreement. This warrant
expires in June 2008. Silicon Valley Bank subsequently assigned the warrant to
an affiliate, Silicon Valley Bancshares, which exercised the warrant for 123,296
shares of Common Stock on January 3, 2002 pursuant to the cashless exercise
provisions of the warrant agreement and, as such, the Company did not receive
any proceeds. The Company relied on an exemption from registration pursuant to
Section 4(2) of the Securities Act with respect to the issuance of the warrant
and shares as a transaction by an issuer not involving a public offering. Both
Silicon Valley Bank and Silicon Valley Bancshares are accredited investors as
defined in Regulation D and received or had access to adequate information about
Mercator. They agreed, as a condition of the issuance, not to transfer or
distribute the warrant or shares except pursuant to a registration statement or
an exemption from registration under the Securities Act.

     Between June and October of 2001, the Company granted warrants to purchase
an aggregate of 456,447 shares of Common Stock to MAST Services LLC, as
compensation for its services in connection with strategic alliance
opportunities. The warrants and services rendered are valued at $368,000. The
warrants have exercise prices ranging from $3.66 to $4.00 per share. The
warrants are subject to anti-dilution adjustments and are exercisable for the
terms of two to three years from the time of grant. Subsequently, MAST Services
LLC assigned all of the warrants to an affiliate, MAST International Limited.
The Company relied on an exemption from registration pursuant to Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. MAST Services LLC and MAST International Limited are accredited
investors as defined in Regulation D, and received or had access to adequate
information about Mercator. Both MAST Services LLC and MAST International
Limited agreed, as a condition of the issuance, not to transfer or distribute
the warrants or the shares except pursuant to a registration statement or an
exemption from registration under the Securities Act.

     Between June and October of 2001, the Company granted warrants to purchase
an aggregate of 179,404 shares of Common Stock to Morgan Howard Global
International Limited for its services in connection with executive search
assignments. The warrants and services rendered are valued at $134,000. The
warrants had exercise prices ranging from $2.62 to $5.60 per share and were
exercisable for terms of three years from the date of grant. On January 9, 2002,
the warrant holder exercised the warrants for 104,846 shares of Common Stock
pursuant to cashless exercise provisions in the warrant agreement and, as such,
the Company did not receive any proceeds from this exercise. The Company relied
on an exemption from registration pursuant to Section 4(2) of the Securities Act
with respect to issuance of the warrants and shares as a transaction by an
issuer not involving a public offering. Morgan Howard Global International
Limited is an accredited investor as defined in Regulation D and received or had
access to adequate information about Mercator. Morgan Howard Global
International Limited agreed, as a condition of the issuance, not to transfer or
distribute the shares except pursuant to a registration statement or an
exemption from registration under the Securities Act.


                                       14

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

                 Selected Financial Data for the Last Five Years
<TABLE>


                                                                                      Year Ended December 31,
                                                          -------------------------------------------------------------------------
                                                             2001           2000            1999           1998           1997
                                                          -----------    -----------     -----------    -----------    ------------
<S>                                                     <C>              <C>             <C>            <C>            <C>
Statements of Operations Data:                                             (In thousands, except per share data)
Revenues:
   Software licensing ...................................   $ 59,004       $ 78,825        $ 56,820       $ 29,105        $ 14,603
   Services .............................................     33,358         32,883          23,208          6,371           3,746
   Maintenance ..........................................     33,911         26,582          18,597          9,840           8,321
                                                          -----------    -----------     -----------    -----------    ------------
         Total revenues .................................    126,273        138,290          98,625         45,316          26,670
                                                          -----------    -----------     -----------    -----------    ------------
Cost of revenues:

   Software licensing ...................................        860          1,537           1,286          1,482             778
   Services (exclusive of non-cash stock option
    re-pricing charges of $259, $0, $0, $0 and 0,
    respectively) .......................................     27,403         25,402          16,319          3,292           1,184
   Maintenance (exclusive of non-cash stock option
    re-pricing charges of $77, $0, $0, $0 and $0,
    respectively) .......................................      7,082          6,621           5,051          2,115           1,306
   Stock option re-pricing charge .......................        336             --              --             --              --
   Amortization of intangibles ..........................      3,845          7,399           6,155             --              --
   Intangibles impairment charge ........................         --         11,200              --             --              --
                                                          -----------    -----------     -----------    -----------    ------------
         Total cost of revenues .........................     39,526         52,159          28,811          6,889           3,268
                                                          -----------    -----------     -----------    -----------    ------------

Gross profit ............................................     86,747         86,131          69,814         38,427          23,402
                                                          -----------    -----------     -----------    -----------    ------------
Operating expense:

   Product development (exclusive of non-cash stock
    option re-pricing charges of $226, $0, $0, $0 and
    $0, respectively) ...................................     19,674         21,189          15,276          5,699           4,462
   Selling and marketing (exclusive of non-cash stock
    option re-pricing charges of $477, $0, $0, $0 and
    $0, respectively) ...................................     63,274         68,861          41,187         22,033          13,095
   General and administration (exclusive of non-cash
    stock option re-pricing charges of $185, $67, $0,
    $0 and $0, respectively) ............................     30,736         24,152           9,300          5,929           3,792
   Stock option re-pricing charge .......................        888             67              --             --              --
   Amortization of intangibles ..........................     23,603         39,464          21,534            303              --
   Intangibles impairment charge ........................         --         28,557              --             --              --
   Restructuring charge .................................      8,111             --              --             --              --
                                                          -----------    -----------     -----------    -----------    ------------
         Total operating expenses .......................    146,286        182,290          87,297         33,964          21,349
                                                          -----------    -----------     -----------    -----------    ------------
Operating income (loss) .................................    (59,539)       (96,159)        (17,483)         4,463           2,053
Other income (expense), net .............................        (61)           650             987          2,015             503
                                                          -----------    -----------     -----------    -----------    ------------
Income (loss) before income taxes .......................    (59,600)       (95,509)        (16,496)         6,478           2,556
Provision for (benefit from) income taxes ...............      3,860          2,583            (228)          (679)             76
                                                          -----------    -----------     -----------    -----------    ------------
Net income (loss) per share .............................   $(63,460)      $(98,092)       $(16,268)       $ 7,157         $ 2,480
                                                          ===========    ===========     ===========    ===========    ============

Net income (loss) per share:

     Basic ..............................................    $ (2.08)       $ (3.36)        $ (0.64)        $ 0.35          $ 0.21
     Diluted ............................................    $ (2.08)       $ (3.36)        $ (0.64)        $ 0.30          $ 0.14
Weighted average number of common shares
    and common equivalent shares outstanding:
     Basic ..............................................     30,536         29,154          25,376         20,299          11,834
     Diluted (1) ........................................     30,536         29,154          25,376         23,816          17,134

</TABLE>

----------------------------------------------------------
(1) For an explanation of the determination of the number of shares used in
computing per share amounts, see Note (8) of Notes to Consolidated Financial
Statements


                                       15

<PAGE>

          Selected Financial Data for the Last Five Years - (Continued)
<TABLE>

                                                                                      Year Ended December 31,
                                                           -------------------------------------------------------------------------
                                                              2001           2000            1999           1998           1997
                                                           -----------    -----------     -----------    -----------    ------------
                                                                                        (In thousands)
<S>                                                         <C>           <C>             <C>            <C>            <C>
Balance sheet data:
Cash and marketable securities ...........................   $ 28,236       $ 21,747        $ 14,886       $ 47,945        $ 21,403
Working capital ..........................................   $  7,887       $ 23,411        $ 39,669       $ 53,742        $ 23,371
Total assets .............................................   $126,978       $160,891        $226,815       $ 78,187        $ 32,942
Total stockholders' equity ...............................   $ 69,080       $111,406        $187,653       $ 61,899        $ 25,416

</TABLE>



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

     We make statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are considered forward-looking within
the meaning of the Securities Act of 1933 and the Securities Exchange Act of
1934. Sometimes these statements will contain words such as "believes",
"expects", "intends", "plans" and other similar words. We intend those
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995 and are including this statement for purposes of complying with these safe
harbor provisions. These forward-looking statements reflect our current views
which are based on the information currently available to us and on assumptions
we have made. Although we believe that our plans, intentions and expectations as
reflected in or suggested by those forward-looking statements are reasonable, we
can give no assurance that the plans, intentions or expectations will be
achieved. We have listed below and have discussed elsewhere in this report some
important risks, uncertainties and contingencies which could cause our actual
results, performances or achievements to be materially different from the
forward-looking statements we make in this report. These risks, uncertainties
and contingencies include, but are not limited to, the following:

     o    our inability in developing and releasing new products or product
          enhancements;
     o    seasonal fluctuations in our revenues or results of operations;
     o    general economic conditions;
     o    competition from others;
     o    risks in expanding international operations; and
     o    other risk factors set forth under "Risk Factors."

     We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the Securities and Exchange Commission, and you
should not rely on those statements.

Overview

     The Company was incorporated in Connecticut in 1985 as TSI International
Software Ltd. and reincorporated in Delaware in September 1993. We completed our
initial public offering in July 1997 and a second public offering in June 1998.
We changed our name to Mercator Software, Inc. effective April 3, 2000.

     Our revenues are derived principally from three sources: (i) license fees
for the use of our software products; (ii) fees for consulting services and
training; and (iii) fees for maintenance and technical support. We generally
recognize revenue from software license fees when a license agreement has been
signed by both parties, the fee is fixed or determinable, collection of the fee
is probable, delivery of our products has occurred and no other significant
obligations remain. Payments for licenses, services and maintenance received in
advance of revenue recognition are recorded as deferred revenue. We intend to
continue to increase the scope of service offerings insofar as it supports the
licensing of our software products. Although it is not the case for 2001, we
believe that software licensing revenue will continue to account for a larger
portion of total revenues than services and maintenance revenues.

     Revenues from services include fees for consulting services and training.
Revenues from services are recognized on either a time and materials or
percentage of completion basis as the services are performed and amounts due
from customers are deemed collectible


                                       16

<PAGE>

and nonrefundable. Revenues from fixed price service agreements are recognized
on a percentage of completion basis in direct proportion to the services
provided.

     Customers who license our products normally purchase maintenance contracts.
These contracts provide unspecified software upgrades and technical support over
a fixed term, and can range from one to four years. Maintenance contracts are
usually paid on an annual basis in advance, and revenues from these contracts
are recognized ratably over the term of the contract.

     Our products can be used by information technology professionals, as well
as value added resellers, independent software vendors, software integrators or
other third parties who resell, embed or otherwise bundle our products with
their products. License fee revenues are derived from direct licensing of
software products through our direct sales force and strategic partners. Sales
through strategic partners accounted for 27% and 37% of license revenues for the
years ended December 31, 2001 and 2000, respectively. International revenues
accounted for 37% of total revenues for both the years ended December 31, 2001
and 2000, respectively.

     The size of orders typically range from $50,000 to over $3.0 million per
order. The loss or delay of large individual orders, therefore, can have a
significant impact on revenue and other quarterly results. In addition, we
generally recognize a substantial portion of our quarterly software licensing
revenues in the last month of each quarter, and, as a result, revenue for any
particular quarter may be difficult to predict in advance. Because operating
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could result in significant
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenue, operating results would be materially and adversely
affected. As a result of these and other factors, operating results for any
quarter are subject to variation, and period-to-period comparisons of results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.

Critical Accounting Policies and Estimates

     The policies discussed below are considered by us to be critical to an
understanding of our financial statements because they require us to apply the
most judgment and make estimates regarding matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. With respect to the policies discussed below, we
note that because of the uncertainties inherent in forecasting, the estimates
frequently require adjustment.

     Our financial statements and related disclosures, which are prepared to
conform with accounting principles generally accepted in the United States of
America, require us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and accounts receivable and expenses
during the period reported. We are also required to disclose amounts of
contingent assets and liabilities at the date of the financial statements. Our
actual results in future periods could differ from those estimates. Estimates
and assumptions are reviewed periodically, and the effects of revisions are
reflected in the Consolidated Financial Statements in the period they are
determined to be necessary.

     We consider the most significant accounting policies and estimates in our
financial statements to be those surrounding: (1) revenues and accounts
receivable; (2) valuation of goodwill and long-lived assets; (3) valuation of
deferred tax assets; (4) legal contingencies; and (5) restructuring reserves.
The accounting policies, the basis for any estimates and potential impact to our
Consolidated Financial Statements, should any of the estimates change, are
further described as follows:

   Revenues and Accounts Receivable. Our revenues are derived principally from
three sources: (i) license fees for the use of our software products; (ii) fees
for consulting services and training; and (iii) fees for maintenance and
technical support. We generally recognize revenue from software license fees
when a license agreement has been signed by both parties, the fee is fixed or
determinable, collection of the fee is probable, delivery of our products has
occurred and no other significant obligations remain. For multiple-element
arrangements, we apply the "residual method". According to the residual method,
revenue allocated to the undelivered elements is allocated based on vendor
specific objective evidence ("VSOE") of fair value of those elements. VSOE is
determined by reference to the price the customer would be required to pay when
the element is sold separately. Revenue applicable to the delivered elements is
deemed equal to the remainder of the contract price. The revenue recognition
rules pertaining to software arrangements are complicated and certain
assumptions are made in determining whether the fee is fixed and determinable
and whether collectability is probable. For instance, in our license
arrangements with resellers, estimates are made regarding the reseller's ability
and intent to pay the license fee. Our estimates may prove incorrect if, for
instance, subsequent sales by the reseller do not materialize. Should our actual
experience with respect to collections differ from our initial assessment, there
could be adjustments to future results. Another assumption made in the revenue
recognition process involves assessing whether the fee may be allocated to the
various elements of the arrangement. For instance, the literature on software
revenue recognition requires that the vendor have the ability to determine
whether VSOE of fair value of the undelivered element exists when recognizing
revenue on the delivered elements. The estimate of fair value of the undelivered
element is generally determined by reference to separate stand-alone sales of
the undelivered element. Should our actual experience with respect to VSOE
differ from our initial assessment, there could be adjustments to future
results.


                                       17

<PAGE>

     Revenues from services include fees for consulting services and training.
Revenues from services are recognized on either a time and materials or
percentage of completion basis as the services are performed and amounts due
from customers are deemed collectible and non-refundable. Revenues from fixed
price service agreements are recognized on a percentage of completion basis in
direct proportion to the services provided. To the extent the actual time to
complete such services varies from the estimates made at any reporting date, our
revenue and the related gross margins may be impacted in the following period.

     In addition to assessing the probability of collection in conjunction with
revenue arrangements, we continually assess the collectability of outstanding
invoices. Assumptions are made regarding the customer's ability and intent to
pay and are based on historical trends, general economic conditions, and current
customer data. Should our actual experience with respect to collections differ
from our initial assessment, there could be adjustments to bad debt expense.

   Valuation of Goodwill and Long-Lived Assets. We review long-lived assets,
goodwill and certain identifiable intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When factors indicate that an intangible or long-lived
asset should be evaluated for possible impairment, an estimate of the related
asset's undiscounted future cash flows over the remaining life of the asset will
be made to measure whether the carrying value is recoverable. Any impairment is
measured based upon the excess of the carrying value of the asset over its
estimated fair value which is generally based on an estimate of future
discounted cash flows. At December 31, 2001, we had goodwill and long-lived
assets on our consolidated balance sheet net of accumulated amortization,
totaling $54.1 million. Should we experience reductions in revenues and cash
flows because our business or market conditions vary from our current
expectations, we may not be able to realize the carrying value of these assets
and will record an impairment charge at that time.

   Valuation of Deferred Tax Assets. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards.
Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established to the extent that it is more likely than not, that we will be
unable to utilize deferred income tax assets in the future. At December 31,
2001, we had a valuation allowance of $40.8 million against $41.0 million of
gross deferred tax assets. The net deferred tax asset of $0.2 million represents
deductible temporary differences located in certain foreign jurisdictions, which
is more likely than not to be utilized in the future. We considered all of the
available evidence to arrive at our position on the net deferred tax asset;
however, should circumstances change and alter our judgment in this regard, it
may have an impact on future operating results.

   Legal Contingencies. Our policy is to accrue for an estimated loss from a
legal contingency if both of the following conditions are met: (1) information
available prior to issuance of the financial statements indicates that it is
probable that an asset had been impaired or a liability had been incurred at the
date of the financial statements; and (2) the amount of loss can be reasonably
estimated. When there is no best point estimate of the loss and only a range of
loss is available, we accrue to the low end of the range. We have certain
significant legal and other contingencies as well as other litigation of a
nature considered normal to our business which are pending against us. As of
December 31, 2001, we have accrued approximately $3.7 million after considering
any insurance recoveries for the aggregate amount of such contingencies. Should
our actual payments resulting from the resolution of these contingencies differ
from amounts accrued, we could incur additional expense in future periods. (See
Note 12 of Notes to Consolidated Financial Statements.)

   Restructuring Reserves. As mentioned in Note 2 of our consolidated financial
statements, we incurred restructuring charges totaling $8.1 million during
fiscal 2001. At December 31, 2001 the restructuring liabilities that remain
totaled $5.0 million on our consolidated balance sheets. Of this amount, $0.3
million is related to employee termination benefits that we expect to be paid in
early 2002. The remaining $4.7 is for estimated future payments, primarily for
rent in excess of anticipated sublease income. Certain assumptions went into
this estimate including sublease income expected to be derived from these
facilities. Should we negotiate more favorable subleases or reach a settlement
with our landlords to be released from our existing obligations, we could
realize a favorable benefit to our results of future operations. Should future
lease costs, in excess of sublease income, if any, related to these facilities
exceed our estimates, we could incur additional expense in future periods.

Restatement of the Quarter Ended March 31, 2000

     In August 2000, the audit committee of our Board of Directors became aware
of questions concerning the accounting for certain expense items. The audit
committee initiated a review of these items and performed certain additional
procedures. As a result of these procedures, it was determined that certain
expenses were not properly recorded in the first and second quarters of 2000
and, accordingly, it was determined that the financial statements for the
quarter ended March 31, 2000, should be restated (the "Restatement"). The impact
of this Restatement on our results of operations for the three months ended
March 31, 2000 was to increase cost of revenues by $0.1 million, increase
operating expenses by $1.2 million, and increase the net loss by $1.6 million
from $9.9 million to $11.5 million. Mercator's fully diluted net loss per share
increased by ($0.06) from ($0.35) to ($0.41). In addition to restating earnings
for the quarter ended March 31, 2000, it was determined that the financial
results announced on July 20, 2000 for


                                       18

<PAGE>

the quarter ended June 30, 2000 were incorrect. As a result, the financial
results included in the June 30, 2000 Form 10-Q are different from the results
initially announced on July 20, 2000.

     During the third and fourth quarters of 2000, we incurred certain expenses
either connected with the Restatement or to mitigate the effects of the
Restatement on our continuing operations. These expenses were incremental to
those expenses required to maintain normal levels of operations and we believe
such expenses would not have been incurred had the Restatement not occurred. The
incremental Selling and Marketing and General and Administrative costs were
approximately $1.6 million and $4.7 million, respectively, during the third and
fourth quarters of 2000. The Selling and Marketing costs relate to a special
commission incentive plan. The General and Administrative costs consisted
primarily of severance costs for the former CEO and CFO, the cost of
accelerating the vesting of options granted to our former CEO, legal costs
associated with securities litigation, and search fees to replace departed
executives. Incremental General and Administrative costs relating to the
Restatement were approximately $2.0 million during 2001, representing legal
costs associated with securities litigation and search fees to replace several
executives.


                                       19

<PAGE>

Results of Operations

     The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items from our statements of
operations:
<TABLE>
<S>                                                                                 <C>

                                                                                                 Years Ended December 31,
                                                                                       -----------------------------------------
                                                                                          2001           2000           1999
                                                                                       -----------    -----------    -----------
Revenues:

     Software licensing ...................................................              46.7%           57.0%          57.6%
     Services .............................................................              26.4            23.8           23.5
     Maintenance ..........................................................              26.9            19.2           18.9
                                                                                       -----------    -----------    -----------
         Total revenues ...................................................             100.0           100.0          100.0
                                                                                       -----------    -----------    -----------

Cost of revenues:

     Software licensing ...................................................               0.7             1.1            1.3
     Services .............................................................              21.7            18.4           16.5
     Maintenance ..........................................................               5.6             4.8            5.2
     Stock option re-pricing charge .......................................               0.3             --             --
     Amortization of intangibles ..........................................               3.0             5.3            6.2
     Intangibles impairment charge ........................................               --              8.1            --
                                                                                       -----------    -----------    -----------
         Total cost of revenues ...........................................              31.3            37.7           29.2
                                                                                       -----------    -----------    -----------
Gross profit ..............................................................              68.7            62.3           70.8
                                                                                       -----------    -----------    -----------

Operating expenses:

     Product development ..................................................              15.6            15.3           15.5
     Selling and marketing ................................................              50.1            49.8           41.8
     General and administration ...........................................              24.3            17.5            9.4
     Stock option re-pricing charge .......................................               0.7             --             --
     Amortization of intangibles ..........................................              18.7            28.5           21.8
     Intangibles impairment charge ........................................               --             20.7            --
     Restructuring charge .................................................               6.4             --             --
                                                                                       -----------    -----------    -----------
         Total operating expenses .........................................             115.8           131.8           88.5
                                                                                       -----------    -----------    -----------

Operating loss ............................................................             (47.1)          (69.5)         (17.7)
Other income (expense), net ...............................................              (0.1)            0.4            1.0
                                                                                       -----------    -----------    -----------
Loss before taxes .........................................................             (47.2)          (69.1)         (16.7)
Income taxes (expense) benefit ............................................              (3.1)           (1.8)           0.2
                                                                                       -----------    -----------    -----------
Net loss ..................................................................             (50.3)%         (70.9)%        (16.5)%
                                                                                       ===========    ===========    ===========

Gross profit exclusive of stock option re-pricing charge, amortization of
    intangibles and intangibles impairment charge:

     Software licensing ...................................................              98.5%           98.1%          97.7%
     Services .............................................................              17.9%           22.8%          29.7%
     Maintenance ..........................................................              79.1%           75.1%          72.8%
         Total ............................................................              72.0%           75.7%          77.0%

</TABLE>

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

     During 2001 we incurred a net (loss) of ($63.5) million compared to a net
(loss) of ($98.1) million in 2000. Our 2001 operating (loss) excluding non-cash
stock option re-pricing charges, amortization of intangibles, intangibles
impairment charges and restructuring charges was ($22.8) million versus ($9.5)
million in 2000. Gross profit excluding non-cash stock option re-pricing
charges, amortization of intangibles and intangibles impairment charges
decreased from $104.7 million in 2000 to $90.9 million in 2001. Product
development expenses decreased by $1.5 million, selling and marketing expenses
decreased by $5.6 million and general and administrative expenses increased by
$6.6 million from 2000 to 2001.

Revenues

     Total Revenues. Our revenues are derived principally from three sources:
(i) license fees for the use of our software products; (ii)


                                       20

<PAGE>

fees for consulting services and training; and (iii) fees for maintenance and
technical support. Total revenues decreased 9% from $138.3 million in 2000 to
$126.3 million in 2001. This decrease resulted from decreased license revenues
partially offset by increased billings for services and maintenance.

     Software Licensing. Total software licensing revenues decreased 25% from
$78.8 million in 2000 to $59.0 million in 2001 as a result of changes in sales
force management, as well as continued weak economic conditions and delayed
purchasing decisions by customers. From 2000 to 2001 we noted a 30% decrease in
the number of license contracts exceeding $100,000, partially offset by a 9%
increase in the average size of such contracts. Americas' software licensing
revenues decreased 27% from $52.6 million to $38.4 million, EMEA software
licensing revenues decreased 24% from $23.2 million to $17.5 million and APAC
software licensing revenues increased 3% from $3.0 million to $3.1 million.

     Services. Total services revenues increased marginally from $32.9 million
in 2000 to $33.4 million in 2001. Americas' services revenues increased 1% from
$18.8 million to $19.0 million, EMEA services revenue increased marginally from
$13.3 million to $13.4 million and APAC services revenue increased 21% from $0.8
million to $1.0 million.

     Maintenance. Total maintenance revenues increased 28% from $26.6 million in
2000 to $33.9 million in 2001 primarily due to growth in the worldwide customer
base and the related renewals of annual maintenance contracts. Americas'
maintenance revenues increased 37% from $16.2 million to $22.1 million, EMEA
maintenance revenues increased 11% from $9.4 million to $10.4 million and APAC
maintenance revenues increased 33% from $1.0 million to $1.4 million.

Cost of Revenues

     Total Cost of Revenues. Cost of software licensing revenues consists
primarily of CD-ROMs, manuals, distribution costs and the royalty costs of
third-party software that we resell. Cost of services consists primarily of
personnel-related and travel costs in providing consulting and training to
customers. Cost of maintenance revenues consists primarily of personnel-related
and occupancy costs in providing maintenance and technical support to customers.
The non-cash stock option re-pricing charge relates to the November 2000
re-pricing of certain options previously granted to certain service and
maintenance personnel as described below. The amortization expense and
impairment of intangibles charge relates to certain purchased intangible
technology assets in connection with the Braid acquisition in 1999 as described
below. Total costs of revenues decreased 24% from $52.2 million in 2000 to $39.5
million in 2001 primarily due to the write-off of certain purchased technology
assets in the fourth quarter of 2000, partially offset by increases in the costs
associated with higher services and maintenance revenues.

     Gross margin on software licensing revenues is higher than gross margins on
services and maintenance revenues reflecting the low materials, packaging and
other costs of software products compared with the relatively high personnel
costs associated with providing consulting and training services, maintenance
and technical support. Cost of services also varies based upon the mix of
consulting and training services. Total gross margins increased from 62% in 2000
to 69% in 2001 primarily due to the absence of the fourth quarter 2000 write-off
of certain purchased technology assets offset by the increased composition of
lower margin service and maintenance revenues within total revenues. Total gross
margins, excluding the impact of the non-cash stock option re-pricing charge,
amortization and impairment of intangibles, were $90.9 million (72%) in 2001
compared to $104.7 million (76%) in 2000.

     Cost of Software Licensing. Total software licensing costs decreased 44%
from $1.5 million in 2000 to $0.9 million in 2001 due primarily to the write-off
of $0.5 million in prepaid royalties in 2000 in connection with discontinuing
use of the Novera technology. Software licensing gross margin remained at 98% in
2000 and 2001.

     Cost of Services exclusive of Non-Cash Stock Option Re-Pricing Charges.
Total services costs increased 8% from $25.4 million in 2000 to $27.4 million in
2001. This increase is primarily due to an increase in services headcount and
related personnel costs in the first half of 2001, in anticipation of higher
services revenues that failed to materialize. Consequently, total services gross
margin decreased from 23% in 2000 to 18% in 2001. Americas' services costs
increased 10% from $15.1 million in 2000 to $16.6 million in 2001, resulting in
a decrease in services gross margin from 19% in 2000 to 12% in 2001. EMEA
services costs increased from $9.2 million in 2000 to $9.6 million in 2001
resulting in a decrease in services gross margin from 31% in 2000 to 29% in
2001. APAC services costs remained constant at $1.2 million.

     To reverse the decline in services gross margin, we initiated a
restructuring plan in the second quarter of 2001 to reduce services headcount by
25% (38 positions in the Americas and 22 positions in EMEA) and bring services
personnel costs in line with services revenues. This action contributed to
services margins improving to 27% for the fourth quarter of 2001.

     Cost of Maintenance exclusive of Non-Cash Stock Option Re-Pricing Charges.
Total maintenance costs increased 7% from $6.6 million in 2000 to $7.1 million
in 2001 to support the increase in the worldwide customer base. Total
maintenance gross margin increased from 75% in 2000 to 79% in 2001. Americas'
maintenance costs decreased 8% from $4.6 million in 2000 to $4.3 million in 2001
resulting in an increase in maintenance gross margin from 71% in 2000 to 81% in
2001. EMEA maintenance costs increased 31% from $1.9 million in 2000 to $2.5
million in 2001 resulting in a decrease in maintenance gross margin from 80% in
2000 to 76%


                                       21

<PAGE>

in 2001. APAC maintenance costs increased from $0.1 million to $0.3 million
resulting in a decrease in maintenance gross margin from 91% in 2000 to 74% in
2001.

     Stock Option Re-Pricing Charge. In November 2000, our Board of Directors
approved the exchange of 615,465 of options granted in September 2000 for an
equal amount of options (the replacement options) priced at the then current
market price of $5.06 per share. As this was a reduction in the exercise prices
of fixed stock option awards, the replacement options are subject to variable
accounting from the date of modification to the date on which the awards are
exercised, forfeited, or expire unexercised in accordance with FASB
Interpretation No. ("FIN") 44 "Accounting for Certain Transactions Involving
Stock Compensation" and FIN 28 "Accounting for Stock Appreciation Rights and
other Variable Stock Option or Award Plans". At December 31, 2001, 346,498
re-priced options were outstanding. We recorded a variable non-cash compensation
charge of $0.3 million during 2001 for the re-priced options. This charge is
related to re-priced options granted to personnel generating services and
maintenance revenues. We also recorded variable non-cash compensation charges of
$0.9 million during 2001 for the re-priced options related to operating
personnel (see below).

     Amortization of Intangibles. Amortization of intangible assets decreased
48% from $7.4 million in 2000 to $3.8 million in 2001. The expense is related to
the Braid business combination completed in 1999, which was accounted for using
the purchase method of accounting. The decrease over prior year is a direct
result of our decision, in the fourth quarter of 2000 as described below, to
write-off certain purchased technology assets that no longer supported our
business focus. We had net purchased technology intangibles of $8.3 million and
$12.2 million at December 31, 2001 and 2000, respectively.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to Be Sold", amortization
relating to capitalized software costs has been charged to cost of revenues, and
amortization relating to other intangible assets is being classified as a
component of operating expenses.

     Intangibles Impairment Charge. As discussed below, during the fourth
quarter of 2000, we re-evaluated intangible assets related to recent
acquisitions and determined that certain Braid products no longer supported our
focus on e-business integration. As a result of this decision we recorded a
write-off of $11.2 million in the fourth quarter of 2000 to cost of revenues for
those Braid purchased technology intangibles.

Operating Expenses

     Total Operating Expenses. Total operating expenses declined 20% from $182.3
million in 2000 to $146.3 million in 2001. This decrease is primarily the result
of a $28.6 million intangible impairment charge recorded in 2000 and, to a
lesser extent, expense rationalization and expense management actions initiated
as part of 2001 restructuring activities. This decrease was partially offset by
a $0.8 million increase in a non-cash stock option re-pricing charge, an $8.1
million restructuring charge in 2001, and increases in our General and
Administrative expenses, as discussed below.

     Product Development exclusive of Non-Cash Stock Option Re-Pricing Charges.
Product development expenses include expenses associated with the development of
new products and enhancements to existing products. These expenses consist
primarily of salaries, recruiting, and other personnel-related costs,
depreciation of development equipment, supplies, travel, allocated facilities
and allocated communication costs.

     Product development expenses decreased 7% from $21.2 million in 2000 to
$19.7 million in 2001 primarily due to the closing of the Burlington, MA
research facility in December 2000 and the elimination of 49 positions in the
second quarter of 2001.

     We believe that a significant level of research and development
expenditures is required to remain competitive. Accordingly, we expect to
continue to devote substantial resources to research and development. We expect
that the dollar amount of research and development expenses will increase
modestly in 2002 as we continue to enhance our core integration products and
further develop industry solutions for our targeted vertical markets. To date,
all research and development expenditures have been expensed as incurred.

     Selling and Marketing exclusive of Non-Cash Stock Option Re-Pricing
Charges. Selling and marketing expenses consist of sales and marketing personnel
costs, including sales commissions, recruiting, travel, advertising, public
relations, seminars, trade shows, product literature, and allocated facilities
and communications costs.

     Selling and marketing expenses decreased 8% from $68.9 million in 2000 to
$63.3 million in 2001 primarily due to staff reductions as a result of our shift
in our sales strategy from increasing the number of sales personnel to
strategically targeting certain vertical markets where our products have
particular and proven value. This decrease is partially offset by increases in
our EMEA and APAC selling and marketing expenses due to geographical market
expansion activities. Americas' selling and marketing expenses decreased 25%
from $47.9 million in 2000 to $35.7 million in 2001 due to the elimination of 57
personnel in the second and third quarters of 2001, lower commissions of $4.0
million due to lower license revenues, the absence in 2001 of $1.6 million of
retention


                                       22

<PAGE>

incentives paid to sales people in the latter half of 2000 as a result of the
Restatement, reductions in marketing costs of $3.2 million, and reductions in
travel and telephone costs of $2.6 million. EMEA selling and marketing expenses
increased 28% from $19.8 million in 2000 to $25.3 million in 2001. APAC selling
and marketing expenses increased 103% from $1.2 million in 2000 to $2.3 million
in 2001.

     General and Administrative exclusive of Non-Cash Stock Option Re-Pricing
Charges. General and administrative expenses consist primarily of salaries,
recruiting, and other personnel related expenses for our administrative,
executive, and finance personnel as well as outside legal, consulting, tax
services and audit fees.

     General and administrative expenses increased 27% from $24.2 million in
2000 to $30.7 million in 2001 primarily due to establishing litigation reserves
of $3.7 million in the Americas as well as increased occupancy costs of $1.0
million in EMEA. We established new offices in Sweden in 2000 and in Spain and
Switzerland in 2001. Total general and administrative expenses, excluding the
reserves for litigation, have declined sequentially throughout 2001 as the
restructuring announced in May 2001 took effect. Americas' general and
administrative expenses increased 6% from $18.9 million in 2000 to $20.0 million
in 2001, excluding increases for litigation reserves of $3.7 million. EMEA
general and administrative expenses increased 33% from $4.1 million in 2000 to
$5.4 million in 2001. APAC general and administrative expenses increased 34%
from $1.2 million in 2000 to $1.6 million in 2001.

     Amortization of Intangibles. Amortization of intangible assets decreased
40% from $39.5 million in 2000 to $23.6 million in 2001. As noted above, this
expense is related to business combinations completed in 1998 and 1999, which
were accounted for using the purchase method of accounting. The decrease over
prior year is a direct result of our decision, in the fourth quarter of 2000, to
write-off certain of these assets that no longer supported our business focus.

     Intangibles Impairment Charge. As discussed below, during the fourth
quarter of 2000 we re-evaluated intangible assets related to recent acquisitions
and determined that the Novera technology no longer supported our focus on
e-business integration. As a result of this decision, the Novera operation was
closed in December of 2000 and we recorded a goodwill impairment charge of $28.6
million in December 2000 to write-off the remaining net book value of Novera
goodwill. We had net operating intangible assets of $3.2 million and $5.3
million and net goodwill of $42.6 million and $64.1 million at December 31, 2001
and 2000, respectively.

     Stock Option Re-Pricing Charge. As discussed above, we recorded a variable
non-cash compensation charge of $0.1 million during 2000 and a $0.9 million
charge during 2001 related to the re-pricing of certain fixed stock option
awards previously granted to certain product development, sales and marketing
and general and administrative employees in November of 2000.

     Restructuring Charge. The restructuring charge of $8.1 million for the year
ending December 31, 2001 consists of $2.9 million in severance-related costs and
$5.2 million to accrue for losses related to leased space in Wilton, CT,
Burlington, MA, Boca Raton, FL, Bannockburn, IL and Cobham, UK no longer
required due to reductions in our Americas and EMEA personnel during the year.
The Americas' restructuring charge was $7.2 million and the EMEA restructuring
charge was $0.9 million. At December 31, 2001, $3.3 million of the unpaid
restructuring charge was included in accrued expenses and other current
liabilities and $1.7 million was included in other long-term liabilities.

Other Income (Expense), Net

     Net other income (expense) represents interest income earned on cash and
marketable securities balances and term license contracts, offset by borrowing
costs related to certain contractual obligations.

     Net other income decreased 109% from $0.7 million in 2000 to net other
expense of $0.1 million in 2001 primarily due to the use of cash to fund
operating losses for the first three quarters of 2001, the related reduction of
interest bearing investments up through our private placement that occurred in
the fourth quarter of 2001, and fees in connection with our credit facility with
Silicon Valley Bank.

Income Taxes

     The provision for income taxes was $3.9 million for the year ended December
31, 2001 as compared to $2.6 million for the year ended December 31, 2000. The
provision for income taxes is based on the anticipated effective tax rates and
taxable income for the full year taking into account each jurisdiction in which
we operate. During the second quarter of 2001, we determined that taxable income
for the full year of 2001 was unlikely to be sufficient to support the full
value of the U.S. federal and state deferred tax assets. Consequently, our 2001
tax provision includes a full valuation reserve for that asset. The difference
between our effective tax rate and the U.S. statutory rate is primarily
attributable to $17.6 million of non-deductible goodwill amortization and the
effect of certain expected full-year foreign taxable losses for the year ended
December 31, 2001, and $46.9 million of non-deductible goodwill amortization and
$39.8 million of non-deductible intangibles impairment charges for the year
ended December 31, 2000.


                                       23

<PAGE>

Year Ended December 31, 2000 compared with Year Ended December 31, 1999

     During 2000, we incurred a net (loss) of ($98.1) million compared to a net
(loss) of ($16.3) million in 1999. Our 2000 operating income (loss) excluding
amortization, non-cash stock option re-pricing charges and intangibles
impairment charge was ($9.5) million versus $10.2 million in 1999. While gross
profit, excluding amortization and an intangibles impairment charge, increased
$28.8 million as a result of increased revenues, we increased our spending in
product development by $5.9 million, selling and marketing by $27.7 million and
general and administrative expenses by $14.9 million. Most of the increase in
selling and marketing expenses and general and administrative expenses were
incurred in anticipation of higher revenue growth throughout the year. These
higher expenses contributed to our lack of profitability in the second half of
the year, as we did not achieve our anticipated level of revenues. Additionally,
in connection with the August 2000 restatement of first quarter results and the
adjustment of previously released second quarter results, we incurred
incremental expenses and related reorganization costs in the third and fourth
quarters.

Revenues

     Total Revenues. Total revenues increased 40% from $98.6 million in 1999 to
$138.3 million in 2000. This increase resulted from increased license revenues
as well as increased billings for services and maintenance. In addition, the
Braid acquisition and our German office contributed a full year of revenues in
2000 whereas in 1999 Braid generated revenues only from March and Germany
generated revenues beginning in May.

     Software Licensing. Total software licensing revenues increased 39% from
$56.8 million in 1999 to $78.8 million in 2000 primarily due to an increase in
revenues from the Mercator Integration Broker suite of products introduced in
2000 and, to a lesser extent, an approximate 100% increase in license pricing
which began to take effect in the fourth quarter of 2000. From 1999 to 2000 we
noted a 49% increase in the number of license contracts exceeding $100,000 and
an 8% increase in the average size of such contracts. Americas' software
licensing revenues increased 27% from $41.5 million in 1999 to $52.6 million in
2000. EMEA software licensing revenues increased 63% from $14.2 million in 1999
to $23.2 million in 2000. APAC software licensing revenues increased 177% from
$1.1 million in 1999 to $3.0 million in 2000. The increases in EMEA in APAC were
primarily due to the successful introduction of the Mercator Integration Broker
suite to the Braid customer base and a full year of revenue contributions in
2000 from the Braid acquisition and the new sales office in Germany.

     Services. Total services revenues increased 42% from $23.2 million in 1999
to $32.9 million in 2000 primarily due to increased licensing of our products,
which resulted in greater services and training opportunities. Americas'
services revenues increased 19% from $15.7 million in 1999 to $18.8 million in
2000. EMEA services revenues increased 90% from $7.0 million in 1999 to $13.3
million in 2000. APAC services revenues increased 66% from $0.5 million in 1999
to $0.8 million in 2000.

     Maintenance. Total maintenance revenues increased 43% from $18.6 million in
1999 to $26.6 million in 2000 primarily due to increased licensing of our
products, including the Mercator Integration Broker suite, the overall growth in
the customer base using our products and, to lesser extent, an approximate 100%
increase in new maintenance pricing which began to take effect in the fourth
quarter of 2000. Americas' maintenance revenues increased 31% from $ 12.4
million in 1999 to $16.2 million in 2000 in line with the 27% increase in
software licensing revenues. EMEA maintenance revenues increased 70% from $5.5
million in 1999 to $9.4 million in 2000 in line with the 63% increase in
software licensing revenues. APAC maintenance revenues increased 42% from $0.7
million in 1999 to $1.0 million in 2000.

Cost of Revenues

     Total Cost of Revenues. Total cost of revenues increased 81% from $28.8
million in 1999 to $52.2 million in 2000 primarily due to the 40% increase in
revenue and the $11.2 million write-off of certain Braid purchased technology
intangibles in December of 2000.

     Total gross margins decreased from 71% in 1999 to 62% in 2000 due to the
intangible write-off mentioned above and to a slightly higher mix of lower
margin service and maintenance revenues within total revenues.

     Cost of Software Licensing. Total software licensing costs increased 20%
from $1.3 million in 1999 to $1.5 million in 2000. This increase was due to
increased imbedded third-party software royalty costs of $0.5 million partially
offset by reduced shipping costs as we expanded electronic transmission of our
products over the WEB and delivery of software and documentation via CD-ROM. The
net increase in licensing costs is consistent with the corresponding increase in
license revenues. Software licensing gross margin remained constant at 98% in
both 1999 and 2000. Americas' software licensing gross margin remained constant
at 98% in both 1999 and 2000. EMEA software licensing gross margin increased
from 97% in 1999 to 98% in 2000. APAC software licensing gross margin increased
from 89% in 1999 to 95% in 2000.

     Cost of Services. Total services costs increased 56% from $16.3 million in
1999 to $25.4 million in 2000. Total services gross margin decreased from 30% in
1999 to 23% in 2000. Americas' services costs increased 41% from $10.8 million
in 1999 to $15.1


                                       24

<PAGE>

million in 2000 primarily due to a 27% increase in personnel costs involved in
delivering additional services to customers. However, increased recruiting and
training costs, as well as lower initial productivity related to new services
personnel, and $1.0 million of revenue reserves related to contract disputes
caused Americas' services gross margin to decrease from 31% in 1999 to 19% in
2000. EMEA services costs increased 79% from $5.1 million in 1999 to $9.2
million in 2000 in line with the 90% increase in service revenues noted above.
EMEA services gross margin increased from 27% in 1999 to 31% in 2000. APAC
services costs increased 159% from $0.4 million in 1999 to $1.1 million in 2000.
APAC services gross margin decreased from 19% in 1999 to (26%) in 2000 as we
added services personnel in advance of contractual services opportunities.

     Cost of Maintenance. Total maintenance costs increased 31% from $5.1
million in 1999 to $6.6 million in 2000 due primarily to an 11% increase in the
number of personnel hired to support the increased number of customer
installations, as well as the Mercator Integration Broker suite of products
introduced in 2000. Total maintenance gross margin increased from 73% in 1999 to
75% in 2000. Americas' maintenance costs increased 23% from $3.8 million in 1999
to $4.6 million in 2000 to support the 31% increase in revenues noted above
while related gross margin increased from 69% in 1999 to 71% in 2000. EMEA
maintenance costs increased 64% from $1.2 million in 1999 to $1.9 million in
2000 to support the 70% increase in revenues noted above. EMEA maintenance gross
margin increased marginally from 79% in 1999 to 80% in 2000. APAC maintenance
costs were $0.1 million in both 1999 and 2000. APAC maintenance gross margin
increased from 84% in 1999 to 91% in 2000.

     Amortization of Intangibles. Amortization expense of the purchased
technology intangibles mentioned above increased 20% from $6.2 million in 1999
to $7.4 million in 2000. This was a result of a full year of amortization
reflected in 2000 versus only 10 months of amortization in 1999.

     Intangibles Impairment Charge. After the decline in our revenues in the
third quarter of 2000 and management changes in the fourth quarter, it was
necessary for us to evaluate our allocation of resources to products that were
not generating significant revenue streams. During the fourth quarter of 2000,
we re-evaluated intangible assets related to recent acquisitions and determined
that two products acquired in the Braid acquisition, Nimbus, a treasury
management product, and Freeway, an information management application, no
longer supported our focus on e-business integration. Revenues from Nimbus
amounted to $817,000 in 1999 and $468,000 in 2000. Revenues from Freeway
amounted to $44,000 in 1999 and $0 in 2000. While revenues from these products
were not significant, we believed that having a suite of products addressing a
multitude of needs gave us an edge over our competitors, and therefore we
continued to offer these product lines during fiscal 2000. In the fourth quarter
of 2000, after re-evaluating the opportunity for the Braid Nimbus and Freeway
products, we elected to discontinue support of these products. As a result, the
unamortized intangible asset net book value of $11.2 million relating to these
products was written-off in the fourth quarter of 2000 and is included in "Cost
of revenues: Intangibles impairment charge" in the accompanying consolidated
statement of operations for the year ended December 31, 2000.

     We had net purchased technology intangibles of $12.2 million and $30.8
million at December 31, 2000 and 1999, respectively.

Operating Expenses

     Total Operating Expenses. Total operating expenses increased 109% from
$87.3 million in 1999 to $182.3 million in 2000. This increase is a result of a
$28.6 million goodwill impairment charge taken in 2000, a $17.9 million increase
in intangibles amortization, a $14.9 million increase in general and
administrative expenses, a $27.7 million increase in selling and marketing
expenses and a $5.9 million increase in product development expenses. In
addition, the Braid and Novera acquisitions in 1999 contributed a full year's
worth of expenses in 2000.

     Product Development. Product development expenses increased 39% from $15.3
million in 1999 to $21.2 million in 2000 primarily due to a $3.3 million
increase in personnel and sub-contractor costs related to developing the
Mercator Integration Broker suite as well as an additional $1.0 million in
Novera personnel costs. Product development expenses represented 15% of total
revenues in both 1999 and 2000.

     Selling and Marketing. Selling and marketing expenses increased 67% from
$41.2 million in 1999 to $68.9 million in 2000 primarily due to a 27% increase
in the number of sales personnel. Accordingly, personnel compensation costs
increased by $14.6 million, including $1.6 million in enhanced incentives to
motivate the sales force after the restatement of our first quarter 2000
results. In addition, marketing costs increased $4.2 million, travel and
communication costs increased by $2.3 million, recruiting costs increased by
$1.5 million and occupancy costs increased by $1.1 million. Selling and
marketing expenses as a percentage of total revenues increased from 42% in 1999
to 50% in 2000. Americas' selling and marketing expenses increased 63% from
$29.4 million in 1999 to $47.9 million in 2000. EMEA selling and marketing
expenses increased 80% from $11.0 million in 1999 to $19.9 million in 2000
primarily due to the Braid acquisition in 1999 and successful efforts to
introduce the Mercator Integration Broker suite to Braid's customer base in
2000. APAC selling and marketing expenses increased 43% from $0.8 million in
1999 to $1.1 million in 2000.

     General and Administrative exclusive of Non-Cash Stock Option Re-Pricing
Charges. General and administrative expenses increased 160% from $9.3 million in
1999 to $24.2 million in 2000 primarily due to a 39% increase in the number of
administrative


                                       25

<PAGE>

personnel, which resulted in a $4.8 million increase in personnel costs incurred
to support our worldwide expansion, $3.5 million increase in legal, accounting
and consulting fees, and $1.2 million increase in occupancy costs due to the
1999 acquisitions. In addition, in the Americas we incurred $4.7 million in
incremental turnover, legal, executive search, strategic consulting and
accounting fees related to the restatement of our first quarter 2000 operating
results and changes in senior management. General and administrative expenses as
a percentage of total revenues increased from 9% in 1999 to 18% in 2000.
Americas' general and administrative expenses increased 158% from $7.3 million
in 1999 to $18.9 million in 2000. EMEA general and administrative expenses
increased 132% from $1.8 million in 1999 to $4.1 million in 2000 and APAC
general and administrative expenses increased significantly from $0.2 million in
1999 to $1.2 million in 2000, both primarily due to the Braid acquisition in
March 1999 and expansion of activities in the European and Asia Pacific regions.

     Amortization of Intangibles. Amortization expense increased 83% from $21.5
million in 1999 to $39.5 million in 2000 primarily due to a full 12 months of
goodwill and intangibles amortization in 2000 related to the Braid and Novera
acquisitions, which occurred in March and September 1999, respectively. In
addition, in April 2000, we determined that operating targets related to
contingent consideration included in the Braid acquisition agreement had been
achieved. In accordance with the terms of the agreement, we issued stock and
cash valued at $17.3 million in additional consideration; this consideration was
added to goodwill and goodwill amortization for the year 2000 was increased
accordingly.

     Intangibles impairment charge. During the fourth quarter of 2000, we
reevaluated intangible assets related to recent acquisitions and determined that
the acquired operations from Novera no longer supported our focus on e-business
integration. In the fourth quarter of 2000, we determined that the Web Broker
product, which included the Novera technology, would be discontinued. In
December 2000, customers were contacted and informed they would be migrated to
the Web Integrator product, which had similar functionality to Web Broker, but
did not incorporate the Novera technology. In addition, we consolidated the
research and development function from Novera with our Boca Raton, Florida
facility in December 2000 and all Novera research and development personnel left
the Company. As a result of these decisions, we recorded an intangibles
impairment charge of $28.6 million in the fourth quarter of 2000 to write-off
the remaining book value of the Novera goodwill.

     We had net operating intangible assets of $5.3 million and $7.5 million and
net goodwill of $64.1 million and $115.0 million at December 31, 2000 and 1999,
respectively.

     Stock Option Re-Pricing Charge. We recorded a variable non-cash
compensation charge of $0.1 million during 2000 related to the re-pricing of
certain fixed stock option awards previously granted to certain general and
administrative employees in November of 2000.

Other Income (Expense), Net

     Other income (expense), net represents interest income earned on our cash
and marketable securities balances and term license contracts offset by
borrowing costs related to certain contractual obligations.

     Interest income decreased 19% from $1.0 million in 1999 to $0.8 million in
2000 primarily due to lower average cash and marketable securities balances
relating to the acquisitions of Braid and Novera, partially offset by higher
average rates of return on these investments. Borrowing expenses increased from
$0 in 1999 to $0.2 million in 2000 primarily due to interest on the Braid
contingent consideration obligation, commitment fees related to the Fleet Bank
credit line agreement, and letter of credit fees.

Income Taxes

     At December 31, 2000, we established a valuation allowance against deferred
tax assets relating to net operating loss carryforwards and federal tax credits
because of uncertainty that all of these assets could be utilized in the near
term. This valuation allowance, partially offset by benefits in foreign tax
jurisdictions, resulted in a net tax provision of $2.6 million in 2000 as
compared to a ($0.2 million) net tax (benefit) in 1999.

     Our effective tax rate for both 2000 and 1999 is impacted by the fact that
the majority of intangibles amortization is not deductible for income tax
purposes; the intangibles impairment charge incurred in 2000 is also not
deductible for income tax purposes. In addition, the change in the valuation
allowance noted above substantially reduced the effective tax rate benefit for
2000.

Liquidity and Capital Resources

     Our cash position has improved in 2001 primarily as a result of proceeds
realized from the sale of Common Stock through two private placements and from
the issuance of Common Stock under our employee stock purchase plan, which
resulted in net proceeds of $18.0 million, partially offset by cash used in
operations of $5.9 million.


                                       26

<PAGE>

Operating Activities

     Operating activities consumed cash of $5.9 million during the year ended
December 31, 2001 compared to providing cash of $11.3 million during the year
ended December 31, 2000. During the first half of 2001, our operations consumed
$11.5 million of cash. In the second half of 2001, we eliminated our operating
cash burn and generated $5.6 million of cash from operations through: (i) a 20%
increase in revenues over the first half of 2001; (ii) restructuring activities
which began in the second quarter of 2001 that included an approximate 29%
reduction in the consolidated workforce and a reorganization of our sales
efforts; (iii) expense management efforts; and (iv) continued improvements in
accounts receivable collections resulting in a decrease in the number of days
sales outstanding in net accounts receivable from 93 days at June 30, 2001 to 77
days at December 31, 2001.

     Net accounts receivable decreased 26% from $38.9 million at December 31,
2000 to $29.0 million at December 31, 2001 due primarily to a $5.2 million
decline in fourth quarter revenues in 2001 as compared to 2000, as well as
improved collections, partially offset by a $4.4 million increase in deferred
revenue. The number of days sales in net accounts receivable decreased from 89
days at December 31, 2000 to 77 days at December 31, 2001 as we applied new
management resources to collection efforts. The allowance for doubtful accounts
increased modestly from $3.6 million at December 31, 2000 to $3.9 million at
December 31, 2001.

     Net accounts receivable increased modestly from $38.3 million at December
31, 1999 to $38.9 million at December 31, 2000 despite a 26% increase in fourth
quarter revenues and a $4.0 million net increase in deferred revenue during
2000. This stability was accomplished primarily by a change in standard payment
terms, improved collection procedures and a $1.8 million net increase in the
allowance for doubtful accounts. Standard payment terms changed from "net 30
days" to "due upon receipt." Improvements in collection procedures included
hiring additional collection personnel, and earlier and more frequent contact
with customers. The increase in the allowance for doubtful accounts was caused
primarily by a $1.4 million addition for receivables related to the Carpet Co-Op
/ FloorLINK litigation (See Item 3). This amount was charged against deferred
revenue as the revenue for these billings had yet to be recognized due to
uncertainties regarding their collectability. In addition, charges to bad debt
expense increased the allowance by $1.0 million primarily in the second half of
the year as economic conditions declined and the financial position of some
customers deteriorated. This increase was partially offset by $0.6 million in
accounts receivable written off against the allowance. The number of days sales
in net accounts receivable decreased from 111 days at December 31, 1999 to 89
days at December 31, 2000.

     Current liabilities increased 19% from $44.1 million at December 31, 2000
to $52.3 million at December 31, 2001. Accounts payable increased 14% from $6.7
million to $7.6 million primarily due to higher legal fees in the Americas.
Accrued expenses increased 15% from $19.5 million to $22.4 million due primarily
to the establishment of $3.7 million in settlement reserves associated with
legal contingencies in the Americas, the current portion of the restructuring
reserve of $3.3 million and a $1.0 million increase in accrued income taxes,
partially offset by a $2.4 million decrease in accrued commission expense
related to the year-to-year decline in fourth quarter revenues, as well as
payments of $3.3 million for legal and consulting expenses and leasehold
improvements accrued at December 31, 2000. Current portion of deferred revenue
increased 25% from $17.8 million to $22.3 million due primarily to a $3.5
million increase in deferred maintenance revenue related to the increased number
of customers with installed software and a $0.9 million increase in deferred
license revenue related to contracts with acceptance testing.

     Current liabilities increased 65% from $26.8 million at December 31, 1999
to $44.1 million at December 31, 2000. Accounts payable increased 70% from $3.9
million to $6.7 million primarily due to higher legal and consulting fees in the
Americas. Accrued expenses increased 139% from $8.2 million to $19.5 million due
primarily to a $4.0 million increase in accrued employee compensation, $2.3
million in accrued legal and consulting expenses and $1.5 million in accrued
leasehold improvements. Current portion of deferred revenue increased 21% from
$14.7 million to $17.8 million due primarily to a $5.6 million increase in
deferred maintenance revenue related to the increased number of customers with
installed software along with higher maintenance pricing, partially offset by a
$2.2 million decrease in deferred license revenue. The decrease in deferred
license revenue was caused by a $1.4 million charge related to the
collectability of certain Carpet Co-Op / FloorLINK receivables with the balance
attributed to the recognition of revenue in accordance with certain term license
contracts.

     Our short-term operating commitments include operating lease payments over
the next twelve months of approximately $5.7 million, including $1.4 million for
our new office space in Wilton, CT. Should we negotiate an early termination of
this lease, our quarterly cash flows may be impacted. In addition, we believe
that our expenditures for product development efforts in 2002 will increase
modestly as we continue to enhance our integration products and further develop
industry solutions for our targeted vertical markets.

     As of December 31, 2001, we have accruals of $3.7 million, after
considering insurance recoveries, related to settlements associated with
outstanding legal contingencies. A significant increase in the estimate of the
cost of settlement of these contingencies could have a material adverse effect
on our consolidated financial position or results of operations.

     Excluding the impact of potential cash payments for the contingencies
discussed in Note 12 of the Notes to Consolidated Financial Statements, we
believe that we will generate modest positive cash flows from operations on a
full-year basis, however, cash flows generated from operations in any one
quarter could be negative. We believe current cash on-hand as well as cash
available from


                                       27

<PAGE>

our Silicon Valley Bank facility (see further discussions below) will be
sufficient to meet our needs associated with cash shortfalls in any one quarter.

Investing Activities

     Investing activities consumed cash of $1.5 million during the year ended
December 31, 2001 compared to $7.3 million during the year ended December 31,
2000. Investing activities for 2001 included a $3.4 million net investment in
furniture, fixtures and equipment and a $1.5 million increase in the restricted
collateral deposit in connection with a facility lease, partially offset by a
$3.4 million liquidation of investments in marketable securities. Investing
activities in 2000 included a $6.2 million net investment in furniture, fixtures
and equipment, a $1.8 million increase in intangible assets in connection with
the Braid acquisition earn-out agreement and a $1.5 million restricted
collateral deposit in connection with a facility lease, partially offset by a
$2.2 million liquidation of investments in marketable securities. During 1999,
investing activities included a sale of marketable securities of $27.2 million,
which was offset by cash outlays of $22.8 million in connection with the Braid
and Novera acquisitions and a $4.6 million net investment in furniture, fixtures
and equipment.

     Our expenditures for furniture, fixtures and equipment are expected to be
approximately $6.2 million in 2002. In addition, capital lease commitments over
the next twelve months are approximately $0.5 million.

Financing Activities

     Financing activities generated cash of $18.0 million during the year ended
December 31, 2001 compared to $5.8 million during the year ended December 31,
2000. Financing activities for 2001 included net proceeds of $14.7 million from
the private sale of shares of Common Stock to a group of institutional
investors, net proceeds of $1.6 million from the sale of shares of restricted
Common Stock to Mitsui and Co., Ltd., $1.7 million of proceeds from employee
stock plan purchases and $0.5 million of proceeds from the exercise of employee
stock options, partially offset by $0.5 million of capital lease principal
payments. Financing activities for 2000 included $3.2 million of proceeds from
the exercise of employee stock options and $2.9 million of proceeds from
employee stock plan purchases, partially offset by $0.3 million of capital lease
principal payments. During 1999, financing activities generated $2.8 million of
proceeds from the exercise of employee stock options and $1.3 million of
proceeds from employee stock plan purchases, partially offset by $0.1 million
for the repayment of long-term debt.

     In February 2000, we entered into a three-year agreement with Fleet Bank
for a $20 million line of credit for general corporate purposes, including
working capital, leasehold improvements and equipment and certain acquisition
purposes. As a result of operating losses sustained during the quarter ended
September 30, 2000, we were in violation of certain financial covenants in the
agreement. In November 2000, Fleet Bank notified us that it would only make
advances under the agreement on a discretionary basis. In March 2001, the $20
million line of credit agreement with Fleet Bank was terminated. Since inception
no amounts were borrowed under the agreement.

     In June 2000, we drew a $1.2 million letter of credit with Fleet Bank in
connection with a new headquarters office lease. At Fleet Bank's request we
provided a $1.5 million restricted collateral deposit as security for the
outstanding letter of credit. In January 2001, we increased the letter of credit
to $2.5 million and the related restricted collateral deposit to $3.0 million.
The letter of credit agreement with Fleet Bank remains in effect.

     In June 2001, we finalized a credit facility with Silicon Valley Bank. This
facility is secured by certain receivables and the amount available under the
facility at December 31, 2001 is $15 million as a result of our achieving
positive EBITDA in the fourth quarter of 2001. This amount may be decreased to
$10 million if we do not maintain positive EBITDA during each quarter of fiscal
2002. In September and November 2001, Silicon Valley Bank agreed to waive and
modified certain terms of the credit facility, including eliminating the
requirement for a capitalization event and relaxing the level of the Adjusted
Quick Ratio covenant. The Bank also extended the expiration date of the facility
to November 27, 2002. Specifically, the agreement, as amended, requires us to
maintain an Adjusted Quick Ratio, as defined, of at least 1.5 to 1.0 for each
month subsequent to December 1, 2001. We were in compliance with the Adjusted
Quick Ratio covenant under the agreement, as amended, at December 31, 2001. If
the Company were in default, such default, if uncured, could result in our being
required to pay a $0.2 million termination fee. Prior to November 27, 2002, we
expect to seek to renegotiate the facility to extend it beyond its scheduled
termination or, alternatively, negotiate a similar facility with another party
on no less favorable terms. Since inception, no amounts have been borrowed under
this facility.


                                       28

<PAGE>

Cash Flow and Funding Requirements

     We believe that current cash and cash equivalent balances ($28.2 million at
December 31, 2001), combined with net cash expected to be generated from
operations, are sufficient to meet anticipated needs for working capital and
capital expenditures ($6.7 million) through December 31, 2002. However, any
projections of future cash needs and cash flows are subject to uncertainty.
Additionally, a significant increase in the cost of settlement of legal
contingencies in excess of amounts accrued and insurance coverages could have a
material adverse impact on our consolidated financial position or consolidated
results of operations. Our long-term capital needs will depend on numerous
factors, including the rate at which we are able to obtain new business from
clients and expand our personnel and infrastructure to accommodate such growth,
as well as the rate at which we choose to invest in new technologies. (See
"Factors that May Affect Future Results" below.)

      If current cash, cash equivalents and cash that may be generated from
operations are deemed to be insufficient to satisfy our liquidity requirements,
we will likely seek to sell additional equity securities. Moreover, we may
determine to sell additional equity for the purpose of further enhancing our
cash resources. The sale of additional equity or equity-related securities, if
achieved, would result in additional dilution to our stockholders. In addition,
we will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, which might
impact our liquidity requirements or cause us to issue debt or additional equity
securities. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, or at all. A failure to obtain such
financing may adversely impact our business. In addition, if our cash flows were
to substantially decrease, our goodwill or our purchased technology intangible
assets may become impaired and we would have to record a charge for impairment,
which may be material to our financial position and results of operations.

Recently issued Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations. SFAS No. 141 specifies criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported separately from goodwill. SFAS No. 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," and subsequently, SFAS No. 144
after its adoption.

     We adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS
No.142 is effective January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are
not amortized. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized and tested for
impairment prior to the full adoption of SFAS No. 142.

     Upon adoption of SFAS No. 142, we are required to evaluate our existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. We will be required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary amortization
period adjustments by the end of the first interim period after adoption. If an
intangible asset is identified as having an indefinite useful life, we will be
required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.

     In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires us to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, we must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. We will then have up to six months from January 1, 2002 to
determine the fair value of each reporting unit and compare it to the carrying
amount of the reporting unit. To the extent the carrying amount of a reporting
unit exceeds the fair value of the reporting unit, an indication exists that the
reporting unit goodwill may be impaired and we must perform the second step of
the transitional impairment test. The second step is required to be completed as
soon as possible, but no later than the end of the year of adoption. In the
second step, we must compare the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill, both of which
would be measured as of the date of adoption. The implied fair value of goodwill
is determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No. 141.
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in our statement of
operations.


                                       29

<PAGE>

     As of the date of adoption of SFAS No. 142, we will have unamortized
goodwill in the amount of $42.6 million and unamortized identifiable intangible
assets in the amount of $11.5 million, all of which will be subject to the
transition provisions of SFAS No. 142. Amortization expense related to goodwill
was $21.5 million and $37.4 million for the years ended December 31, 2001, and
2000, respectively. Because of the extensive effort needed to comply with
adopting SFAS No. 142, it is not practicable to reasonably estimate the impact
of adopting this Statement on our financial statements at the date of this
report, including whether we will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires us to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use of
the assets. Under such circumstances we would record a corresponding asset,
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. We are required to adopt
SFAS No. 143 on January 1, 2003. We have not yet determined the expected impact
of SFAS No. 143 on our financial position or results of operations.

     In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. We are required
to adopt SFAS No. 144 on January 1, 2002. We have not yet determined the
expected impact of SFAS No. 144 on our financial position or results of
operations.

     In November 2001, the Emerging Issues Task Force ("EITF") concluded that
reimbursements for out-of-pocket-expenses incurred should be included in revenue
in the income statement and subsequently issued EITF 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred" in January 2002. The Company is required to adopt EITF 01-14 on
January 1, 2002 and will reclassify comparative financial statements for prior
periods to comply with the guidance in this EITF. Management has not yet
determined the impact of EITF 01-14 on the Company's revenues and cost of
revenues for the years ended December 31, 2001 and 2000.

     Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are not
significant to our financial statements.

Conversion to a Single European Currency

     We generate revenues in a number of foreign countries. However, as the
majority of foreign contracts are denominated in US dollars, we do not expect
the conversion to a single European currency to have a material impact on our
financial results.

Factors That May Affect Future Results

     You should carefully consider the following risks factors before making an
investment decision. Our business, results of operations, and financial
condition could be adversely affected by any of the following factors. The
market price of our Common Stock could decline due to any of these risks, and
you could lose all or part of your investment.

Our quarterly and annual operating results are volatile and difficult to predict
and may cause our stock price to fluctuate

     Our quarterly and annual operating results have varied significantly in the
past and may continue to do so in the future. We had operating losses in 2001
and may continue to have losses in the future. In certain quarters of 2001, our
operating results were below the expectations of public market analysts and
investors, and were followed by a decline in the price of our stock. This may
occur in the future and if our revenues and operating results do not meet
expectations, our stock price could decline which may result in potential
customers choosing other vendors.


                                       30

<PAGE>

     In 2001, we announced a restructuring plan to reduce our cost structure.
This plan consisted of work force reductions of 29% across the Company, closing
some office facilities and reducing some other space. We also announced a
strategic plan to focus our resources on the largest vertical market
opportunities where we have significant experience including financial services,
manufacturing, retail and distribution, and healthcare. Our restructuring plan
that has been put in place remains somewhat unproven, and could result in
increased volatility in and have an adverse effect on our stock price. Our focus
on large vertical market opportunities may result in longer sales cycles and any
delay in obtaining larger contracts may have an adverse impact on quarterly
operating results. We believe that investors should not rely on period-to-period
comparisons of our results of operations, as they are not necessarily
indications of our future performance.

An adverse reaction by customers and vendors to changes in our company may
result in a revenue decline and adverse impact to cash position

     Our success depends in large part on the support of key customers and
vendors who may react adversely to changes in our company. Many members of our
senior management have joined us during the past year. It will take time and
resources for these individuals to effect change within our organization and
during this period our vendors and customers may re-examine their willingness to
do business with us. If we are unable to retain and attract our existing and new
customers and vendors, our revenues could decline and our cash position could be
materially adversely affected.

Our future success depends on retaining our key personnel and attracting and
retaining additional highly qualified employees

     Other than Roy King, our Chairman, Chief Executive Officer and President,
all of our employees are employed at-will and we have no fixed-term employment
agreements with our employees. The loss of the services of any of our key
employees could harm our business.

     Our future success also depends on our ability to attract, train and retain
highly qualified sales, research and development, professional services and
managerial personnel, particularly sales and professional services personnel.
Competition for these personnel is intense. We may not be able to attract,
assimilate or retain qualified personnel. We have at times experienced, and we
continue to experience, difficulty in recruiting qualified sales and research
and development personnel, and we anticipate these difficulties may continue in
the future. Furthermore, we have in the past experienced, and in the future
expect to continue to experience, a significant time lag between the date sales,
research and development and professional services personnel are hired and the
date these employees become fully productive.

It would be difficult for us to materially or immediately adjust our spending if
we experience any revenue shortfalls

     Our future revenues will be difficult to predict and we could fail to
achieve our revenue expectations. Our expense levels are based, in part, on our
expectation of future revenues, and expense levels are, to a large extent, fixed
in the short term. We may be unable to materially adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. If revenue levels are
below expectations for any reason, our operating results and cash flows are
likely to be harmed. Net income may be disproportionately affected by a
reduction in revenue because large portions of our expenses are related to
headcount that may not be easily reduced without harming our business. If cash
flows are negatively impacted, there can be no assurance that our existing
accounts receivable financing arrangement will be sufficient to meet cash needs
or will be available in the future, as there is no assurance that we will be
able to draw down upon our existing line of credit.

We may experience seasonal fluctuations in our revenues or results of operations

     It is not uncommon for software companies to experience strong calendar
year ends followed by weaker subsequent quarters, in some cases with sequential
declines in revenues or operating profit. We believe that many software
companies exhibit this pattern in their sales cycles primarily due to customers'
buying patterns and budget cycles. We have displayed this pattern in the past
and may display this pattern in future years.

We have been and may continue to be impacted by the overall economy and the
events of September 11th

     As a result of recent unfavorable economic conditions including the impact
of the events of September 11th on certain of our vertical markets, we have seen
reduced capital spending, and software licensing revenues have declined in
fiscal year 2001 in total and as a percentage of our total revenues as compared
to the prior year. In particular, sales to e-commerce and internet businesses,
value-added resellers and independent software vendors were impacted during
2001. Sales to financial institutions have been impacted in the fourth fiscal
quarter of 2001. If the economic conditions in the United States worsen, or if a
wider global economic slowdown occurs, we may experience a material adverse
impact on our revenues and collections of our accounts receivable.


                                       31

<PAGE>

We depend on the sales of our existing Mercator products and related services

     We first introduced our Mercator products in 1993. In recent years, a
significant portion of our revenue has been attributable to licenses of Mercator
products and related services, and we expect that revenue attributable to our
Mercator products and related services will continue to represent a significant
portion of our total revenue for the foreseeable future. Accordingly, our future
operating results significantly depend on the market acceptance and growth of
our existing Mercator product line and enhancements of these products and
services. Market acceptance of our Mercator product line may not increase or
remain at current levels, and we may not be able to market successfully our
Mercator product line or develop extensions and enhancements to this product
line on a long-term basis. In the event that our current or future competitors
release new products that provide, or are perceived as providing, more advanced
features, greater functionality, better performance, better compatibility with
other systems or lower prices than our Mercator product line, demand for our
products and services would likely decline. A decline in demand for, or market
acceptance of, the Mercator product line would harm our business.

We may face significant risks in expanding our international operations

     International revenues accounted for approximately 29% of our total
revenues for 1999 compared to approximately 37% of our total revenues for 2000
and 37% of our total revenues for 2001. Continued expansion of our international
sales and marketing efforts will require significant management attention and
financial resources. We also expect to commit additional time and development
resources to customizing our products for selected international markets and to
developing international sales and support channels. International operations
involve a number of additional risks, including the following:

     o   difficulties in staffing and managing foreign operations;

     o   impact of possible recessionary environments in economies outside the
         United States;

     o   longer receivables collection periods and greater difficulty in
         accounts receivable collection;

     o   unexpected changes in regulatory requirements;

     o   dependence on independent resellers;

     o   reduced protection for intellectual property rights in some countries;

     o   tariffs and other trade barriers;

     o   foreign currency exchange rate fluctuations;

     o   the burdens of complying with a variety of foreign laws;

     o   potentially adverse tax consequences; and

     o   political instability.

     To the extent that our international operations expand, we expect that an
increasing portion of our international license and service and other revenues
will be denominated in foreign currencies. We do not currently engage in foreign
currency hedging transactions. However, as we continue to expand our
international operations, exposures to gains and losses on foreign currency
transactions may increase. We may choose to limit our exposure by the purchase
of forward foreign exchange contracts or similar hedging strategies. The
currency exchange strategy that we adopt may not be successful in avoiding
exchange-related losses. In addition, the above-listed factors may cause a
decline in our future international revenue and, consequently, may harm our
business. We may not be able to sustain or increase revenue that we derive from
international sources.

We may experience difficulties in developing and introducing new or enhanced
products necessitated by technological changes

     Our future success will depend, in part, upon our ability to anticipate
changes, to enhance our current products and to develop and introduce new
products that keep pace with technological advancements and address the
increasingly sophisticated needs of our customers. Development of enhancements
to existing products and new products depend, in part, on a number of factors,
including the following:

     o   the timing of releases of new versions of applications systems by
         vendors;


                                       32

<PAGE>

     o   the introduction of new applications, systems or computing platforms;

     o   the timing of changes in platforms;

     o   the release of new standards or changes to existing standards;

     o   changing customer requirements; and

     o   the availability of cash to fund development.

     Our product enhancements or new products may not adequately meet the
requirements of the marketplace or achieve any significant degree of market
acceptance. We have in the past experienced delays in the introduction of
product enhancements and new products and we may experience delays in the
future. Furthermore, as the number of applications, systems and platforms
supported by our products increases, we could experience difficulties in
developing, on a timely basis, product enhancements which address the increased
number of new versions of applications, systems or platforms served by our
existing products. If we fail, for technological or other reasons, to develop
and introduce product enhancements or new products in a timely and
cost-effective manner or if we experience any significant delays in product
development or introduction, our customers may delay or decide against purchases
of our products as our products may be rendered obsolete.

The success of our products will also depend upon the success of the platforms
we target

     We may, in the future, seek to develop and market enhancements to existing
products or new products, which are targeted for applications, systems or
platforms that we believe will achieve commercial acceptance. This could require
us to devote significant development, sales and marketing personnel, as well as
other resources, to these efforts, which would otherwise be available for other
purposes. We may not be able to successfully identify these applications,
systems or platforms, and even if we do so, we may not achieve commercial
acceptance or we may not realize a sufficient return on our investment. Failure
of these targeted applications, systems or platforms to achieve commercial
acceptance or our failure to achieve a sufficient return on our investment could
harm our business.

We may not successfully expand our sales and distribution channels

     An integral part of our strategy is to expand our indirect sales channels,
including strategic partners, value-added resellers, independent software
vendors, systems integrators and distributors. However, while we believe this is
a profitable and incremental strategy, such sales will be at lower unit prices,
may limit our contact with customers (potentially inhibiting future follow-up
sales) and places us in a position of depending upon the reseller to achieve
customer satisfaction, and could result in these resellers selling to customers
we may have sold to. We are increasing resources dedicated to developing and
expanding these indirect distribution channels. In 2001, 27% of our total
license revenues came from those sources. We may not be successful in expanding
the number of indirect distribution channels for our products. If we are
successful in increasing our sales through indirect sales channels, we expect
that those sales will be at lower per unit prices than sales through direct
channels, and revenue we receive for each sale will be less than if we had
licensed the same product to the customer directly. As a result, our ability to
accurately forecast sales, evaluate customer satisfaction and recognize emerging
customer requirements may be hindered.

     Even if we successfully expand our indirect distribution channels, any new
strategic partners, value-added resellers, independent software vendors, system
integrators or distributors may offer competing products, or have no minimum
purchase requirements of our products. These third parties may also not have the
technical expertise required to market and support our products successfully. If
the third parties do not provide adequate levels of services and technical
support, our customers could become dissatisfied, and we may have to devote
additional resources for customer support. Our brand name and reputation could
be harmed. Selling products through indirect sales channels could cause
conflicts with the selling efforts of our direct sales force.

     Our strategy of marketing products directly to end-users and indirectly
through value-added resellers, independent software vendors, systems integrators
and distributors may result in distribution channel conflicts. Our direct sales
efforts may compete with those of our indirect channels and, to the extent
different resellers target the same customers, resellers may also come into
conflict with each other. Although we have attempted to manage our distribution
channels to avoid potential conflicts, channel conflicts may harm our
relationships with existing value added resellers, independent software vendors,
systems integrators or distributors or impair our ability to attract new value-
added resellers, independent software vendors, systems integrators and
distributors.


                                       33

<PAGE>

We may encounter difficulties in managing our long-term growth

     The long-term growth of our business has placed, and is expected to
continue to place, a strain on our administrative, financial, sales and
operational resources and increased demands on our internal systems and
controls.

     To address this growth, we have recently implemented, or are in the process
of implementing and will implement in the future, a variety of new and upgraded
operational and financial systems, procedures and controls. We may not be able
to complete successfully the implementation and integration of these systems,
procedures and controls, or hire additional personnel, in a timely manner. Our
inability to manage our growth amid changing business conditions, or to adapt
our operational, management and financial control systems to accommodate our
growth, could harm our business.

We face significant competition in the market for e-business integration
software

     The markets for our products and services are extremely competitive and
subject to rapid change. Because there are relatively low barriers to entry in
the software market, we expect additional competition from other established and
emerging companies.

     In the e-business integration market, our products and related services
compete primarily against solutions developed internally by individual
businesses to meet their specific e-business integration needs. In addition, we
face increasing competition in the e-business integration market from other
third-party software vendors.

     Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Our present or future competitors may be able to develop products that are
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements, or devote
greater resources than we do to the development, promotion and sale of their
products. Accordingly, we may not be able to compete effectively in our target
markets against these competitors.

     We expect that we will face increasing pricing pressures from our current
competitors and new market entrants. Our competitors may engage in pricing
practices that may reduce the average selling prices of our products and related
services. To offset declining average selling prices, we believe that we must
successfully introduce and sell enhancements to existing products and new
products on a timely basis. We must also develop enhancements to existing
products and new products that incorporate features that can be sold at higher
average selling prices. To the extent that enhancements to existing products and
new products are not developed in a timely manner, do not achieve customer
acceptance or do not generate higher average selling prices, our operating
margins may decline.

Government regulation and legal uncertainties relating to the internet could
adversely affect our business

     Congress has passed legislation and several more bills have been sponsored
in both the House and Senate that are designed to regulate various aspects of
the internet, including, for example, on-line content, copyright infringement,
user privacy, and taxation. In addition, federal, state, local and foreign
governmental organizations are considering other legislative and regulatory
proposals that would regulate aspects of the internet, including libel, pricing,
quality of products and services, and intellectual property ownership. The laws
governing the use of the internet, in general, remain largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws apply to the internet. In addition, the
growth and development of the market for on-line commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
which may impose additional burdens on companies conducting business online by
limiting the type and flow of information over the internet. The adoption or
modification of laws or regulations relating to the internet could adversely
affect our business.

     It is not known how courts will interpret both existing and new laws.
Therefore, we are uncertain as to how new laws or the application of existing
laws will affect our business or our clients' business, which may have an
indirect effect on our business. Increased regulation of the internet may
decrease the growth in the use of the internet, which could decrease the demand
for our services, increase our cost of doing business or otherwise have a
material adverse effect on our business, or results of operations and financial
condition.

The United States Omnibus Appropriations Act of 1998 places a moratorium on
taxes levied on internet access from October 1998 to November 2003. However,
states may place taxes on internet access if taxes had already been generally
imposed and actually enforced prior to October 1998. States which can show they
enforced internet access taxes prior to October 1998 and states after November
2003 may be able to levy taxes on internet access resulting in increased cost to
access the internet which may result in a material adverse effect to our
business.

We have only limited protection for our proprietary technology

     Our success is dependent upon our proprietary software technology. We
protect our technology as described herein but this may not prevent
misappropriation or development by third parties of similar products. We do not
have any patents and we rely principally on trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect our


                                       34

<PAGE>

technology. We enter into confidentiality and/or license agreements with our
employees, distributors and customers, and we limit access to and distribution
of our software, documentation and other proprietary information by employees,
distributors and customers. The steps taken by us may not be sufficient to
prevent misappropriation of our technology, and such protections do not preclude
competitors from developing products with functionality or features similar to
our products. Furthermore, it is possible that third parties will independently
develop competing technologies that are substantially equivalent or superior to
our technologies. In addition, effective copyright and trade secret protection
may be unavailable or limited in certain foreign countries, which could pose
additional risks of infringement as we continue to expand internationally. Our
failure or inability to protect our proprietary technology could have a material
adverse effect on our business.

     Although we do not believe that our products infringe the proprietary
rights of any third parties, infringement claims could be asserted against us or
our customers in the future. Furthermore, we may initiate claims or litigation
against third parties for infringement of our proprietary rights, or for
purposes of establishing the validity of our proprietary rights. Litigation,
either as plaintiff or defendant, would cause us to incur substantial costs and
divert management resources from productive tasks whether or not such litigation
is resolved in our favor, which could have a material adverse effect on our
business. Parties making claims against us or customers for which we are subject
to payment of indemnification could recover substantial damages, as well as
injunctive or other equitable relief, which could effectively block our ability
to license our products in the United States or abroad. Such a judgment could
have a material adverse effect on our business. If it appears necessary or
desirable, we may seek licenses to intellectual property that we are allegedly
infringing. Licenses may not be obtainable on commercially reasonable terms, if
at all. The failure to obtain necessary licenses or other rights could have a
material adverse effect on our business. As the number of software products in
the industry increases and the functionality of these products further overlaps,
we believe that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be
time-consuming and expensive to defend and could adversely affect our business.
We are not aware of any currently pending claims that our products, trademarks
or other proprietary rights infringe upon the proprietary rights of third
parties.

We may become subject to product liability claims

     Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements, especially unsigned shrink-wrap licenses, may not be
effective under the laws of certain jurisdictions. Consequently, the sale and
support of our software entails the risk of product liability claims in the
future.

The ultimate outcome of pending securities litigation is uncertain

     After the restatement of our first quarter 2000 earnings and the adjustment
to previously disclosed second quarter 2000 results, we were named in a series
of similar purported securities class action lawsuits. These lawsuits have now
been consolidated into one matter. The amended complaint in the consolidated
matter alleges violations of United States securities law through alleged
material misrepresentations and omissions and seeks an unspecified award of
damages. We believe that the allegations in the amended complaint are without
merit, and we intend to contest them vigorously. There can be no guarantee as to
the ultimate outcome of this pending litigation or whether the ultimate outcome
may have a material adverse effect on our financial position or results of our
operations. Our insurance company has reserved its rights with respect to this
matter.

Our stock price has fluctuated and could continue to fluctuate

     The trading price of our Common Stock has fluctuated widely in the past and
may be significantly affected by a number of factors, including the following:

     o   actual or anticipated fluctuations in our operating results;

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

     o   developments with respect to patents, copyrights or proprietary rights;

     o   conditions and trends in the software or other industries; and

     o   general market conditions.

     In addition, the stock market has, from time to time, experienced
significant price and volume fluctuations that have particularly affected the
market prices for the stock of technology companies. These broad market
fluctuations may cause the market price of our Common Stock to decline. The high
and low sale prices of our Common Stock as reported on the Nasdaq National
Market System in the past three years are included in Item 5.


                                       35

<PAGE>

Our stockholder rights plan, corporate governance structure and governing law
may delay or prevent our acquisition by another company

     Our corporate governing documents as well as Delaware law contain
provisions that could make it more difficult for a third party to attempt to
acquire or gain control of our company. These provisions include:

     o   our Board of Directors can issue shares of preferred stock without any
         vote or action by the stockholders and this stock could have rights
         superior to those of existing stockholders and could impede the success
         of any acquisition attempt by another company;

     o   we adopted a stockholders rights plan which permits existing
         stockholders to purchase a substantial number of shares at a
         substantial discount to the market price if a third party attempts to
         gain control on a large equity position in our company;

     o   a stockholder must give our Board of Directors prior notice of a
         proposal to take action by written consent;

     o   a stockholder must give advance notice to the Board of Directors before
         stockholder-sponsored proposals may receive consideration at annual
         meetings and before a stockholder may make nominations for the election
         of directors;

     o   vacancies on the Board of Directors may be filled until the next annual
         meeting of stockholders only by majority vote of the directors then in
         office; and

     o   stockholders cannot call special meetings of stockholders.

     We are also governed by Section 203 of the Delaware General Corporation
Law, which restricts certain business combinations with any interested
stockholder, as defined by that statute. Our stockholder rights plan, our
charter, bylaws and the provisions of Section 203 could make it more difficult
for a third party to acquire control of our outstanding voting stock and could
delay or prevent a change in our control.

     In addition, we have arrangements with certain officers and other option
holders which provide for benefits upon a change in control, which could also
delay or impede an acquisition.

Future sales of our common stock by our stockholders could cause our stock price
to decline

     As of March 8, 2002, we have outstanding warrants to purchase an aggregate
of 1,120,729 shares of Common Stock and also options to purchase an aggregate of
8,487,959 shares of Common Stock granted under our directors' and employee
benefit plans. The number of shares issuable upon exercise of warrants are
subject to adjustment pursuant to anti-dilution provisions. Holders of such
warrants and options are likely to exercise them when, in all likelihood, we
could obtain additional capital on terms more favorable than those provided in
such warrants and options. Further, while these warrants and options are
outstanding, our ability to obtain additional financing on favorable terms could
be affected. Exercise of warrants and options may result in dilution to existing
stockholders.

     Sales of a significant amount of Common Stock in the public market by
existing shareholders, including holders of warrants and options, could
adversely affect the market price of the Common Stock, and it may make it more
difficult for us to sell our Common Stock in the future at times and for prices
that we deem appropriate. Several of our stock and warrant holders are parties
to registration rights agreements with us under which we are required to
register their stock for sale to the public. In January 2002, we filed a
Registration Statement covering resale of an aggregate of 3,577,883 shares. Sale
of the shares of Common Stock covered by this Registration Statement, or even
the availability of such shares for sale, may have an adverse effect on the
market price of our stock from time to time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the ordinary course of operations, our financial position and cash flows
are subject to a variety of risks, which include market risks associated with
changes in foreign currency exchange rates and movement in interest rates. We do
not, in the normal course of business, use derivative financial instruments for
trading or speculative purposes. Uncertainties that are either non-financial or
non-quantifiable, such as political, economic, tax, other regulatory or credit
risks are not included in the following assessment of our market risks.


                                       36

<PAGE>

Foreign Currency Exchange Rates

     Operations outside of the U.S. expose us to foreign currency exchange rate
changes and could impact translations of foreign denominated assets and
liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. During the year ended December
31, 2001, 37% of our total revenue was generated from our international
operations, and the net assets of our foreign subsidiaries totaled approximately
60% of consolidated net assets as of December 31, 2001. Our exposure to currency
exchange rate changes is diversified due to the number of different countries in
which we conduct business. We operate outside the U.S. primarily through wholly
owned subsidiaries in the United Kingdom, France, Germany, Netherlands, Sweden,
Switzerland, Spain, Singapore, Hong Kong, Australia and Japan. These foreign
subsidiaries use local currencies as their functional currency, as certain sales
are generated and expenses are incurred in such currencies. Foreign currency
gains and losses will continue to result from fluctuations in the value of the
currencies in which we conduct our operations as compared to the U.S. dollar. We
do not believe that possible near-term changes in exchange rates will result in
a material effect on our future earnings or cash flows and, therefore, have
chosen not to enter into foreign currency hedging instruments. There can be no
assurance that this approach will be successful, especially in the event of a
sudden and significant decline in the value of foreign currencies relative to
the United States dollar.

Interest Rates

     We invest our cash in a variety of financial instruments, consisting
principally of investments in commercial paper, interest-bearing demand deposit
accounts with financial institutions, money market funds and highly liquid debt
securities of corporations, municipalities and the U.S. Government. These
investments are denominated in U.S. dollars. Cash balances in foreign currencies
overseas are operating balances and are only invested in short-term deposits of
the local operating bank.

     We classify our investment instruments as available-for-sale in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Changes in interest rates
could impact our anticipated interest income or could impact the fair market
value of our investments. However, we believe these changes in interest rates
will not cause a material impact on our financial position, results of
operations or cash flows.


                                       37

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial statements of Mercator Software meeting the requirements of
Regulation S-X are filed on page F-1 to F-26 of this Annual Report on Form 10-K.
See Part IV, Item 14.

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

     None.


                                       38

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following sets forth certain information about the Company's directors
and executive officers. Each director serves for a one-year term until the next
annual meeting of stockholders and officers are elected annually by the Board of
Directors.

Directors
<TABLE>
<S>                             <C>        <C>                                             <C>

NAME                                  AGE      PRINCIPAL OCCUPATION                            DIRECTOR SINCE
----                                  ---      --------------------                            --------------
Constance F. Galley                   60       Director                                              1985
Ernest E. Keet (1)                    61       President, Vanguard Atlantic Ltd.                     1985
Roy C. King                           48       Chairman, Chief Executive Officer, President          2001
James P. Schadt (1)(2)                63       Vice Chairman                                         1998
Dennis G. Sisco (1)(2)(3)             55       Partner, Behrman Capital                              1990
Mark C. Stevens (2)(3)                42       Consultant                                            2000
</TABLE>

(1)  Member of the Audit Committee
(2)  Member of the Compensation Committee
(3)  Member of the Stock Option Committee

Constance F. Galley has served as a Director of Mercator since April 1985. From
April 1985 to her retirement in November 2000, Ms. Galley was President and
Chief Executive Officer of the Company. Ms. Galley is a member of the Executive
Committee and the Board of Directors of the Connecticut Technology Council,
Chairman of the Software/IT Cluster Advisory Board, and Vice-Chair of the
Governor's Council on Economic Competitiveness and Technology.

Ernest E. Keet has served as a Director of Mercator since April 1985. Mr. Keet
has been the President and a Director of Vanguard Atlantic Ltd., a venture
capital firm, since September 1984. Mr. Keet is a Director of Axolotl Corp.
(formerly AccentHealth) and serves on the boards of Engenia Software Inc.,
Technology Help Inc., ALARA Inc., Extenex Inc., the Trudeau Institute, and the
Charles Babbage Foundation.

Roy King was elected President, Chief Executive Officer and a Director of
Mercator in January 2001 and Chairman of the Board on March 21, 2001. Mr. King
brings many years of software business experience to the Company. Prior to
joining Mercator, Mr. King spent 7 years at IBM, most recently serving as its
General Manager, Consulting and Integration Services, Europe, Middle East and
Africa.

James P. Schadt has served as a Director of Mercator since August 1998, and was
Chairman from August 2000 until March 2001. He has been Vice Chairman since
March 2001. Mr. Schadt has been the Chairman of Dailey Capital Management, LP.
since December 1998. From July 1994 until his retirement in August 1997, Mr.
Schadt was the Chief Executive Officer of Readers Digest Association, Inc.

Dennis G. Sisco has served as a Director of Mercator since January 1990. Since
January 1998, he has been a partner in Behrman Capital, a private equity
investment firm. From January 1997 through December 1997, he served as the
President of Storm Ridge Capital, a venture capital firm. He also serves as a
Director of Gartner Inc. and several private companies.

Mark C. Stevens has served as a Director of Mercator since October 2000. Mr.
Stevens has been an independent consultant since August 2001. From January 1999
to August 2001, Mr. Stevens was Executive Vice President, Business Development
with At Home Corporation, where he was responsible for leading the company's
business and corporate development activities. At Home Corporation filed for
bankruptcy protection under Chapter 11 of the Federal bankruptcy laws in
November 2001. From June 1990 to January 1999, Mr. Stevens was a partner with
the law firm of Fenwick & West.


                                       39

<PAGE>

Executive Officers
<TABLE>
<CAPTION>

NAME                       AGE              POSITION IN THE COMPANY
----                       ---              -----------------------
<S>                       <C>              <C>
Roy C. King                48               Chairman, Chief Executive Officer & President
James P. Schadt            63               Vice Chairman
Jill Donohoe               32               Senior Vice President, Global Alliances & Corporate Development
Robert Farrell             38               President, Americas
Eileen Garry               40               Senior Vice President & Chief Marketing Officer
Kenneth J. Hall            44               Executive Vice President, Chief Financial Officer & Treasurer
Gerald Klein               53               Vice President, Americas, General Counsel & Secretary
David Linthicum            39               Executive Vice President, Research & Development, & Chief
                                            Technology Officer
Gregory O'Brien            54               Senior Vice President, Human Resources
David Raye                 40               Senior Vice President, Customer Care
Mark Register              39               President, International
Ronald Smith               55               Senior Vice President & Chief Administrative Officer
Michael Wheeler            43               Executive Vice President, Industry Solutions & Services

</TABLE>

Roy King was elected Chief Executive Officer, President and a Director in
January 2001 and Chairman of the Board in March 2001. Mr. King brings many years
of software business experience to the Company. Prior to joining Mercator, Mr.
King spent 7 years at IBM, lastly serving as its General Manager, Consulting and
Integration Services, Europe, Middle East and Africa.

James P. Schadt served as Chief Executive Officer from November 2000 until
January 2001. Mr. Schadt has served as a Director of the Company since August
1998 and was elected Chairman in August 2000 and Vice Chairman since March 2001.
Mr. Schadt has been the Chairman of Dailey Capital Management, LP. since
December 1998. From July 1994 until his retirement in August 1997, Mr. Schadt
was the Chief Executive Officer of Readers Digest Association, Inc.

Jill Donohoe has been Senior Vice President, Global Alliances and Corporate
Development since October 2001. From June 2000 to October 2001, Ms. Donohoe was
Vice President, Business Development and Client Management at the investment
banking firm MAST Services, LLC. From 1999 to June 2000, she was Executive Vice
President, Business Development at Rxcentric, Inc., a Marcomm Company, an
information technology services company. From 1998 to 1999, she was Vice
President, Global Client Partners of iXL, an information technology services
company. From 1997 to 1998, Ms. Donohoe was Senior Director of Business
Development at Larry Miller Productions, a Marcomm services company that was
acquired by iXL. From 1997 to 1998, she was Regional Director of Business
Development at Touch Screen Media. From 1995 to 1997, she was Director, Business
Development at Convergent Media Systems.

Robert Farrell has been President, Americas since July 2001. From December 1999
to April 2001, Mr. Farrell was the Chief Operating Officer at LeadingSide, Inc.,
a software solutions company. LeadingSide, Inc. filed for bankruptcy protection
under Chapter 7 of the Federal bankruptcy laws in April 2001. From July 1996 to
December 1999, he was Executive Vice President, Operations at Computer Horizons
Corporation, an integration and software services company.

Eileen Garry has been Senior Vice President and Chief Marketing Officer since
July 2001. From July 1987 to July 2001, Ms. Garry worked in various marketing
positions at Hyperion Software, a solutions software company, including Vice
President, General Manager (January 2000 to July 2001), Vice President, Product
Manager (July 1998 to January 2000), Senior Director, Corporate Development
(January 1997 to June 1998), Senior Director, Product Marketing (September 1994
to January 1997) and Manager, Senior Manager, Director of Product Management
(July 1987 to August 1994).

Kenneth J. Hall became Senior Vice President, Chief Financial Officer and
Treasurer in July 2001. In December 2001, he was promoted to his current
position of Executive Vice President, Chief Financial Officer and Treasurer.
From 1999 to 2000, Mr. Hall was Executive Vice President and Chief Financial
Officer at Onsite Access, Inc., a broadband communications provider. From 1997
to 1998 he was Senior Vice President, Chief Financial Officer and Treasurer of
Icon CMT Corp., an applications development and internet services provider,
until its acquisition by Qwest Communications International, Inc. From 1998 to
1999, he was Senior Vice President, Chief Financial Officer and Treasurer at
Qwest Internet Solutions, Inc. From 1996 to 1997, Mr. Hall was Chief Financial
Officer at Systemax, Inc., a marketer of computer and computer related products.
From 1990 to 1995, he was Vice President, Finance & Administration and Chief
Financial Officer of National Football League Properties.


                                       40

<PAGE>

Gerald E. Klein has been General Counsel and Secretary since August 2000 and
Vice President, Americas since May 2001. For 7 years prior thereto, Mr. Klein
was Purchasing and Credit Counsel at Union Carbide Corporation.

David S. Linthicum became Senior Vice President, Software Development and Chief
Technology Officer in March 2001. In December 2001, he was promoted to his
current position of Executive Vice President, Research & Development and Chief
Technology Officer. From December 1997 to February 2001, Mr. Linthicum was Chief
Technology Officer of SAGA Software, Inc. Before joining SAGA Software, Mr.
Linthicum was Senior Manager at AT&T Solutions from 1996 to 1997.

Gregory O'Brien has been Senior Vice President, Human Resources since August
2001. From 1996 to May 2001, he was Vice President, Operations at CSK
Corporation, an integration software company. From 1990 to 1996, Mr. O'Brien
was Vice President, Human Resources and Administration at Micrognosis, Inc.,
a system solutions company.

David Raye, who has been with the Company since 1991, was promoted to his
current position of Senior Vice President, Customer Care in May 2001. From June
1994 to May 2001 he was General Manager and Vice President of Operations.

Mark Register became Vice President, Asia Pacific in June 2000. He was promoted
to President, Asia Pacific January 2001, and most recently promoted to
President, International in October 2001. He was Vice President, Application
Services of Computer Services Company, an information technology services
company, from January 2000 to June 2000. Prior to Computer Services Company, he
was General Manager, Systems Integration and Managed Services at GE Capital, IT
Solutions from April 1994 to January 2000.

Ronald Smith has been an operations consultant for Mercator since February 2001.
He became Mercator's Vice President, Global Operations in June 2001. In January
2002, he was promoted to Senior Vice President and Chief Administrative Officer.
From March 2000 until February 2001, Mr. Smith taught leadership development at
Northwood University, Florida. From January 1995 to March 2000, Mr. Smith was a
Business Operations Manager at IBM Corp.

Michael Wheeler became the Company's Senior Vice President, Worldwide Product
Intensive Enterprises in October 2001. He was promoted to his current position
of Executive Vice President, Industry Solutions & Services in December 2001.
From January 1999 to October 2001, he was a Vice President in the services
division of IBM. From January 1993 to January 1999, he was Managing Principal in
the consulting division of IBM.

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16 of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities Exchange Commission ("SEC").
Such persons are required by SEC regulations to furnish the Company with copies
of all forms under Section 16(a). Based solely on its review of the copies of
such forms furnished to the Company and written representations from the
executive officers and directors of the Company, to the Company's knowledge, all
such filings were made on a timely basis, except the 2001 Form 5 for Diane Baker
was not filed and the 2001 Form 5 for Richard Little was filed one day late
showing one transaction.


                                       41

<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

     The following table sets forth all compensation awarded, earned or paid for
services rendered in all capacities to Mercator and its subsidiaries during
1999, 2000 and 2001 to: (i) individuals who served as Mercator's Chief Executive
Officer during 2001, (ii) the Company's four other most highly compensated
executive officers who were serving as executive officers during 2001 and (iii)
two former executive officers of the Company (the "Named Executive Officers").
This information includes the dollar values of base salaries and bonus awards,
the number of shares subject to stock options granted and certain other
compensation, if any, whether paid or deferred. The Company does not grant stock
appreciation rights and has no long-term compensation benefits other than stock
options.

Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                                     Long-Term
                                                                                                   Compensation
                                                      Annual Compensation                             Awards
                                  ------------------------------------------------------------    -------------
                                                                                                   Securities       All Other
                                                                               Other Annual        Underlying     Compensation
Name and Principal Position        Year (1)       Salary         Bonus (2)     Compensation          Options           (3)
---------------------------        --------       ------         ---------     -------------       -----------    ------------
<S>                                 <C>          <C>             <C>             <C>              <C>             <C>
Roy C. King                          2001        $351,923         $ ----          $  ----          1,000,000      $ 15,163
   Chairman of the Board,            2000           ----            ----             ----             ----            ----
   Chief Executive Officer,          1999           ----            ----             ----             ----            ----
   and President

James P. Schadt                      2001        $111,154(4)      $ ----          $  ----              33,000       $103,846
   Chief Executive Officer and       2000          62,308           ----             ----             473,000          ----
   Vice Chairman of the Board        1999           ----            ----             ----               7,500          ----

Kenneth Hall                         2001        $126,923        $137,500         $  ----             400,000       $    411
  Executive Vice President,          2000           ----            ----             ----             ----             ----
  Chief Financial Officer and        1999           ----            ----             ----             ----             ----
   Treasurer

David Linthicum                      2001        $178,077         $ ----          $  ----             350,000       $    685
   Executive Vice President,         2000           ----            ----             ----             ----             ----
   Research & Development and        1999           ----            ----             ----             ----             ----
   Chief Technology Officer

David M. Raye                        2001        $189,610        $ 30,833         $  ----              27,500       $  4,094
   Senior Vice President,            2000         182,846           ----             ----              40,000          3,089
   Customer Care                     1999         164,999          40,000            ----              25,000          2,704

Mark Register                        2001        $181,270         $ 7,203         $  ----              30,000       $  ----
   President, International          2000         108,887          86,112            ----              75,000          ----
                                     1999           ----            ----             ----              ----            ----

Richard Applegate                    2001        $173,077        $ 31,250         $  ----              ----         $135,286
   Senior Vice President,            2000          32,308(5)        ----             ----             100,000          ----
   Chief Financial Officer and       1999           ----            ----             ----              ----            ----
   Treasurer (7)

Peter Jones                          2001        $160,160        $  ----          $  8,176 (6)         ----         $129,291
   Managing Director and             2000         151,460         151,090           10,905 (6)         75,000          7,573
   President, EMEA (7)               1999         170,209         163,802           11,648 (6)         58,806          5,945

</TABLE>

(1)  Mr. King became Chief Executive Officer and President of the Company on
     January 16, 2001; Mr. Hall became Senior Vice President, Chief Financial
     Officer and Treasurer on July 9, 2001; and Mr. Linthicum became Senior Vice
     President, Research & Development and Chief Technology Officer on March 14,
     2001. The amounts shown in the table for 2001 with respect to Messrs. King,
     Hall and Linthicum are payments from such dates.

(2)  Bonus amounts are reported in the year paid.


                                       42

<PAGE>



(3)  The following amounts are included in the above table for 2001: The portion
     of Company matching 401(k) contributions for Mr. King $5,481; Mr. Raye
     $3,243, $3,089 and $2,704 for 2001, 2000 and 1999, respectively; Mr.
     Applegate $1,154. Severance for Mr. Schadt $103,846; Mr. Applegate
     $133,846; Mr. Jones $108,850. Life insurance and disability insurance
     premiums paid by the Company for Mr. King $9,682; Mr. Hall $411; Mr.
     Linthicum $685; Mr. Raye $851, Mr. Applegate $286. Payments by the Company
     to Mr. Jones for local (UK) pension benefits $20,441, $7,573 and $5,945 for
     2001, 2000 and 1999, respectively. Such payments are not part of a defined
     contribution plan.
(4)  Includes $30,500 representing Director's fees paid to Mr. Schadt while he
     was not an employee.
(5)  The Company paid an additional $200,595 to IMCOR, which supplied the
     services of Mr. Applegate from August 2000 to November 2000. The $32,308
     represents salary paid directly to Mr. Applegate for employment in November
     and December 2000.
(6)  Represents a car allowance paid by the Company.
(7)  Mr. Applegate served until July 2001 and Mr. Jones served until October
     2001.

Option Grants in 2001

     The following table sets forth information regarding option grants pursuant
to the Company's 1997 Equity Incentive Plan during 2001 to each of the Named
Executive Officers. In accordance with the rules of the SEC, the table sets
forth the hypothetical gains or "option spreads" that would exist for the
options at the end of their respective ten-year terms. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10% from the
date the option was granted to the end of the option term.
<TABLE>
<CAPTION>

                                                                                                POTENTIAL REALIZABLE
                                               PERCENTAGE                                        VALUE AT ASSUMED
                                NUMBER OF       OF TOTAL                                          ANNUAL RATES OF
                                SECURITIES       OPTIONS                                            STOCK PRICE
                                UNDERLYING     GRANTED TO        EXERCISE                           APPRECIATION
                                 OPTIONS        EMPLOYEES       PRICE PER      EXPIRATION        FOR OPTION TERM (2)
NAME                           GRANTED (1)       IN 2001          SHARE           DATE             5%            10%
------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                <C>            <C>            <C>             <C>           <C>
Roy C. King                     250,000 (3)       5.1%           $  9.188      1/16/11         $1,444,571    $3,660,826
                                750,000 (4)      15.3%              2.78       5/17/11          1,311,245     3,322,953

James P. Schadt                  33,000 (5)        .7%           $  2.04       8/15/11         $   42,337    $  107,290

Kenneth J. Hall                 400,000 (6)       8.1%           $  2.29       7/9/11          $  576,067    $1,459,868

David Linthicum                 100,000 (7)       2.0%           $  2.03       7/16/11         $  127,666    $  323,530
                                250,000 (8)       5.1%              4.375      3/14/11            687,854     1,743,156

David Raye                       27,500 (7)        .6%           $  1.15       9/26/11         $   19,889    $   50,402

Mark Register                    30,000 (7)        .6%           $  1.15       9/26/11         $   21,697    $   54,984

Richard Applegate                      ----       ----              ----         ----           ----           ----

Peter Jones                            ----       ----              ----         ----           ----           ----

</TABLE>

(1)  The options shown in the table were granted at fair market value, are
     incentive stock options (to the extent permitted under the Code) and,
     unless noted, will expire ten years from the date of grant, subject to
     earlier termination upon termination of the optionee's employment.
(2)  Potential realizable values are calculated based on the fair market value
     of the Common Stock at the date of grant minus the exercise price. The 5%
     and 10% assumed annual compound rates of stock price appreciation are
     mandated by the rules of the Securities and Exchange Commission and do not
     represent the Company's estimate or projection of future Common Stock
     prices or values.
(3)  These options vest 100% on date of grant.
(4)  These options vest 33% on grant date and 8.33% each quarter thereafter.
(5)  These options vest 100% after 1 year.
(6)  These options vest 100,000 on date of grant and the remaining quarterly
     thereafter for 4 years.
(7)  These options vest 25% after 1 year and 75% quarterly thereafter for
     3 years.
(8)  These options vest 25% after 6 months and 75% quarterly thereafter for
     42 months.



                                       43

<PAGE>

Aggregate Option Exercises in 2001 and Year-End Values

     There were no option exercises by the Named Executive Officers during 2001.
The following table includes the number of shares covered by both exercisable
and unexercisable stock options as of December 31, 2001. Also reported are
values of "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and $8.36 per share,
which was the closing price of Mercator Software's Common Stock as reported on
the Nasdaq National Market on December 31, 2001, the last day of trading for
2001.

<TABLE>
<S>                 <C>               <C>           <C>                              <C>

                                                            NUMBER OF SECURITIES
                                                           UNDERLYING UNEXERCISED             VALUE OF UNEXERCISED IN-
                          SHARES                                 OPTIONS                        THE-MONEY OPTIONS
                       ACQUIRED ON       VALUE                AT YEAR-END(1)                      AT YEAR-END(1)
NAME                     EXERCISE       REALIZED        EXERCISABLE    UNEXERCISABLE       EXERCISABLE       UNEXERCISABLE
----                     --------       --------        -------------  -------------       ------------      -------------

Roy C. King                ----           ----              250,000        750,000         $    -----        $ 4,185,000

James P. Schadt            ----           ----              503,000         40,500            747,750            208,560

Kenneth J. Hall            ----           ----              121,430        278,570            737,080          1,690,920

David Linthicum            ----           ----              105,580        244,420            490,352          1,138,898

David Raye                 ----           ----               60,250         72,500            219,445            209,588

Mark Register              ----           ----               25,000         80,000             72,369            309,769

Richard Applegate          ----           ----                ----           ----               ----               ----

Peter Jones                ----           ----               60,645          2,500            144,962              ----

</TABLE>

(1)  These values have not been, and may never be, realized and are based on the
     positive spread between the respective exercise prices of outstanding
     options and the closing price of the Company's Common Stock on December 31,
     2001, the last day of trading for 2001.

Director Compensation

     The Company reimburses its Directors for reasonable expenses associated
with their attendance at Board meetings. Directors also receive cash
compensation as follows: (a) an annual retainer of $15,000, (b) $1,500 per board
meeting attended, and (c) $500 per committee meeting attended. Directors who are
not employees of the Company, or any parent, subsidiary or affiliate of the
Company, are eligible to participate in the Company's 1997 Equity Incentive Plan
(the "1997 Plan"). During 2001, Diane Baker (a former Director) was granted two
options pursuant to the 1997 Plan to purchase 10,000 and 3,000 shares,
respectively, of the Company's Common Stock at an exercise price of $2.04 per
share. Constance Galley was granted an option pursuant to the 1997 Plan to
purchase 50,000 shares of the Company's Common Stock at an exercise price of
$2.04 per share. Ernest Keet was granted two options pursuant to the 1997 Plan
to purchase 20,000 and 10,000 shares, respectively, of the Company's Common
Stock at an exercise price of $2.04 per share. Richard Little (a former
Director) was granted two options pursuant to the 1997 Plan to purchase 20,000
and 10,000 shares, respectively, of the Company's Common Stock at an exercise
price of $2.04 per share. James Schadt was granted three options pursuant to the
1997 Plan to purchase 20,000, 10,000 and 3,000 shares, respectively, of the
Company's Common Stock at an exercise price of $2.04 per share. Dennis Sisco was
granted two options to purchase 20,000 and 10,000 shares, respectively, of the
Company's Common Stock at an exercise price of $2.04 per share. Mark Stevens was
granted two options to purchase 10,000 and 3,000 shares, respectively, of the
Company's Common Stock at an exercise price of $2.04 per share.

Compensation and Severance Agreements

     The Company has entered into agreements with the Named Executive Officers
as described below.

     Mr. King's agreement provides for an annual base salary of $375,000 and an
option grant to purchase an aggregate of 1,000,000 shares of Common Stock,
250,000 shares of which were granted upon commencement of employment and 750,000
shares of which were issued on May 17, 2001. Mr. King currently receives an
annual base salary of $400,000. The term of the agreement is five years
commencing January 16, 2001. Mr. King shall be eligible to receive an
operational bonus equal to 100% of his base salary for each calendar year upon
achievement of certain profit and revenue targets. Mr. King is also eligible to
receive a special bonus equal to


                                       44

<PAGE>

100% of his base salary for each calendar year upon achievement of extraordinary
performance thresholds. As a condition to receive the special bonus, Mr. King
must achieve the minimum performance under the operational bonus. If Mr. King is
terminated for cause, he will be entitled to receive his base salary through his
termination date and any options granted hereunder shall immediately expire. If
Mr. King is terminated without cause, he will be entitled to receive unpaid
salary through the termination date, severance compensation of 18 months base
salary, a bonus amount equal to his operational bonus pro rated through the
termination date, a bonus equal to 150% of his annual operational bonus payable
during the 18 month severance period and 18 months of continued eligible
benefits. Upon any such termination, options already vested shall remain vested
and exercisable for the remainder of their originally stated term up to the
maximum extension permitted by the Plan, and any options to become vested within
18 months of the termination date shall vest and remain vested and exercisable
for the remainder of their originally stated terms up to the maximum extension
permitted by the Plan. Mr. King has the right to terminate the agreement for
significant diminution of his duties, a reduction in base salary, loss of any
material compensation or benefit plan or arrangement, relocation by Mercator, or
failure of a successor to assume the agreement. Upon a change of control as
defined in the agreement, Mr. King shall receive the same benefits as if
terminated without cause, however, the period specified as 18 months shall be 3
years. Also, upon a change of control, 50% of Mr. King's outstanding unvested
stock options will vest and become immediately exercisable.

     Mr. Schadt had an agreement with the Company providing for his employment,
which terminated as of May 31, 2001. Mr. Schadt is being paid severance of 12
months salary and benefits pursuant to that agreement. He remains Vice Chairman
of the Board.

     Mr. Hall's agreement provides for an annual base salary of $275,000 and an
option grant to purchase an aggregate of 400,000 shares of Common Stock. Upon a
change of control, 50% of the outstanding unvested stock options will vest and
become immediately exercisable and, if he is terminated within one year of such
change of control, he will receive eighteen months of his then base salary, a
bonus of 150% of his annual base salary and eighteen months of continued
eligible benefits and other executive perquisites. For 2001, Mr. Hall was
guaranteed to receive a bonus of no less than 100% of his base salary prorated
from July 1, 2001. $75,000 of the bonus was paid at his hire date with the
balance paid in December 2001. Mr. Hall is eligible for a target bonus of 100%
up to 300% of his base salary upon meeting certain corporate performance and
goals. If there has not been a change in control and if Mr. Hall is terminated
for any reason other than for cause, he will receive twelve months' salary plus
a bonus at 100% of his then base salary, and twelve months of continued eligible
benefits and other executive perquisites. Mr. Hall is entitled to receive term
life insurance valued at $1,000,000 paid by the Company.

     Mr. Linthicum's agreement provides for an annual base salary of $200,000
and an option grant to purchase an aggregate of 250,000 shares of Common Stock.
Upon a change of control, options to be vested within twelve months of such
change of control will immediately vest. He is eligible for a bonus of 100% of
his base salary upon meeting certain corporate performance and goals. In
addition to the target bonus, he is eligible to receive an additional bonus of
up to $200,000 based upon superior performance of the entire Company. If Mr.
Linthicum is terminated for any reason other than for cause, he will receive
twelve months' salary and medical insurance and other executive perquisites. Mr.
Linthicum is entitled to receive term life insurance in the amount of $1,000,000
paid by the Company.

     Mr. Register's agreement provides for an annual base salary of $225,000. He
is eligible to receive a bonus of 100% of base salary based upon meeting
corporate and international results. Mr. Register is on a two-year assignment in
Germany and as such will receive paid benefits including housing, education for
family members, relocation expenses and certain tax equalization payments. In
the event of Mr. Register's involuntary termination before the completion of
this assignment for reasons other than cause, or resulting from a change in
control, he will be paid severance equal to twelve month's base salary and
receive certain relocation benefits.

     Mr. Applegate's agreement provided for an annual base salary of $300,000.
He received an option grant to purchase an aggregate of 100,000 shares of Common
Stock. Mr. Applegate left the Company on July 12, 2001 and is being paid
severance equal to nine months' salary and a prorated bonus.


Change in Control Plan

     In December 2001, the Compensation Committee adopted a Change of Control
protection plan. Such plan provides that, upon a Change of Control, (a) the
Chief Executive Officer, Chief Financial Officer and Chief Technology Officer
will receive (i) full acceleration of unvested options, and (ii) in the event of
constructive termination as defined below within one year of the Change in
Control, pro-ration of his or her year-to-date annual bonus, eighteen months
severance (salary and target bonus) and continued benefits for eighteen months
(pursuant to his employment agreement, the Chief Executive Officer will receive
three years severance (salary and target bonus) and benefits); (b) Senior Vice
Presidents, and certain Vice Presidents selected by the Chief Executive Officer,
will receive (i) 50% acceleration of unvested options, and (ii) if
constructively terminated within one year of the Change of Control, full
acceleration of unvested options, pro-ration of year to date annual bonus, 12
months severance (salary and target bonus) and benefits; (c) other employees
will receive (i) one year acceleration of unvested options, and (ii) if
constructively terminated within six months, full acceleration of unvested
options. "Constructive Termination" is defined as the occurrence of any of the
following, without employee's written consent: (i) a significant


                                       45

<PAGE>

diminution of, or the assignment to the employee of any duties inconsistent with
the employee's title, status, duties or responsibilities, (ii) a reduction in
annual base salary as the same may be increased from time to time, target bonus
or fringe benefit which by itself or in the aggregate is material to employee's
compensation, (iii) the relocation of employee's office more than fifty miles
from the employee's current location, or (iv) the failure to obtain the written
assumption of employee's Employment Agreement by any successor to all or
substantially all of the Company's assets or business within thirty days after a
merger, consolidation, sale or a change of control.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information with respect to the
beneficial ownership of Mercator Common Stock as of March 8, 2002 by (i) each
stockholder known by the Company to be the beneficial owner of more than 5% of
the Company's Common Stock; (ii) each director; (iii) the Company's current
Chief Executive Officer, each of the Company's four other most highly
compensated executive officers, and two former executive officers who served
during 2001; and (iv) all directors and executive officers as a group.
<TABLE>
<S>                                       <C>                                <C>

                                             Amount and Nature of               Percent of Outstanding
Name and Address of Beneficial Owner (1)    Beneficial Ownership (2)               Common Stock (2)
----------------------------------------    ------------------------               ----------------

Brookside Capital Partners Fund, L.P. (3)           1,901,384                            5.6%

Ernest E. Keet                                      1,636,867                            4.8%
     Vanguard Atlantic Ltd. (4)

Bear Stearns Asset Management Inc. (5)              1,612,700                            4.7%

Constance F. Galley (6)                               953,804                            2.8%

Roy C. King (7)                                       685,548                            2.0%

James P. Schadt (8)                                   557,957                            1.6%

Kenneth J. Hall (9)                                   210,081                             *

David Linthicum (10)                                  158,033                             *

David Raye (11)                                        85,748                             *

Dennis G. Sisco (12)                                   80,000                             *

Peter Jones (13)                                       75,495                             *

Mark Register (14)                                     62,241                             *

Mark C. Stevens (15)                                   38,000                             *

Richard Applegate (16)                                  4,000                             *


All executive officers and directors as a group
     (12 persons) (17)                              5,489,242                           16.2%
</TABLE>
* Less than 1%

(1) Except as otherwise noted, the address of record is c/o Mercator Software,
Inc., 45 Danbury Road, Wilton, CT 06897.

(2) Based on a total of (i) 33,820,924 shares of Common Stock outstanding as of
March 8, 2002, and (ii) shares of Common Stock issuable pursuant to options held
by the respective person or group which may be exercised within 60 days of March
8, 2002. Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
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 8, 2002 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.


                                       46

<PAGE>

(3) Based on a Schedule 13G dated February 14, 2002. The address of
Brookside Capital Partners Fund, L.P. is 111 Huntington Avenue, Boston, MA
02199. Mr. Roy Edgar Brakeman III has voting and investment control over the
Company's securities owned by Brookside Capital Partners Fund, L.P.

(4) Includes 68,000 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002, and 250,000 shares
of Common Stock held of record by Vanguard Atlantic Ltd. ("Vanguard"), 50,000
shares of Common Stock held of record by the Ernest E. & Nancy R. Keet
Foundation, 413,761 shares of Common Stock held of record by the Ernest E. Keet
Grantor Retained Annuity Trust, 734,020 shares of Common Stock held of record by
the Ernest E. & Nancy R. Keet Family Trust, and 121,086 shares of Common Stock
held of record by Mr. Keet. Mr. Keet, a director of the Company, is the
President of Vanguard, exercises voting and investment power with respect to its
shares of the Company's Common Stock and may be deemed to beneficially own the
shares owned by such entity. Mr. Keet disclaims beneficial ownership of the
shares held by Vanguard, the Ernest E. & Nancy R. Keet Foundation, the Ernest E.
& Nancy R. Keet Family Trust, and by the Ernest E. Keet Grantor Retained Annuity
Trust, except to the extent of his indirect pecuniary interest therein. The
address of Vanguard is P. O. Box 1360, Saranac Lake, NY 12983 and the address of
Mr. Keet is c/o Vanguard, P.O. Box 1360, Saranac Lake, NY 12983.

(5) Based on a Schedule 13G dated February 6, 2002. Includes 1,606,300 shares
over which Bear Stearns reports having sole voting power and 6,400 shares over
which Bear Stearns reports having shared voting power. The address of Bear
Stearns Asset Management Inc. is 383 Madison Avenue, 27th Floor, New York, NY
10179.

(6) Includes 423,922 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002, 50,010 shares of
Common Stock issuable upon exercise of Warrants, and 472,872 shares of Common
Stock held of record by Ms. Galley. Also includes approximately 7,000 shares of
Common Stock owned by Ms. Galley's husband, Richard Galley. Ms. Galley disclaims
beneficial ownership of shares owned by Mr. Galley. (1)

(7) Includes 651,562 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 33,986 shares of
Common Stock held of record by Mr. King. (1)

(8) Includes 503,000 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 47,957 shares of
Common Stock held of record by Mr. Schadt. Also includes 7,000 shares of Common
Stock held by Mr. Schadt's wife, Barbara Schadt. (1)

(9) Includes 199,915 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 10,166 shares of
Common Stock held of record by Mr. Hall. (1)

(10) Includes 158,033 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002. (1)

(11) Includes 82,375 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 3,373 shares of
Common Stock held of record by Mr. Raye. (1)

(12) Includes 65,000 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 15,000 shares of
Common Stock held of record by Mr. Sisco. (1)

(13) Includes 63,145 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 12,350 shares of
Common Stock held of record by Mr. Jones. Mr. Jones resigned from the Company on
October 16, 2001. (1)

(14) Includes 58,890 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 3,351 shares of
Common Stock held of record by Mr. Register. (1)

(15) Includes 37,500 shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of March 8, 2002 and 500 shares of
Common Stock held of record by The Stevens-Murphy Living Trust. Mr. Stevens
transferred his outstanding options to The Stevens-Murphy Living Trust on
February 25, 2002. (1)

(16) Includes 4,000 shares of Common Stock held of record by Mr. Applegate.
Mr. Applegate resigned from the Company on July 12, 2001. (1)

(17) Includes an aggregate of 5,489,242 shares of Common Stock subject to
options currently exercisable or exercisable within 60 days of March 8, 2002,
and 50,010 shares of Common Stock issuable upon exercise of Warrants, including
the options and Warrants described in footnotes (4) and (6) through (16).


                                       47

<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In December 2000, the Company entered into a license agreement with Harvard
Pilgrim Health Care ("Harvard"). The license fees of $495,000 and maintenance
fees of $84,150 charged to Harvard are comparable to the Company's regular
charges to its unaffiliated customers. The chief executive officer of Harvard is
Mr. Schadt's son-in-law.

     Mr. Schadt, a member of the Company's Compensation Committee, was an
officer of the Company during 2001, and was formerly Chairman and Chief
Executive Officer of the Company.


                                       48

<PAGE>

                                     PART IV

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

The following documents are filed as part of this Annual Report on Form 10-K:

1.       Consolidated  Financial  Statements.  The following  consolidated
         financial statements of Mercator Software,  Inc. and Report
         from the Independent Accountants are incorporated in Item 8 of
         this Annual Report on Form 10-K.

         Independent Auditors' Report

         Consolidated Balance Sheets at December 31, 2001 and 2000

         Consolidated Statements of Operations for the Years Ended
         December 31, 2001, 2000 and 1999

         Consolidated Statements of Stockholders' Equity for the Years Ended
         December 31, 2001, 2000 and 1999

         Consolidated Statements of Cash Flows for the Years Ended
         December 31, 2001, 2000 and 1999

         Notes to Consolidated Financial Statements

2.       Consolidated Financial Statement Schedules. Consolidated financial
         statement schedules have been omitted because the required information
         is not present or not present in amounts sufficient to require
         submission of the schedule, or because the information required is
         included in the consolidated financial statements or the notes thereto.

3.(a)    The Exhibits listed in the Exhibit Index immediately preceding the
         Exhibits are filed as a part of this Annual Report on Form 10-K.

3.(b)    Mercator  Software,  Inc.  filed two current  reports on Form 8-K in
         the fourth  quarter of 2001:  (i) on October 1, 2001 with respect to
         the amendment to the Financing  Agreement between the Company and its
         credit facility lender;  (ii) on December 21, 2001 with respect to a
         private placement financing.


                                       49

<PAGE>



                                   SIGNATURES

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

                               By: /s/ Roy C. King
                                   ---------------
                                   Roy C. King
                                   Chairman of the Board of Directors,
                                   Chief Executive Officer and President

     Pursuant to the requirements of the Securities Act, this Annual Report on
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                   <C>                                                           <C>

Name                                          Capacity                                                       Date
----                                          --------                                                       ----

/s/ Roy C. King                           Chairman of the Board of Directors,                             March 18, 2002
---------------                           Chief Executive Officer and President
Roy C. King                               (Principal Executive Officer)

/s/ Kenneth J. Hall                       Executive Vice President, Chief                                 March 18, 2002
-------------------                       Financial Officer and Treasurer
Kenneth J. Hall                           (Principal Financial and Accounting Officer)

/s/ James P. Schadt                       Director and Vice Chairman                                      March 18, 2002
-------------------
James P. Schadt

/s/Constance F. Galley                    Director                                                        March 18, 2002
----------------------
Constance F. Galley

/s/ Ernest Keet                           Director                                                        March 18, 2002
---------------
Ernest E. Keet

/s/ Dennis G. Sisco                       Director                                                        March 18, 2002
-------------------
Dennis G. Sisco

/s/ Mark C. Stevens                       Director                                                        March 18, 2002
-------------------
Mark C. Stevens

</TABLE>


                                       50

<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<S>             <C>

Exhibit No.                               Exhibit Title
-----------                               -------------
2.1                Agreement and Plan of Reorganization dated as of September 30, 1999 by and among Mercator Software, Inc. Natchez
                   Acquisition Corp. and Novera Software, Inc. /(1)/

2.2                Stock Purchase Agreement dated as of March 18, 1999 by and among Mercator Software and each of the stockholders
                   of Braid Group Limited/(8)/

2.3                Asset Transfer Agreement dated as of November 13, 1998 by and among the Mercator Software, Software Consulting
                   Partners and the sole stockholder of Software Consulting Partners/(7)/

3(i)-1             Amended and Restated Certificate of Incorporation/(5)/

    -2             Certificate of Designations specifying the terms of the Series A Junior Participating Preferred Stock of Mercator
                   Software/(4)/

3(ii)              Registrant's Amended and Restated Bylaws/(3)/

4.1                Form of Specimen Certificate for Registrant's Common Stock/((2)/

4.2                Stockholders Agreement dated as of June 1, 1989, as amended/(2)/

4.3                1989 Stock Purchase Agreement dated as of June 1, 1989, as amended/(2)/

4.4                Series E Preferred Stock Purchase Agreement dated as of May 15, 1997 between Mercator Software and the Purchasers
                   named therein/(2)/

4.5                Rights Agreement between the Registrant and The Bank of New York dated as of September 2, 1998/(3)/

4.6                Securities Purchase Agreement dated as of December 11, 2001 among Registrant and certain Purchasers/(10)/

4.7                Form of Warrant issued to Purchasers dated December 11, 2001/(10)/

4.8                Registration Rights Agreement between the Registrant and Silicon Valley Bank dated June 22, 2001/(9)/

4.9                Warrant to Purchase Stock issued to Silicon Valley Bank on June 22, 2001/(9)/

4.10               Warrant Agreement dated as of December 11, 2001 between William Blair & Company, L.L.C. and the Registrant/(11)/

4.11               Warrant Agreement dated as of January 7, 2002 between MAST Global Limited and the Registrant/(11)/

4.12               Warrant Agreement dated as of June 20, 2001 between Morgan Howard Group International Limited and the
                   Registrant/(11)/

10.1               *Employment Agreement dated as of January 1, 1999 between Registrant and Albert
                   Denz/(12)/

10.2               *Employment Agreement dated as of January 16, 2001 between Registrant and Roy C. King/(12)/

10.3               *Registrant's 1993 Stock Option Plan and related documents/(2)/

10.4               *Registrant's 1997 Equity Incentive Plan, as amended/(13)/

10.5               *Registrant's 1997 Directors Stock Option Plan/(2)/

10.6               *Registrant's 1997 Employee Stock Purchase Plan/(2)/

</TABLE>


                                       51

<PAGE>

<TABLE>
<S>             <C>

10.7               *Registrant's Profit Participation Plan/(2)/

10.8               *Form of Indemnification Agreement entered into by Registrant with each of its directors and executive
                   officers/(2)/

10.9               Lease Agreement dated as of January 2, 1990 between Registrant and Robert D. Scinto, as amended/(2)/

10.10              Lease Agreement dated as of June 26, 2000 between Registrant and Bannockburn Development Company/(12)/

10.11              Lease Agreement dated as of January 29, 2001 between Registrant and CDR Federal LLC/(12)/

10.12              *Letter Agreement dated as of September 20, 2000, between Registrant and Constance Galley/(5)/

10.13              *Letter Agreement dated as of December 5, 1995 between Registrant and Eric Amster/(2)/

10.14              *Separation and Release Agreement dated as of March 13, 2001 between Registrant and Saydean Zeldin/(13)/

10.15              Accounts Receivable Financing Agreement between the Registrant and Silicon Valley Bank dated June 22, 2001/(9)/

10.16              Credit Agreement between registrant and Fleet Nation Bank dated as of February 25, 2000/(6)/

10.17              Lease Agreement between Registrant and Wilton Realty Investors Corp. dated June 6, 2000/(5)/

10.18              *Agreement between Registrant and James P. Schadt dated as of August 21,2000/(5)/

10.19              *Letter Agreement between Registrant and James P Schadt dated as of November 21, 2000/(12)/

10.20              *Letter Agreement between Registrant and Richard Applegate dated as of July 12, 2001/(13)/

10.21              *Agreement between Registrant and Patricia Boggs dated December 22, 2000/12)/

10.22              Lease dated April 20, 2001 between the Registrant and the Prudential Assurance Company Limited/(9)/

10.23              *Agreement between the Registrant and David Linthicum, dated as of March 12, 2001/(13)/

10.24              *Agreement between the Registrant and Eileen Garry dated as of May 25, 2001/(13)/

10.25              *Agreement between the Registrant and Ron Smith dated as of May 31, 2001/(13)/

10.26              *Agreement between the Registrant and Robert J. Farrell dated as of June 13, 2001/(13)/

10.27              *Agreement between the Registrant and Kenneth J. Hall dated as of June 28, 2001/(13)/

10.28              *Agreement between the Registrant and Gregory G. O'Brien dated as of July 11, 2001/(13)/

10.29              *Agreement between the Registrant and Michael Wheeler dated as of August 16, 2001/(13)/

10.30              *Agreement between the Registrant and Jill Donohoe dated as of September 18, 2001/(13)/

10.31              *Agreement between the Registrant and Mark Register dated as of September 25, 2001/(13)/

10.32              *Change of Control Benefits Plan dated as of December 18, 2001

10.33              Accounts Receivable Financing Modification Agreement Dated as of September 18, 2001 between the Registrant and
                   Silicon Valley Bank

10.34              Second Loan Modification Agreement dated as of November 28, 2001 between the Registrant and Silicon Valley Bank

</TABLE>

                                       52

<PAGE>
<TABLE>
<S>              <C>


10.35              Deed of Office Lease dated February 22, 2002 between 11720 Sunrise Corp., L.L.C. and the Registrant

13                 Consolidated Financial Statements as of and for the years ended December 31, 2001 and 2000

21                 Subsidiaries of the Company

23                 Consent of Independent Auditors

</TABLE>

* Indicates a management contract or compensatory plan, contract or arrangement.

(1)  Previously filed as an exhibit to our current Report on Form 8-K dated
     September 30, 1999 and incorporated herein by reference.
(2)  Previously filed as an exhibit to our Registration Statement on Form S-1
     (File No. 333-27293) dated June 5, 1998 and incorporated herein by
     reference.
(3)  Previously filed as an exhibit to our Registration Statement on Form 8-A
     (File No. 000-22667) filed on September 4, 1998 and incorporated herein by
     reference.
(4)  Previously filed as an exhibit to our Current Report on Form 8-K filed on
     September 4, 1998 and incorporated herein by reference.
(5)  Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the
     quarter ended September 30, 2000 and incorporated herein by reference.
(6)  Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the
     quarter ended June 30, 2000 and incorporated herein by reference.
(7)  Previously filed as an exhibit to our Current Report on Form 8-K dated
     November 13, 1998 and incorporated herein by reference.
(8)  Previously filed as an exhibit to our Current Report on Form 8-K dated
     March 18, 1999 and incorporated herein by reference.
(9)  Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the
     quarter ended June 30, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to our Current Report on Form 8-K dated
     December 21, 2001 and incorporated herein by reference.
(11) Previously filed as an exhibit to our Registration Statement on Form S-3
     (File No. 333-76882) dated January 17, 2002 and incorporated herein by
     reference.
(12) Previously filed as an exhibit to our Annual Report on Form 10-K for the
     fiscal year ended December 31, 2000 and incorporated herein by reference.
(13) Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the
     quarter ended September 30, 2001 and incorporated herein by reference.


                                       53