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

                             -------------------
                                   FORM 10-K
                             -------------------

 X  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
--- of 1934

    For the year ended December 31, 2000

                                      OR


__  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934


                        Commission File Number: 0-30925


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

              Delaware                                     94-3319751
    (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                    Identification No.)

                               2600 Campus Drive
                          San Mateo, California 94403
                   (Address of principal executive offices)

                        Telephone Number (650) 356-4000
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

               Yes  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.  X
           ---

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the Common Stock on March 1, 2001
as reported on the Nasdaq National Market was approximately $144,706,000.
Shares of Common Stock held by each current executive officer and director and
by each person who is known by the registrant to own 5% or more of the
outstanding Common Stock have been excluded from this computation in that such
persons may be deemed to be affiliates of the Company.  This determination of
affiliate status is not a conclusive determination for other purposes.

The number of shares outstanding of the registrant's Common Stock as of March 1,
2001 was approximately 69,502,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for Registrant's 2001 Annual Meeting of
Stockholders to be held June 7, 2001 are incorporated by reference in Part III
of this Form 10-K Report.
<PAGE>

                          BLUE MARTINI SOFTWARE, INC.

                                     INDEX


                                                                   Page No.
                                                                   --------
                                    PART I
Item 1.    Business................................................    1

Item 2.    Properties..............................................    8

Item 3.    Legal Proceedings.......................................    8

Item 4.    Submission of Matters to a Vote of Security Holders.....    8


                                    PART II


Item 5.     Market for the Registrant's Common Equity
              and Related Stockholder Matters......................    8

Item 6.     Selected Consolidated Financial Data...................    9

Item 7.     Management's Discussion and Analysis of Financial
              Condition and Results of Operations..................   10

Item 7A.    Quantitative and Qualitative Disclosures About
              Market Risk..........................................   23

Item 8.     Financial Statements and Supplementary Data............   23

Item 9.     Changes in and Disagreements with Accountants
              On Accounting and Financial Disclosure...............   23


                                    PART III

Item 10.    Directors and Executive Officers of the Registrant.....   24

Item 11.    Executive Compensation.................................   25

Item 12.    Security Ownership of Certain Beneficial Owners
              And Management.......................................   25

Item 13.    Certain Relationships and Related Transactions.........   25


                                    PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K..........................................   26

Signatures.........................................................   49

                                      ii
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                                     PART I


     This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements using terminology such as "can," "may," "believe," "designed to,"
"will," "expect," "plan," "anticipate," "estimate," "potential," or "continue,"
or the negative thereof or other comparable terminology regarding beliefs,
plans, expectations or intentions regarding the future.  Forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements.  All forward-
looking statements and risk factors included in this document are made as of the
date hereof, based on information available to the Company as of the date
thereof, and the Company assumes no obligation to update any forward-looking
statement or risk factors.


ITEM 1.   BUSINESS


Overview

  Blue Martini LLC, a Delaware limited liability company, was founded on June 5,
1998. On January 12, 1999, Blue Martini LLC merged into Blue Martini Software,
Inc., a Delaware corporation, with Blue Martini Software, Inc. being the
surviving entity.  This merger was treated for financial reporting purposes as a
reorganization of entities under common control in a manner similar to a pooling
of interests.

  Blue Martini Software competes in the Electronic Customer Relationship
Management (eCRM) market and provides enterprise software applications and
services that enable companies to understand, target and interact with customers
and channel partners. Our products' analytic capabilities are designed to allow
companies to develop insights regarding customer behavior, and then use these
insights to provide customers with relevant products, content and offerings.
Blue Martini Software's application suite also allow companies to interact with
customers and channel partners across multiple "touch points," including,
websites, mobile wireless devices, cellular phones, e-mail and online
marketplaces.

  Blue Martini Software's comprehensive packaged applications are designed to
offer extensive capabilities out-of-the-box, enabling companies to implement
eCRM solutions quickly and accelerate their time to benefit. Our application
suite are designed to be business-user friendly, allowing non-technical
employees to manage the day-to-day online content, campaigns and programs.  In
addition, our application suite is extensible, thereby allowing developers to
create differentiating capabilities.

  Blue Martini Software's target customers include senior sales, marketing,
information technology (IT) and service executives in larger, established
companies.  We primarily target our products to manufacturing, retail, financial
services and consumer goods industries.  As of December 31, 2000, we had
licensed our application suite to 87 customers worldwide.


The Blue Martini Software Solution

  Our application suite and services enable companies to interact more
effectively with customers and partners across multiple touch points.

 Our application suite is designed to provide the following benefits to our
customers:

  Generate Revenues Through Sales Channels By Coordinating Across Multiple Touch
Points.  By coordinating interaction across multiple touch points, our
application suite enables companies to increase revenues through multiple sales
channels, such as stores, call centers, websites and on-line marketplaces.  This
coordination allows companies to manage competition among sales channels. For
example, a customer can browse, compare and purchase products on a company's
website and then choose to pick up the items at the company's local store to
avoid shipping costs and wait time. Similarly, a business-to-business customer
could identify the appropriate product through an e-mail campaign by the seller,
then establish mutually agreeable terms with a salesperson on the telephone and
subsequently execute recurring transactions on the seller's website according to
the negotiated terms.

                                       1
<PAGE>

  Convert Browsers into Long-Term and Profitable Customers.  The publishing
capabilities of our application suite are designed to enable companies to
publish new content rapidly and frequently.  Our application suite integrates
data analysis capabilities with personalization capabilities that enable
companies to specifically target each customer through interactions that are
appropriate to the customer's preferences.  We believe that this content and
personalization attracts more customers to a website and encourages customers to
visit more often and stay longer, thus increasing the likelihood of purchases.
Additionally, our application suite enables companies to recognize and take
advantage of opportunities to sell complementary products or more profitable
substitute products, with the goal of increasing the average size of
transactions.

  Accelerate Time to Benefit through Rapid Deployment and Updating.  Our
application suite is designed to enable companies to deploy their Internet-
enabled solutions in as little as eight weeks and thus begin generating revenues
substantially earlier than would be possible with other solutions.  Deployments
of in-house developed or third-party point solutions for e-business typically
take many months and, in some cases, years to complete.  By the time these
solutions are deployed, competitors may have already captured the market.
Additionally, our application suite enables companies to readily publish fresh
content on an ongoing basis and to respond quickly to changing market
conditions.

  Reduce Total Cost of Ownership.  Our integrated application suite is designed
to allow business users, who best know their customers, to manage the content of
their websites, freeing up scarce and expensive IT professionals to focus on
developing enhancements instead of core website functionality.  In addition,
because our application suite fully integrates the business-critical functions
for conducting business on the Internet, customers should need to dedicate
substantially fewer IT resources to development, integration and ongoing
maintenance.

  Build and Enhance Brand Equity and Awareness.  Our application suite allows
companies to interact directly with their customers on a consistent, coordinated
and personalized basis irrespective of whether such customer interaction takes
place on a website, at a store, through a call center or across online
marketplaces.  This coordinated approach is designed to enable companies to
effectively build and enhance brand equity and awareness across multiple touch
points.

  Our application suite features the following characteristics that we believe
differentiate it from other software solutions:

  Scalable.  Our application suite architecture is designed to support a large
number of concurrent users.  The application suite may be installed across any
number of web and application servers, making it possible to support large
amounts of content and products and large numbers of products and concurrent
users.  Our application suite enables a customer request to be satisfied by the
server able to most rapidly fulfill the request.

  Flexible.  Our architecture is modular, allowing customers to implement either
our entire product or only selected portions critical to their businesses with
the option to add our other modules easily and without time-consuming
integration. Using a published Applications Programming Interface, or API,
website developers can customize the behavior of Internet interactions and
extend our business functionality to accommodate their unique business needs.

  Available.  Our application suite is designed to enable companies to maintain
continuous customer interactions on-line in unstable hardware and networking
environments, even as new product catalogs and content are published.  If an
application server fails, our application suite is designed to continue the
customer session on an alternative application server.

  Integrated.  The adoption of application software raises several integration
issues.  Point solutions or internally developed software solutions that are
integrated on an ad hoc basis can be difficult to deploy and maintain.  Our
integrated application suite matches and links operational and analytical
capabilities, enabling both deeper analysis and faster reaction times in
operations.

Products

  In March 2001, we introduced our Blue Martini 4 suite of software
applications.  This integrated suite consists of four applications: Blue Martini
Channels, Blue Martini Commerce, Blue Martini Marketing and Blue Martini
Service.

  Blue Martini Channels.  Blue Martini Channels delivers a comprehensive channel
management solution designed to maximize revenues through channel partners and
online marketplaces.  It provides portals that equip resellers with the
information and tools they need to sell most effectively.  Blue Martini Channels
distributes sales leads immediately.  It publishes Web-ready catalogs so
partners can quickly present compelling information about their products on
their website.

                                       2
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The application also allows each company participating in an online marketplace
to differentiate their products, helping companies to preserve margins.

  Blue Martini Commerce.  Blue Martini Commerce is designed to be a full-
featured enterprise e-commerce application for selling directly to businesses
and consumers.  As a packaged application, it offers significant capabilities
out-of-the-box, providing a solid foundation for effective selling.  It enables
compelling, personalized interactions--increasing conversion rates and order
sizes.  It allows customers to buy when, where and how they want, including over
the Web and through mobile devices.  Blue Martini Commerce empowers business
staff to manage the day-to-day operations of a website, while providing IT
professionals with flexibility to build differentiating extensions.  The
application can be deployed rapidly, allowing customers to implement their e-
commerce strategy on-time and on-budget.

  Blue Martini Marketing.  Blue Martini Marketing is designed to be a powerful
e-marketing solution that enables companies to target, acquire and retain
customers.  It allows marketers to segment customers and thus identify
profitable strategies. It manages targeted campaigns and personalized offers
across multiple touchpoints.  The application also supports virtual focus groups
that allow marketers to gather quick feedback on new advertising or products.
Finally, by producing Web-based access to customer analysis and campaign
results, Blue Martini Marketing allows continuous improvement in ongoing
campaigns.

  Blue Martini Service.  Blue Martini Service is designed to enable high levels
of customer service over the phone or over the Web, helping companies  to
increase revenues and levels of customer satisfaction.  It is designed to
increase conversion rates and order sizes by equipping customer service
representatives (CSRs) with rich product information so they can effectively
represent their company's products and close sales.  The application also helps
convert browsers into buyers by enabling CSRs to collaborate with customers over
a company's website.  Blue Martini Service enables improved customer
satisfaction by empowering CSRs to handle virtually any question or request.
And it reduces implementation costs by seamlessly integrating with other Blue
Martini Software applications.

Services

  While our business model focuses on the development and licensing of software,
we also offer a comprehensive selection of services to our customers, including
professional, technical support and training services, as well as value-added
data analysis services.

  Blue Martini Consulting.  We offer professional services to our customers for
the deployment of our application suite and the integration with third-party
software such as customer relationship management, enterprise resource planning
and supply chain management systems.  Our service professionals work directly
with our customers as well as with systems integrators. In addition to working
with systems integrators, we have relationships with a number of companies that
provide website design as well as systems integration services.

  Blue Martini Support.  We offer comprehensive technical support, designed to
allow companies to quickly and effectively address technical issues as they
arise.  We offer two levels of services--Standard and Premium-- allowing our
customers to select the most appropriate level for their organization.

  Blue Martini Training.  We offer a comprehensive training curriculum designed
for systems integrators and customers. Our courses not only train professionals
in the use and implementation of our application suite, but also educate
business users on key concepts such as personalization and data mining.  We have
training facilities in Redwood City, California and Chicago, Illinois and also
conduct training in various locations throughout Europe.

  Blue Martini Analytic Services.  We offer our customers subscription-based,
value-added data analysis services. Our Blue Martini Analytic Services process
and analyze transaction, clickstream, customer and product data to produce
insights that assist our clients to understand, target and interact with their
customers.  Our dedicated Analytic Services consultants apply state-of-the-art
analysis tools such as data mining and visualization based on their extensive
experience with e-commerce best practices, information design, target marketing
and merchandising.  Results are presented to clients in easy- to-understand
reports that combine statistics, business rules, customer profiles and plain-
English business advice.  These reports provide information to enable critical
sales and marketing decisions.  Our analytic service investigations are
performed using the product management, targeting and analysis capabilities of
our application suite.

                                       3
<PAGE>

Sales and Marketing

  Our sales strategy is to pursue targeted accounts through a combination of our
direct sales force and indirect selling efforts through consulting and systems
integrators, platform and infrastructure providers and independent software
vendors.  Our principal target accounts consist of large, traditional companies.
These accounts include companies in the retail, manufacturing, financial
services and consumer goods industries.

  As of December 31, 2000, our worldwide direct sales organization consisted of
95 managers, account executives, product consultants and business development
professionals.   Our sales force works closely with customers to identify
client-specific requirements and to tailor appropriate and flexible solutions.
We have sales representatives throughout the United States and Europe, and
recently we began to assign sales resources to the Asian market.  We intend to
increase the size of our direct sales force domestically and internationally.

  Our direct sales force is complemented by the efforts of our Alliance Program
members. Our Alliance Partners have substantial influence with prospective
clients in terms of the selection of software and applications providers, and
are a significant source of lead generation for us.  We intend to augment the
number of market segments and the geographies in which we operate by expanding
our relationships with our alliance program members, adding additional partners
and opening other channels such as entering relationships with application
service providers to reach mid market companies.

  As of December 31, 2000, our marketing organization consisted of 42
professionals.  Marketing efforts include management of alliances, as well as
corporate, industry and product marketing.

Research and Development

  Since inception, we have devoted significant resources to develop our products
and technology.  We believe that our future success will depend in large part on
a strong development effort that enhances and extends the features of our
application suite.  Our product development organization is responsible for
product architecture and technology, engineering, quality and production.

  As of December 31, 2000, we had 91 employees engaged in research and
development and quality assurance.  For the years ended December 31, 1999 and
2000, our research and development expenses totaled $7.1 million and $21.3
million, respectively. We expect to continue to devote substantial resources to
our research and development activities.

Alliances

  Our alliances include those with consulting and system integrator firms
(CSIs), independent software vendors (ISVs), and platform and infrastructure
providers (PIs). Many alliances are terminable at will upon thirty days' notice
by either party.

  Consulting and System Integrators (CSI). CSI alliance members lead the
integration projects at our customer sites. We offer CSI alliance members
benefits such as discounted training fees, assigned or dedicated account
managers, participation in joint marketing activities, access to our software,
and the opportunity to participate in joint development projects for specific
industry verticals.  In addition, we have programs in place with certain members
that provide bonuses for customer referrals.  In return, CSI alliance members
pay a fee, commit to train their consultants, and participate with us in
marketing activities.  Our CSI alliance members help us develop customer
relationships, and similarly we recommend our CSI alliance members to our
customers.  Our customers pay us directly for our application suite and pay our
CSI alliance members directly for their services.  By recruiting, training, and
managing personnel deploying our software, CSI alliance members permit us to
focus on developing and distributing our application suite and on providing
additional technical expertise periodically required during consulting service
engagements.  Our CSI alliance members include Accenture (formerly Anderson
Consulting), Answerthink, Inc., Arthur Andersen LLP, Axion Solutions, Cap Gemini
Ernst & Young, Deloitte Consulting, eForce, Emerald Solutions, Inc., Headstrong,
Iconixx, Inforte Corporation, iXL, marchFIRST, Inc., Plaut Consulting, Inc.,
Techna, Viant Corporation and Xpedior Corp., as well as others.



                                       4
<PAGE>

  Independent Software Vendors (ISV).  Our ISV alliance members deliver software
products that complement our application suite.  Their offerings include
fulfillment, transportation management, product configuration, assisted selling,
content enhancement, marketplace infrastructure and customer relationship
management software.  In addition, we partner with vertically focused ISVs to
enhance our application suite' applicability in retail, manufacturing, consumer
goods and financial services markets.   Our ISV alliance members help us to
develop customer relationships, and similarly we recommend our independent
software vendor alliance members to our customers.  Our customers pay directly
for our application suite and pay our ISV alliance members directly for their
products.  Our ISV program facilitates the delivery of packaged adapters that
connect the Blue Martini application suite to our alliance members' software.
Delivery of packaged adapters requires software development at the outset as
well as validation of the packaged software for each release of our application
suite.  Our ISV alliance members include Apropos Technology, Inc., ClearCommerce
Corp., Commerce One, Inc., CommercialWare, Inc., Cybrant Corp., Found, Inc.,
Industri-Matematik International Corp (IMI), Interwoven, Inc., Macromedia, Inc.,
Selectica, Inc., TrueSpectra, Inc., 360Commerce, Inc. and Yantra Corporation, as
well as others.

  Platform and Infrastructure (PI).  Our PI alliance members provide our
customers with the hardware and software infrastructure used for the deployment
of our application suite. Our PI alliance members sell hardware, operating
systems, database products, and software services. We perform the software
development work necessary to ensure that our software supports the platforms of
our PI alliance members. Our customers pay us directly for our application suite
and pay our PI alliance members directly for their products and services. Our PI
alliance members include Acxiom Corp., Akamai Technologies, Inc. and Hewlett-
Packard Company, as well as others.

Technology

  Our application suite incorporates technologies for data analysis,
visualization, personalization and workflow. Our engineering staff has developed
software that can respond rapidly without interruption to large numbers of
concurrent customers. Our application suite incorporates technologies including
a Java application server, full-text retrieval software, rules induction
software, rules execution software, a workflow system, data transformation
software, visualization libraries and a reporting system.

  Our application suite is built upon a three-tiered architecture designed to
deliver consistent, high performance operation in an uncertain environment where
demand imbalances and equipment failures are common.  We use non-proprietary
software standards, including XML, Microsoft's COM, CORBA, IBM's MQ Series and
Java's EJB.  Website requests are handled by a layer of web servers.  These web
servers return and cache static content but forward dynamic web requests to a
layer of application servers.  These application servers execute business logic
that typically requires access to data stored in read-only catalog databases.
To improve performance, our architecture automatically caches catalog and
session data in memory to avoid slow database access.  These catalog databases
can also be replicated to further improve support for large numbers of customers
without interruption.  Customers can easily handle increased website volume by
adding any combination of web, application or database servers.  Read-write
transaction databases record customer transactions as well as updates to end
customer profiles.

  Our software is developed in the Java programming language to take advantage
of the graphical user interface and functional libraries available in Java, as
well as the speed of development made possible by other Java features such as
pointer-less references and automatic memory management.

International Sales Capabilities

  We currently have sales offices in Australia, Hong Kong, Japan, United
Kingdom, Germany, Netherlands, Sweden, Canada, France and the United States.  We
intend to further expand our international sales and marketing capabilities by
increasing the size of our direct sales and marketing organizations in major
markets, and by continuing to develop our partner relationships.  As market
conditions warrant, we intend to increase our direct sales and marketing
activities worldwide.

  During 2000, no individual customer accounted for more than 10% of revenues.
International sales for 2000 were $13.8 million and represented 19% of our total
revenues for the year.

                                       5
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Competition

  The market for our product is intensely competitive, evolving and subject to
rapid technological change.  Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could reduce our future revenues or earnings.  The intensity of competition is
expected to increase in the future.  Our current competitors include:

     . Point Application Vendors. We compete with providers of stand-alone point
       solutions such as BroadVision, Inc., E.piphany, Inc., Interwoven, Inc.
       and Vignette  Corporation.

     . Component Vendors. We compete with component vendors such as Art
       Technology Group, Inc., BEA Systems, Inc., IBM and Microsoft Corporation.

     . Enterprise Resource Planning Software, Customer Relationship Management
       Software and Supply Chain Management Software Vendors. We compete with
       enterprise resource planning software, customer relationship management
       software and supply chain management software vendors such as Oracle
       Corp., PeopleSoft, Inc., SAP AG, Siebel Systems, Inc. and i2
       Technologies, Inc.

     . Internal IT Departments. Information technology departments of potential
       customers have developed or may develop systems that provide for some or
       all of the functionality of our product. We expect that internally-
       developed application integration and process automation efforts will
       continue to be a principal source of competition for the foreseeable
       future. In particular, it can be difficult to license our product to a
       potential customer whose internal development group has already made
       large investments in, and progress towards completion of, systems that
       our product is intended to replace.

  Many of our competitors have greater resources and broader alliance and
customer relationships than we do. In addition, many of these competitors have
extensive knowledge of our industry. Current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to offer a single solution and increase the ability of their
products to address customer needs. Furthermore, our competitors may combine
with each other and other companies may enter our markets by acquiring or
entering into strategic relationships with our competitors.

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

  .  product functionality and features;

  .  availability of global support;

  .  incumbency of vendors;

  .  relationship with system integrators;

  .  coverage of direct sales force;

  .  ease and speed of product implementation;

  .  vendor and product reputation;

  .  financial condition of eCRM vendors;

  .  ability of products to support large numbers of concurrent users; and

  .  price.

  Although we believe that we currently compete favorably with respect to most
of these factors, our market is relatively new and is evolving rapidly.  We may
not be able to maintain our competitive position against current and potential
competitors, especially those with greater financial, sales, marketing,
professional services, technical support, training and other resources.

                                       6
<PAGE>

Intellectual Property and Other Proprietary Rights

  Our success depends in part on the development and protection of the
proprietary aspects of our technology as well as our ability to operate without
infringing on the proprietary rights of others.  To protect our proprietary
technology, we rely primarily on a combination of trade secret, copyright,
trademark and patent laws, as well as confidentiality procedures and contractual
restrictions.

  We license technologies from several software providers that are incorporated
in our product.  We anticipate that we will continue to license technology from
third parties in the future.  In particular, we license application server
technology from BEA Systems, Inc. and we license a rules engine from Blaze
Software Inc. that automates the execution of business processes according to
criteria set by our customers.  The license agreement with BEA expires in July
2003 and the license agreement with Blaze expires in June 2007.  We may not be
able to renew our licenses for these technologies on commercially reasonable
terms, if at all.  The loss of these technologies or other technologies that we
license could prevent sales of our product and increase our costs until
substitute technologies, if available, are developed or identified, licensed and
successfully integrated into our product.  Even if substitute technologies are
available, there can be no guarantee that we will be able to license these
technologies on commercially reasonable terms, if at all.

  We license the modules of our application suite and require our customers to
enter into license agreements that impose restrictions on their ability to
reproduce, distribute and utilize the modules.  In addition, we seek to avoid
disclosure of our trade secrets through a number of means, including but not
limited to, generally restricting access to our source code and object code and
requiring those entities and persons with access to our proprietary information
to agree to confidentiality terms which restrict their use and disclosure.  We
seek to protect our software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection.  We
cannot assure you that any of our proprietary rights with respect to our
applications will be viable, or of value, in the future since the validity,
enforceability and type of protection of proprietary rights in Internet-related
industries are uncertain and still evolving.

  We have no issued patents.  We presently have two United States patent
applications pending.  It is possible that either or both of the patents that we
have applied for will not be issued, and even if issued, that either or both may
be successfully defended.  It is also possible that we may not develop
proprietary products or technologies that are patentable, that any patent issued
to us may not provide us with any competitive advantages or that the patents of
others will harm our ability to do business.

  Despite our efforts to protect our proprietary rights and technology,
unauthorized parties may attempt to copy aspects of our products or obtain the
source code to our software or use other information that we regard as
proprietary or could develop software competitive to ours.  Policing
unauthorized use of our products is difficult, and while we are unable to
determine the extent to which piracy of our software exists, software piracy may
be or become a problem.  Our means of protecting our proprietary rights may not
be adequate, and our competitors may independently develop similar technology or
duplicate our product.  Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Any such resulting litigation could result
in substantial costs and diversion of resources which could have a material
adverse effect on our business, operating results and financial condition.

  It is possible that in the future, a third party may bring suit claiming that
we or our current or future products infringe their patents, trade secrets or
copyrights.  Any claims, with our without merit, could be costly and time-
consuming to defend, divert our management's attention or cause product delays.
We have no patents that we could use defensively against any company bringing
such a claim.  If our product was found to infringe a third party's proprietary
rights, we could be required to enter into royalty or licensing agreements to be
able to sell our product.  Royalty and licensing agreements, if required, may
not be available on terms acceptable to us, if at all, which could harm our
business.

Employees

  As of December 31, 2000, we had 473 full-time employees, of whom 443 were
based in North America and 30 were based in Europe.  Of these employees, 137
were in sales and marketing, 91 were in product development, 188 were in
professional services, technical support and training and 57 were in finance,
human resources, legal, information systems and administrative functions.  Our
employees are not represented by any collective bargaining agreements and we
have never experienced a work stoppage.  We believe our employee relations are
good.


                                       7
<PAGE>

ITEM 2.   PROPERTIES

  Our principal administrative, research and development, sales, consulting and
marketing activities are conducted in 76,000 square feet of leased space in San
Mateo, California.  Approximately 32,000 square feet of this leased space
expires in 2002, with the remainder expiring in 2005 and 2006.  Our training
facilities are located in leased space in Redwood City, California and Chicago,
Illinois.  The leases for the training facilities expire in 2003.  We have
additional domestic sales offices located throughout the United States.  Our
European headquarters is located in leased space in Maidenhead, United Kingdom.
We also lease offices in various cities in Europe and Asia to support our
worldwide sales organization.


ITEM 3.  LEGAL PROCEEDINGS

 None.


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

  No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2000.

                                    PART II

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

 (a) Our common stock is listed on the Nasdaq National Market under the symbol
"BLUE".

  Following our initial public offering on July 25, 2000, the following high and
low closing sales prices were reported by Nasdaq in each period indicated:

                                               High     Low
                                               ----     ---
 Year Ended December 31, 2000:
     Fourth quarter                           $41.69  $ 7.00
     Third quarter (from July 25, 2000)       $69.75  $30.13

  The reported last sale price of our common stock on the Nasdaq National Market
on March 19, 2001 was $2.75. The approximate number of holders of record of the
shares of our common stock was 386 as of March 7, 2001. This number does not
include stockholders whose shares are held in trust by other entities. The
actual number of stockholders is greater than this number of holders of record.
We estimate that the number of beneficial stockholders of the shares of our
common stock as of March 7, 2001 was approximately 13,600.

  We have not paid any cash dividends on our capital stock.  We currently intend
to retain our earnings to fund the development and growth of our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.  See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."

  (b) There has been no change to the disclosure contained in our report on Form
10-Q for the nine month period ended September 30, 2000 regarding the use of
proceeds generated by our initial public offering.

                                       8
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

  The following selected consolidated financial data is derived from our
consolidated financial statements. This data should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements of Blue Martini
Software, Inc. and the notes to consolidated financial statements included
elsewhere in this annual report.

<TABLE>
<CAPTION>
                                                                   June 5, 1998       Year Ended
                                                                  (Inception) to     December 31,
                                                                    December 31,  -------------------
                                                                       1998         1999       2000
                                                                     --------     --------   --------
                                                                  (In thousands, except per share data)
<S>                                                               <C>             <C>        <C>
Consolidated Statement of Operations Data:
Revenues:
 License.......................................................      $    --      $  7,205   $ 42,650
 Service.......................................................           --         4,027     31,601
                                                                     -------      --------   --------
  Total revenues...............................................           --        11,232     74,251
                                                                     -------      --------   --------
Cost of revenues:
 License.......................................................           --           719      3,754
 Service.......................................................           --         5,480     41,868
                                                                     -------      --------   --------
  Total cost of revenues.......................................           --         6,199     45,622
                                                                     -------      --------   --------
  Gross profit.................................................           --         5,033     28,629
                                                                     -------      --------   --------
Operating expenses:
 Sales and marketing...........................................          725         7,736     52,961
 Research and development......................................          562         7,076     21,277
 General and administrative....................................          310         1,348     21,223
                                                                     -------      --------   --------
  Total operating expenses.....................................        1,597        16,160     95,461
                                                                     -------      --------   --------
  Loss from operations.........................................       (1,597)      (11,127)   (66,832)
Interest income and other, net.................................           15           253      4,745
                                                                     -------      --------   --------
  Net loss.....................................................      $(1,582)     $(10,874)  $(62,087)
                                                                     =======      ========   ========
Basic and diluted net loss per common share....................       $(0.07)       $(0.47)    $(1.52)
                                                                     =======      ========   ========
Shares used in computing basic and diluted net
loss per common share..........................................       22,000        22,964     40,870
                                                                     =======      ========   ========

                                                                                 December 31,
                                                                     --------------------------------
                                                                       1998         1999        2000
                                                                     --------     --------   --------
                                                                               (In thousands)
<S>                                                                  <C>          <C>        <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments                    $   261      $ 12,924   $102,284
Working capital                                                           53         7,708     78,274
Total assets                                                             742        20,360    188,298
Long-term obligations, less current portion                               39           544        117
Total stockholders' equity                                               317        10,295    144,645
</TABLE>

                                       9
<PAGE>

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

  The following discussion of the financial condition and results of operations
of Blue Martini Software should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and notes
thereto.

  Blue Martini LLC, a Delaware limited liability company, was founded on June 5,
1998. On January 12, 1999, Blue Martini LLC merged into Blue Martini Software,
Inc., a Delaware corporation, with Blue Martini Software, Inc. being the
surviving entity. This merger was treated for financial reporting purposes as a
reorganization of entities under common control in a manner similar to a pooling
of interests.

  We develop, market and support a suite of eCRM applications that help
companies to understand, target and interact with their customers and business
partners. The application suite, Blue Martini 4, consists of four modules that
can be used individually or integrated as a complete business suite for managing
catalogs, content, transactions, analysis and personalization. Following the
initial release of our product, we substantially increased spending on
consulting services, technical support, training, sales and marketing
organizations. We have incurred significant losses since inception, and as of
December 31, 2000, we had an accumulated deficit of $74.5 million.

  Our revenues are derived from the licensing of our application suite and the
sale of related services. The license agreement for our application suite
typically provides for an initial fee to use the software in perpetuity. License
revenues are recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or determinable and
collectibility is probable, assuming no significant future obligations or
customer acceptance rights exist. If an acceptance period is contractually
provided, revenues are recognized upon the earlier of customer acceptance or the
expiration of that period. In instances where delivery is electronic and all
other criteria for revenue recognition have been achieved, the product is
considered to have been delivered when the customer either takes possession by
downloading the software or the access code to download the software has been
provided to the customer. Payments received in advance of revenue recognition
are recorded as deferred revenues.

  Services revenues are principally derived from consulting services, technical
support and training. Our maintenance agreements entitle customers to receive
software updates, maintenance releases and technical support. Maintenance is
typically paid in advance and the related revenues are deferred and recognized
ratably over the term of the maintenance contract, which is typically one year.
A majority of our customers use systems integrators to implement our product.
Consulting services and training are typically sold on a time-and-materials
basis and revenues from these services are recognized when the services are
performed and collectibility is deemed probable.

  We market our application suite through a direct sales force. We also engage
in alliances with systems integrators and technology vendors to assist us in
marketing and selling our application suite and related services. While our
revenues to date have been derived principally from customers in the United
States, international revenues accounted for 19% of our revenues for the year
ended December 31, 2000. We believe international revenues will represent a
significant portion of our total revenues in the future but may fluctuate as a
percentage of revenues in the near term as we build out our international
presence. Although we have a limited operating history, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our customers' fiscal year, budgeting
cycles, sales incentive plans, slow summer purchasing patterns and general
economic conditions in markets where we conduct business.

  To date, we have derived a significant portion of our revenues from a small
number of customers. No single customer accounted for more than 10% of our total
revenues for the year ended December 31, 2000. Sales to three customers
individually represented 19%, 19% and 10% of our total revenues in 1999. While
we do not anticipate that any one customer will represent more than 10% of total
revenues in 2001, we do expect that a limited number of customers will continue
to account for a substantial portion of our license revenues in a given quarter.
As a result, if we lose a major customer or if anticipated significant license
contracts are delayed or cancelled, our revenues and operating results in a
particular quarterly period would be adversely affected. In addition, customers
that have accounted for significant revenues in the past may not generate
revenues in any future period. If we fail to obtain a significant number of new
customers or additional orders from existing customers in any period, our
business and operating results would be harmed.

                                       10
<PAGE>

  We believe our success requires expanding our customer base, growing our
relationships with consulting and system integrator partners, continuing to
enhance our application suite and growing our professional services, sales,
technical support and training organizations. There can be no assurance that we
will be successful in accomplishing any of these goals. We expect that our
operating expenses will increase to the extent we invest to expand our sales and
marketing operations worldwide, fund greater levels of research and development,
grow our global professional services, technical support and training
organizations and expand our related infrastructure. As a result of anticipated
increases in our operating expenses, we expect to continue to incur net losses
both on a quarterly and annual basis for the foreseeable future. Our operating
expenses are based in part on our expectations of future revenues and are
relatively fixed in the short term. As such, a delay in completion of new
customer license contracts or the recognition of revenues from one or more
license contracts could cause significant variations in our operating results
from quarter to quarter and could result in net losses in a given quarter being
greater than expected.


Results of Operations

  The following table presents selected financial data for the periods indicated
as a percentage of total revenues:

                                                    Year Ended
                                                   December 31,
                                                  --------------
                                                   1999    2000
                                                  ------  ------
 Revenues:
   License......................................     64 %    57 %
   Service......................................     36      43
                                                   ----    ----
     Total revenues.............................    100     100
                                                   ----    ----
 Cost of revenues:
   License......................................      6       5
   Service......................................     49      56
                                                   ----    ----
     Total cost of revenues.....................     55      61
                                                   ----    ----
     Gross profit...............................     45      39
                                                   ----    ----
 Operating expenses:
   Sales and marketing..........................     69      71
   Research and development.....................     63      29
   General and administrative...................     12      29
                                                   ----    ----
     Total operating expenses...................    144     129
                                                   ----    ----
     Loss from operations.......................    (99)    (90)
 Interest income and other, net.................      2       6
                                                   ----    ----
     Net loss...................................    (97)%   (84)%
                                                   ====    ====

Revenues

  License.  Our first software product was commercially released in late March
1999, and we recognized no license revenues before that date. License revenues
increased from $7.2 million for the year ended December 31, 1999 to $42.7
million for the year ended December 31, 2000. The increase in license revenues
in 2000 as compared to 1999 was due to an increase in software licenses to new
customers.

  Service.  Service revenues increased from $4.0 million in 1999 to $31.6
million in 2000. The increase in service revenues in 2000 as compared to 1999
was due to an increase in the number of consulting service engagements and
customer maintenance agreements, as well as an increase in training revenues. We
expect that our service revenues will fluctuate as a percentage of total
revenues as we build our professional services staff in the near term, and then
decrease as a percentage of total revenues over the long term as systems
integrators and other professional services organizations provide the consulting
services, technical support and training that we currently provide. Service
revenues will also fluctuate in response to the level of license agreements
entered into with new and existing customers.

                                       11
<PAGE>

Cost of Revenues


  License.  Cost of license revenues consists of royalties payable to third
parties and amortization of purchased intangibles for software that is either
embedded in or bundled with our products. Cost of license revenues increased
from $719,000 in 1999 to $3.8 million in 2000. These amounts represented 10% of
license revenues in 1999 and 9% in 2000. The increase in cost of license
revenues in absolute dollars in 2000 compared to 1999 was principally the result
of growth in license revenues resulting in increased royalties payable to third
parties. We expect cost of license revenues will increase in absolute dollars in
the future due to higher royalties payable to third parties as a result of
anticipated growth in license revenues. To the extent license revenues increase,
we expect cost of license revenues to decline slightly as a percentage of
license revenues as a result of royalty agreements that typically contain
declining royalty rates.

  Service.  Cost of service revenues consists primarily of salaries and other
personnel-related expenses, amortization of deferred stock compensation, as well
as depreciation of equipment used to provide consulting services, technical
support and training. Cost of service revenues increased from $5.5 million in
1999 to $41.9 million in 2000. These amounts represented 136% and 133% of
service revenues for these periods. The increase in absolute dollars in 2000 as
compared to 1999 resulted from the expansion of our consulting services,
technical support and training organizations to support the growth in new
licenses and increased amortization of deferred stock compensation. While cost
of services, when expressed as a percentage of related service revenues, may
fluctuate in the near term, we expect this percentage to decrease over time due
to higher productivity of our consulting services organizations and economies of
scale.


Operating Expenses

  Sales and Marketing.  Sales and marketing expenses consist primarily of costs
of our direct sales and marketing personnel, amortization of deferred stock
compensation, as well as costs of marketing programs including trade shows,
advertisements, promotional activities and media events. Sales and marketing
expenses increased from $7.7 million in 1999 to $53.0 million in 2000. The
increase in 2000 as compared to 1999 was primarily attributable to an increase
in sales and marketing personnel expenses, including higher commissions to sales
personnel associated with increased revenues and increased spending for
marketing and advertising programs. Additionally, amortization of deferred stock
compensation accounted for an increase in sales and marketing expense in 2000 as
compared to 1999.

  In April 2000, we entered into a non-exclusive marketing and business
development agreement with a systems integrator to promote and market our
product in Europe, the Middle East and Africa. As part of this marketing
agreement, we issued a warrant to purchase 2,400,000 shares of our common stock
at an exercise price of $5.00 per share. The warrant is fully vested and non-
forfeitable and is exercisable at the end of eight years and can be exercised
sooner upon the achievement of performance milestones during the first four
years of the marketing agreement. The fair value of this warrant based on an
independent valuation was $13.8 million. The value of this warrant is being
amortized over the four-year term of the marketing agreement and included as a
non-cash component of marketing and sales expense in our consolidated statement
of operations. Amortization expense for the year ended December 31, 2000 was
$2.3 million.

  Research and Development.  Research and development expenses consist primarily
of salaries and related expenses for engineering personnel, amortization of
deferred stock compensation, costs of contractors and depreciation of equipment
used in the development of our software product. To date, we have expensed all
internal software development costs as incurred.

  Research and development expenses increased from $7.1 million in 1999 to $21.3
million in 2000. The growth in expenses in 2000 as compared to 1999 was
primarily due to an increase in personnel-related expenses resulting from the
addition of engineering personnel to support the development and enhancement of
our products and an increase in the amortization of deferred stock compensation.

  General and Administrative.  General and administrative expenses include costs
associated with our finance, human resources, legal, information systems and
other administrative functions and consist principally of amortization of
deferred stock compensation, salaries and related expenses, professional fees,
provisions for doubtful accounts and equipment depreciation. General and
administrative expenses increased from $1.3 million in 1999 to $21.2 million in
2000. The increase in expenses in 2000 as compared to 1999 was attributable to
amortization of deferred stock compensation, expenses for administrative
personnel, professional fees and an increase in the provision for doubtful
accounts.

                                       12
<PAGE>

  Stock Compensation.  Deferred stock compensation represents the difference
between the exercise price of stock option grants to employees and the deemed
fair value of our common stock at the time of those grants. We recorded deferred
stock compensation of $2.2 million for the period from inception to December 31,
1998, $10.4 million in 1999 and $50.6 million in 2000. We are amortizing
deferred stock compensation to expense over the period during which the stock
options vest, generally four years, using an accelerated method allowed by
generally accepted accounting principles. Such amortization amounted to $528,000
for the period from inception to December 31, 1998, $3.2 million in 1999 and
$29.0 million in 2000.

  During 1999 and 2000, we granted and immediately vested, stock options to non-
employees. In connection with these grants, we recorded non-cash compensation
expense of $47,000 in 1999 and $1.6 million in 2000. This reflects the fair
value of these stock options based on the Black-Scholes option pricing model.

  The amortization of deferred stock compensation, combined with the expense
associated with stock options granted to non-employees, relates to the following
items in the accompanying consolidated statement of operations (in thousands):

<TABLE>
<CAPTION>
                                                     June 5, 1998        Year Ended
                                                    (Inception) to      December 31,
                                                     December 31,  ---------------------
                                                        1998        1999           2000
                                                       ------      ------        -------
<S>                                                 <C>            <C>           <C>
     Cost of revenues..............................    $  --       $  436        $ 7,192
     Sales and marketing...........................      332        1,398          7,001
     Research and development......................       91        1,088          6,606
     General and administrative....................      105          276          9,772
                                                       -----       ------        -------
                                                       $ 528       $3,198        $30,571
                                                       =====       ======        =======
</TABLE>

  Amortization of deferred stock compensation is estimated to total $19.5
million for 2001, $8.4 million for 2002, $2.9 million for 2003 and $0.2 million
for 2004.  Amortization of deferred stock compensation will be reduced in future
periods to the extent options are terminated prior to full vesting.

Interest Income and Other, Net

  Interest income and other, net consists of interest income from cash, cash
equivalents and available-for-sale short and long-term investments, partially
offset by amortization of a warrant issued in connection with lease financing
and interest expense associated with capital leases and bank borrowings.
Interest income and other, net increased from $253,000 in 1999 to $4.7 million
in 2000.  The increase was due primarily to higher balances of cash, cash
equivalents and short and long-term investments as a result of our initial
public offering in July 2000.

Income Taxes

  From inception to December 31, 2000, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
December 31, 2000, we had approximately $21.0 million of federal and $15.7
million of state net operating loss carryforwards to offset future taxable
income. The federal and state tax net operating loss carryforwards are available
to reduce future taxable income and expire at various dates through 2020 and
2010, respectively. Because of our limited operating history, our losses
incurred to date and the difficulty in accurately forecasting our future
results, management does not believe that the realization of the related
deferred income tax asset meets the criteria required by generally accepted
accounting principles. Therefore, we have recorded a 100% valuation allowance
against the deferred income tax assets. See Note 9 of the notes to our
consolidated financial statements. Significant future changes in our share
ownership, as defined in the Tax Reform Act of 1986 and similar state
provisions, may restrict the utilization of these carryforwards.

Quarterly Results of Operations

  The following tables set forth consolidated statement of operations data for
1999 and 2000. This information has been derived from our unaudited quarterly
consolidated financial statements that, in the opinion of our management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this information. We have experienced and
expect to continue to experience fluctuations in operating results from quarter
to quarter. We incurred net losses in each quarter since inception and expect to
continue to incur losses in the foreseeable future. You should not draw any
conclusions about our future results from the results of our operations for any
quarter, as quarterly results are not indicative of the results for a full
fiscal year or any other period.

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                -------------------------------------------
                                                 Mar. 31,   June 30,   Sept. 30,   Dec. 31,
                                                  1999        1999        1999       1999
                                                ---------  ---------  ----------  ---------
                                                              (In thousands)
<S>                                             <C>        <C>         <C>        <C>
Revenues:
 License...................................     $     25   $  1,066    $  1,934   $  4,180
 Service...................................          216        410       1,661      1,740
                                                --------   --------    --------   --------
  Total revenues...........................          241      1,476       3,595      5,920
                                                --------   --------    --------   --------
Cost of revenues:
 License...................................            3        214         170        332
 Service...................................          117        353       1,824      3,186
                                                --------   --------    --------   --------
  Total cost of revenues...................          120        567       1,994      3,518
                                                --------   --------    --------   --------
  Gross profit.............................          121        909       1,601      2,402
                                                --------   --------    --------   --------
Operating expenses:
 Sales and marketing.......................          524        935       2,133      4,144
 Research and development..................          994      1,587       1,951      2,544
 General and administrative................          247        314         315        472
                                                --------   --------    --------   --------
  Total operating expenses.................        1,765      2,836       4,399      7,160
                                                --------   --------    --------   --------
  Loss from operations.....................       (1,644)    (1,927)     (2,798)    (4,758)
Interest income and other, net.............           31         13          97        112
                                                --------   --------    --------   --------
  Net loss.................................     $ (1,613)  $ (1,914)   $ (2,701)  $ (4,646)
                                                ========   ========    ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                ------------------------------------------
                                                Mar. 31,   June 30,   Sept. 30,   Dec. 31,
                                                  2000       2000        2000       2000
                                                --------   --------    --------   --------
<S>                                             <C>        <C>         <C>        <C>
Revenues:
 License...................................     $  6,070   $  8,421    $ 11,966   $ 16,193
 Service...................................        4,611      6,599       9,053     11,338
                                                --------   --------    --------   --------
  Total revenues...........................       10,681     15,020      21,019     27,531
                                                --------   --------    --------   --------
Cost of revenues:
 License...................................          561        751       1,025      1,417
 Service...................................        6,237     10,464      11,594     13,573
                                                --------   --------    --------   --------
  Total cost of revenues...................        6,798     11,215      12,619     14,990
                                                --------   --------    --------   --------
  Gross profit.............................        3,883      3,805       8,400     12,541
                                                --------   --------    --------   --------
Operating expenses:
 Sales and marketing.......................        8,580     12,847      14,821     16,713
 Research and development..................        4,402      4,914       5,835      6,126
 General and administrative................        2,528      5,407       6,151      7,137
                                                --------   --------    --------   --------
  Total operating expenses.................       15,510     23,168      26,807     29,976
                                                --------   --------    --------   --------
  Loss from operations.....................      (11,627)   (19,363)    (18,407)   (17,435)
Interest income and other, net.............           60         79       1,827      2,779
                                                --------   --------    --------   --------
  Net loss.................................     $(11,567)  $(19,284)   $(16,580)  $(14,656)
                                                ========   ========    ========   ========
</TABLE>

                                       14
<PAGE>

     Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations
including:


 .    demand for our product and services;

 .    the timing of sales of our product and services;

 .    the timing of customer orders, customer budget cycles and product
     implementations;

 .    unexpected delays in introducing new products, product enhancements and
     services;

 .    general economic conditions in the markets where we conduct business;

 .    the introduction of competing products;

 .    increased expenses related to sales and marketing, professional services,
     product development, technical support or administration;

 .    availability of financing sources for our customers;

 .    the mix of license and service revenues;

 .    the rate of international expansion;

 .    non-renewal of service agreements;

 .    changes in our pricing policies or those of our competitors;

 .    changes in our sales compensation and incentive plans;

 .    the rate at which new sales personnel become productive;

 .    changes in our strategy; and

 .    costs related to possible acquisitions of technologies or businesses.

     Accordingly, quarter-to-quarter comparisons of our operating results are
not necessarily meaningful and investors should not rely on the results of one
quarter as an indicator of our future performance.

     We have significantly increased our operating expenses to expand our sales
and marketing operations, develop new distribution channels, fund greater levels
of research and development, broaden professional services, technical support
and training and improve operational and financial systems. If our revenues do
not increase along with these expenses, our business, operating results or
financial condition could be harmed and net losses in a given quarter would be
greater than expected.

     Although we have a limited operating history, we believe that our quarterly
operating results may experience seasonal fluctuations.  For instance, quarterly
results may fluctuate based on our clients' calendar year budgeting cycles and
slow summer purchasing patterns.

Liquidity and Capital Resources

     On July 28, 2000, we closed our initial public offering of 8,625,000 shares
of common stock, which included 1,125,000 shares in connection with the exercise
of the underwriters' over-allotment option, at $20 per share. We received net
proceeds of approximately $158.4 million in cash. Prior to this offering, we had
financed our operations from the sale of our preferred and common stock and
$750,000 of borrowings under a secured loan agreement. As of December 31, 2000,
we had cash, cash equivalents and investments of $153.7 million.

     During 2000, net cash used in operating activities was $10.2 million
compared to $2.3 million in 1999. Net cash used in operating activities in 1999
and 2000 was primarily the result of net losses of $10.9 million in 1999 and
$62.1 million in 2000, after adjusting for amortization of deferred stock
compensation and warrants of $3.2 million in 1999 and $33.1 million in 2000.

    Net cash used for investing activities was $5.9 million in 1999 and $122.3
million in 2000.  The cash used for investing activities was principally related
to the purchase of short and long-term investments and to purchase property and
equipment.

                                       15
<PAGE>

     Net cash provided by financing activities was $18.3 million in 1999 and
$162.2 million in 2000. The cash provided by financing activities in 2000 was
principally related to the net proceeds received from the initial public
offering of our common stock, net of issuance costs. The cash provided by
financing activities in 1999 was principally related to the net proceeds
received from the issuance of convertible preferred stock.

     Our liquidity, capital resources and results of operations in any period
could be impacted by the exercise of outstanding stock options and warrants. For
example, at December 31, 2000, we had outstanding options to purchase 8.7
million shares of our common stock at a weighted average exercise price of $8.86
per share, and had approximately 10.7 million additional shares reserved for
future grant under our stock option and employee stock purchase plans. In
addition, we have issued warrants that are now exercisable to purchase 2,445,000
shares of common stock at a weighted average exercise price of $4.94 per share.
Accordingly, our liquidity and capital resources may be impacted in future
periods by cash proceeds upon exercise of these securities and from securities
reserved for future issuance under our stock option plans. In addition, our per
share results of operations could also be impacted by the increased number of
outstanding shares. However, we cannot predict the timing or amount of proceeds
from the exercise of these securities, if they are exercised at all.

     We expect to experience growth in our operating expenses for the
foreseeable future in order to execute our business plan. As a result, we expect
that operating expenses and planned capital expenditures will constitute a
material use of our cash balances. In addition, we may use cash to fund
acquisitions or invest in other businesses, technologies or product lines. We
currently anticipate that our existing cash and investments will be sufficient
to meet our presently anticipated working capital, capital expenditure and
business expansion requirements for 2001. However, we may require additional
funds either within this time period or at some future date. We may seek to
raise these additional funds through public or private debt or equity financing
to meet these additional working capital requirements. There can be no assurance
that this additional financing will be available, or if available, will be on
reasonable terms and not dilutive to our stockholders. If adequate funds are not
available on acceptable terms, our business and operating results could be
adversely affected. If we were to seek additional financing today, we do not
believe it would be available on reasonable terms.


Factors That May Impact Future Operating Results
------------------------------------------------

Our short operating history makes it difficult to evaluate our business and
prospects.

     You must consider our business and prospects given the risks, expenses and
challenges we might encounter because we are at an early stage of development in
a new and rapidly evolving market. We were founded in June 1998 and licensed our
first software product in late March 1999, and our sales and service
organizations are new. Due to our short operating history, our future financial
performance is not predictable and may not meet analyst projections for revenues
or other operating results, thereby disappointing investors and resulting in a
significant decline in our stock price.

We have incurred losses during our operating history and expect losses to
continue for the foreseeable future and we may not achieve or maintain
profitability.

     We incurred net losses of $1.6 million for the period from June 5, 1998,
our date of inception, through December 31, 1998, $10.9 million for the year
ended December 31, 1999 and $62.1 million for the year ended December 31, 2000.
As of December 31, 2000, we had an accumulated deficit of $74.5 million. We
expect to continue to incur losses on both a quarterly and annual basis for the
foreseeable future. Moreover, we expect to continue to incur significant sales
and marketing and research and development expenses. Further, we will incur
substantial stock compensation expense in future periods, which represents non-
cash charges incurred due to the issuance of stock options prior to the closing
of our initial public offering on July 28, 2000. Therefore, we will need to
significantly increase our revenues to achieve and maintain profitability. We
may not be able to sustain our recent revenue growth rates or be able to
generate sufficient revenues to achieve profitability.

                                       16
<PAGE>

Our product has a long and variable sales cycle, which makes it difficult to
predict our future results and may cause our operating results to vary
significantly.

     Our revenues and results of operations are difficult to predict and may
fluctuate substantially from quarter to quarter. In particular, license revenues
in any quarter depend substantially upon our level of license agreements and
service engagements with customers and our ability to recognize revenues in that
quarter in accordance with our revenue recognition policy.

     The period between initial contact with a prospective customer and the
licensing of our application suite varies, but is typically five to seven
months. The timing of revenues from the licensing of our application suite is
difficult to forecast for a variety of reasons, including the following factors:

     .    a significant portion of our license agreements are completed within
          the last few weeks of each quarter. Recently this pattern has become
          more pronounced, and as a result, any revenue shortfalls for a
          quarterly period may not be known until late in the quarter;

     .    our sales cycle is relatively long and complex as customers consider a
          number of factors before committing to purchase our application suite.
          Factors considered by customers when evaluating our application suite
          include product benefits, cost and time of implementation, ability to
          operate with existing and future computer systems and the ability to
          accommodate increased transaction volume and product reliability. As a
          result, we spend significant time and resources informing prospective
          customers about our application suite, which may not result in a
          completed transaction, which may impact our operating margins;

     .    because the licensing of our application suite is often an enterprise-
          wide decision by our customers that involves many factors, our ability
          to conclude license agreements may be impacted by changes in the
          strategic importance of eCRM projects at customers, budgetary
          constrains or changes in customer management;

     .    the values of individual license agreements can vary significantly,
          therefore, delays in the signing of one or more large license
          agreements or the loss of a significant customer order could have a
          material impact on our revenues and results of operations because a
          substantial portion of our quarterly revenues are derived from a small
          number of customers;

     .    the existence or even the anticipation by potential customers of
          economic downturns in the markets in which we operate may decrease the
          demand for our applications, cause pricing pressures for our products
          and substantially reduce our contracting activity. As a result of
          these macroeconomic conditions, customers may unexpectedly postpone or
          cancel planned eCRM projects, including, the evaluation and purchase
          of new applications or upgrades to existing applications;

     .    customer evaluation, purchasing and budgeting processes vary
          significantly from company to company, and a customer's internal
          approval and expenditure authorization process can be difficult and
          time consuming. Delays on approvals, even after selection of a vendor,
          could impact the timing and amount of revenues recognized in a
          quarterly period;

     .    changes in our sales incentive plans may have an unpredictable impact
          on our sales cycle and contracting activities; and

     .    the number, timing and significance of enhancements to our application
          suite and the introduction of new software by us and our competitors
          may affect customer purchasing decisions.

     Several factors may require us to defer recognition of license revenue for
a significant period of time after entering into a license agreement, including
instances where we are required to deliver either unspecified additional
products or specified upgrades for which we do not have vendor-specific-
objective-evidence of fair value. While we have a standard software license
agreement that provides for revenue recognition provided that delivery has taken
place, collectibility from the customer is probable and assuming no significant
future obligations or customer acceptance rights exist, customer negotiations
and revisions to these terms could impact our ability to recognize revenues at
the time of delivery. Also, the additional time needed to negotiate mutually
acceptable terms that culminate in an agreement to license our application suite
could also extend the sale cycle.

     Slowdowns or variances from internal expectations in our quarterly license
contracting activities may impact our service offerings and may result in lower
revenues from our customer training, consulting services and technical support
organizations.  Our ability to maintain or increase service revenues is highly
dependent on our ability to increase the number of license agreements we enter
into with customers.


                                       17
<PAGE>

     Because our operating expenses are based on our expectations for future
revenues and are relatively fixed in the short term, any revenue shortfall below
expectations could have an immediate and significant adverse effect on our
consolidated results of operations and financial condition.

The current economic downturn has impacted demand for our products and services
and may adversely impact future revenues

     The majority of our revenues have been and are expected to continue to be
derived from customers in the United States.  Recent economic indicators,
including growth in gross domestic product, reflect a decline in economic
activity in the United States.  Some reports have indicated an even more
significant decline in spending by corporations in the area of information
technology, which includes the eCRM market.  While we cannot specifically
correlate the impact of macro-economic conditions on our sales activities, we
believe that the economic conditions have resulted in decreased demand in our
target markets, and in particular, have increased the average length of our
sales cycles.  To the extent that the current downturn continues or increases in
severity, or results in a similar downturn worldwide, we believe demand for our
products and services, and therefore future revenues, will be reduced.

Because a small number of customers have accounted, and are likely to continue
to account, for a substantial portion of our revenues, our revenues could
decline due to the loss or delay of a single customer order.

     A relatively small number of customers account for a significant portion of
our total quarterly revenues. The loss or delay of individual orders could have
a significant impact on revenues and operating results. No single customer
accounted for more than 10% of our revenues in 2000. In 1999, we derived a
significant portion of our revenues from three customers who individually
accounted for 19%, 19% and 10% of our total revenues. We expect that revenues
from a limited number of new customers will continue to account for a large
percentage of total revenues in future periods. Our ability to attract new
customers will depend on a variety of factors, including the performance,
quality, breadth, depth and price of our current and future products. Our
failure to add new customers that make significant purchases of our application
suite and services would reduce our future revenues.

     We record as deferred revenues payments from customers that do not meet our
revenue recognition policy requirements. Since some of our quarterly revenues
are recognized from deferred revenues, our quarterly results will depend
primarily upon entering into new agreements to generate revenues for that
quarter. New agreements may not result in revenues in the quarter in which the
agreement was signed and commissions and royalties may become payable, and we
may not be able to predict accurately when revenues from these agreements will
be recognized.  Similarly, declines in deferred revenues from prior quarters may
disappoint investors and could result in a significant decline in our stock
price.  We expect the level of our deferred revenues to fluctuate in future
periods.

If our application suite does not successfully function for customers with large
numbers of transactions, customers or product offerings, we may lose sales and
suffer decreased revenues.

     Our application suite must be able to accommodate a large number of
transactions, customers and product offerings. Large scale usage presents
significant technical challenges which are difficult or impossible to predict.
To date, our application suite has been deployed by only a limited number of
customers and, therefore, we cannot assure you that our application suite is
able to meet our customers' demands for large scale usage. If our customers
experience difficulty with our application suite during periods of high traffic
or usage, it could damage our reputation and reduce our revenues.

All of our revenues to date have been derived from the licensing of our
application suite and the sale of related services, and if we fail to
successfully upgrade or enhance our application suite and introduce new
products, our revenues would decline.

     All of our revenues to date have been derived from the licensing of our
application suite and the sale of related services. For the year ended December
31, 2000, 57% of our total revenues were derived from the licensing of our
application suite. Our future revenues will depend, in significant part, on our
successful development and license of new and enhanced versions of our
application suite and of other new products. If we are not able to successfully
develop new products or these new products do not achieve market acceptance, our
revenues would be reduced.

                                       18
<PAGE>

Our failure to develop and maintain strong relationships with consulting and
system integrator firms (CSIs) would harm our ability to market our application
suite, which could reduce future revenues and increase our expenses.

     An increasing portion of our sales are influenced by the recommendation of
our application suite by systems integrators, consulting firms and other third
parties that help deploy our application suite for our customers. Losing the
support of these third parties may limit our ability to penetrate our existing
or potential markets. These third parties are under no obligation to recommend
or support our application suite and could recommend or give higher priority to
the products and services of other companies or to their own products. Our
inability to gain the support of CSIs or a shift by these companies toward
favoring competing products could negatively affect our software license and
service revenues.

     Some CSIs also engage in joint marketing and sales efforts with us. If our
relationships with CSIs fail, we will have to devote substantially more
resources to the sales and marketing of our application suite. In many cases,
these parties have extensive relationships with our existing and potential
customers and influence the decisions of these customers. A number of our
competitors have longer and more established relationships with these CSIs than
we do, and as a result these CSIs may be more likely to recommend competitors'
products and services and increase our expenses.

Our failure to develop and maintain strong relationships with systems
integrators would harm our ability to implement our application suite.

     Systems integrators assist our customers with the installation and
deployment of our application suite, in addition to those products of our
competitors, and perform custom integration of computer systems and software. If
we are unable to develop and maintain relationships with systems integrators, we
would be required to hire additional personnel to install and maintain our
application suite, which would result in delays in our ability to recognize
revenue and higher expenses.

If our product does not operate with a wide variety of hardware, software and
operating systems used by our customers, our revenues would be harmed.

     We currently serve a customer base that uses a wide variety of constantly
changing hardware, software applications and operating systems. Our application
suite will only gain broad market acceptance if it can support a wide variety of
hardware, software applications and systems. If our product is unable to support
a variety of these products, our revenues would be harmed. Our business depends
on the following factors, among others:

     .  our ability to integrate our application suite with multiple hardware
        systems and existing software systems and to modify our product as new
        versions of packaged applications are introduced;
     .  our ability to anticipate and support new standards, especially
        Internet-based standards; and
     .  our ability to integrate additional software modules under development
        with our existing application suite.

Defects in our application suite could diminish demand for our application suite
and result in loss of revenues, decreased market acceptance, injury to our
reputation and product liability claims.

     We have in the past discovered software errors and performance problems
with our application suite after commencement of commercial shipment, and as a
result, have experienced injury to our reputation, increased expenses, delays in
the shipment of our application suite and our customers have experienced
difficulty in deploying and operating our application suite.

     Errors in our application suite may be caused by defects in third-party
software incorporated into our application suite. If so, we may not be able to
fix these defects without the cooperation of these software providers. Since
these defects may not be as significant to our software providers as they are to
us, we may not receive the rapid cooperation that we may require. We may not
have the contractual right to access the source code of third-party software
and, even if we access the source code, we may not be able to fix the defect.

     Since our customers use our application suite for critical business
applications such as e-commerce, any errors, defects or other performance
problems of our application suite could result in damage to the businesses of
our customers. Consequently, these customers could delay or withhold payment to
us for our software and services, which could result in an increase in our
provision for doubtful accounts or an increase in collection cycles for accounts
receivable, both of which could disappoint investors and result in a significant
decline in our stock price.  In addition, these customers could seek significant
compensation from us for their losses. Even if unsuccessful, a product liability
claim brought against us would likely be time consuming and costly and harm our
reputation, and thus our ability to license to new customers.  Even if a suit is
not brought, correcting errors in our application suite could increase our
expenses.

                                       19
<PAGE>

If we fail to introduce new versions and releases of our application suite in a
timely manner, customers may license competing products and our revenues may
decline.

  We may fail to introduce or deliver new products on a timely basis, if at all.
In the past, we have experienced delays in the commencement of commercial
shipments of enhancements to our application suite. To date, these delays have
not had a material impact on our revenues. If we are unable to ship or implement
new products or enhancements to our application suite when planned or at all, or
fail to achieve timely market acceptance of these new products or enhancements,
we may suffer lost sales and could fail to increase our revenues. Our future
operating results will depend on demand for our application suite, including new
and enhanced releases that are subsequently introduced.

We may not successfully enter international markets or generate significant
revenues abroad, which could result in slower revenue growth and harm our
business.

  To date, we have generated limited revenues from sales outside the United
States. We have established sales offices in the United Kingdom, Canada,
Germany, Sweden, France, Netherlands, Hong Kong and Australia and intend to do
so elsewhere in Europe, Asia and Latin America.  If we fail to license our
application suite in international markets, we could experience slower revenue
growth and our business could be harmed. We anticipate devoting significant
resources and management attention to expanding international opportunities.
Expanding internationally subjects us to a number of risks, including:

     .  greater difficulty in staffing and managing foreign operations;
     .  expenses associated with foreign operations and compliance with
        applicable laws;
     .  changes in a specific country's or region's political or economic
        conditions;
     .  expenses associated with localizing our product for foreign countries;
     .  differing intellectual property rights;
     .  protectionist laws and business practices that favor local competitors;
     .  longer sales cycles and collection periods or seasonal reductions in
        business activity;
     .  multiple, conflicting and changing governmental laws and regulations;
        and
     .  foreign currency restrictions and exchange rate fluctuations.

Our growth continues to place a significant strain on our management systems and
resources, and if we fail to manage our growth our ability to market and license
our application suite, sell our services and develop new products may be harmed.

  We must manage our growth effectively in order to successfully license our
application suite, sell our services and achieve revenue growth and
profitability in a rapidly evolving market. Our growth has placed, and will
continue to place, a significant strain on our management systems and resources,
and we may not be able to effectively manage our growth in the future. We have
increased the scope of our operations and have added a substantial number of
employees.  For example, the number of our employees grew from 123 people at
December 31, 1999 to 473 people at December 31, 2000.  For us to effectively
manage our growth, we must continue to do the following:

     .  improve our operational, financial and management controls;
     .  improve our reporting systems and procedures;
     .  install new management and information control systems; and
     .  expand, train and motivate our workforce.


Because competition for qualified personnel is intense, we may not be able to
retain or recruit personnel, which could impact the development and license of
our application suite.

  If we are unable to hire or retain qualified personnel, or if newly hired
personnel fail to develop the necessary skills or to reach expected levels of
productivity, our ability to develop and market our application suite will be
weakened. Our success also depends on the continued contributions of our key
management, engineering, sales and marketing and professional services
personnel. In particular, Monte Zweben, our Chairman, President and Chief
Executive Officer, would be difficult to replace.

                                       20
<PAGE>

  Our ability to increase our sales will depend on our ability to recruit, train
and retain top quality sales people who are able to target prospective
customers' senior management, and who can generate and service large accounts.
There is a shortage of qualified sales personnel in our industry and competition
for them is intense.

Failure of our prospective Internet customers to receive necessary funding could
harm our business.

  Our customers include rapidly growing Internet companies. Most privately and
publicly held Internet companies require outside cash sources to continue
operations. Recently, funding has been less available for Internet companies as
a result of the stock market decline and public and private investor concern
regarding Internet-based businesses. These factors have reduced demand for our
application suite from Internet-based customers and reduced demand for
additional services from current Internet-based customers. Failure by existing
customers in this industry to receive or generate adequate funding has and may
continue to result in provisions for uncollectible accounts receivable from such
companies.

Increasing government regulation of the Internet, imposition of sales and other
taxes on products sold by our customers over the Internet and privacy concerns
relating to the Internet could reduce the license of our application suite and
harm our business.

  Federal, state or foreign agencies may adopt laws or regulations affecting the
use of the Internet as a commercial medium. We expect that laws and regulations
relating to user privacy, pricing, content and quality of products and services
could indirectly affect our business.

  Current federal legislation limits the imposition of state and local taxes on
Internet-related sales at this time. Congress may choose not to renew this
legislation in 2002, in which case state and local governments would be free to
impose taxes on electronically purchased goods. The imposition of new sales or
other taxes could limit the growth of Internet commerce in general and, as a
result, the demand for our application suite and services.

  Businesses use our application suite to capture information regarding their
customers when those customers contact them on-line with customer service
inquiries.  Privacy concerns may cause visitors to withhold personal data, which
would limit the effectiveness of our application suite. More importantly, even
the perception of privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of our application suite.

If we are unable to meet the rapid changes in technology, our existing
application suite could become obsolete.

  The market for our application suite is marked by rapid technological change,
frequent new product introductions, Internet-related technology enhancements,
uncertain product life cycles, changes in client demands and evolving industry
standards. We cannot be certain that we will successfully develop and market new
products, new product enhancements or new products compliant with present or
emerging Internet technology standards. New products based on new technologies
or new industry standards can render existing products obsolete and
unmarketable. To succeed, we will need to enhance our current application suite
and develop new products on a timely basis to keep pace with developments
related to Internet technology and to satisfy the increasingly sophisticated
requirements of our clients. Enterprise application software technology is
complex and new products and product enhancements can require long development
and testing periods. Any delays in developing and releasing enhanced or new
products could harm our business.

Rising energy costs and power system shortages in California may result in
increased operating expenses and reduced net income, and harm our operations due
to power loss.

  California is currently experiencing an energy crisis and has recently
experienced significant power shortages.  As a result, energy costs in
California, including natural gas and electricity, may rise significantly over
the next year.  Because our principal operating facilities are located in
California, our operating expenses may increase significantly if this trend
continues.  In addition, California has on some occasions implemented, and may
in the future continue to implement, rolling blackouts throughout the state.  If
blackouts interrupt our power supply, we may be temporarily unable to operate.
Any such interruption in our ability to continue operations could delay the
development, marketing and sale of our application suites.  Future interruptions
could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue, any of which could
have an adverse effect on our operating results.

                                       21
<PAGE>

Our directors and executive officers maintain significant control over Blue
Martini Software, which may lead to conflicts with other stockholders over
corporate governance.

  Our directors, executive officers and holders of 5% or more of our outstanding
common stock owned approximately 57.8% of our outstanding common stock as of
March 1, 2001.  Monte Zweben, our Chairman, President and Chief Executive
Officer, together with related entities, owned approximately 38.9% of our common
stock as of this date. These stockholders, acting together, and Mr. Zweben,
individually, will be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and
significant corporate transactions, such as mergers or other business
combination transactions. This control may delay or prevent a third party from
acquiring or merging with us.

We are at risk of securities class action litigation due to our expected stock
price volatility.

  In the past, securities class action litigation has often been brought against
a company following a decline in the market price of its securities. This risk
is especially acute for us because technology companies have experienced greater
than average stock price volatility in recent years, particularly since mid-2000
to the present, and, as a result, have been subject to, on average, a greater
number of securities class action claims than companies in other industries. We
may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources, and could harm our business.

There may be sales of a substantial amount of our common stock in the near
future that could cause our stock price to fall.

  Our current stockholders hold a substantial number of shares, which they are
able to sell in the public market, subject to restrictions under the Securities
Act. Sales of a substantial number of shares of our common stock within a short
period of time could cause our stock price to fall. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional stock.

We have implemented anti-takeover provisions which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.

  Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:

     .  establishment of a classified board of directors requiring that not all
        members of the board may be elected at one time;
     .  authorizing the issuance of "blank check" preferred stock that could be
        issued by our board of directors to increase the number of outstanding
        shares and thwart a takeover attempt;
     .  prohibiting cumulative voting in the election of directors, which would
        otherwise allow less than a majority of stockholders to elect director
        candidates;
     .  limitations on the ability of stockholders to call special meetings of
        stockholders;
     .  prohibiting stockholder action by written consent and requiring all
        stockholder actions to be taken at a meeting of our stockholders; and
     .  establishing advance notice requirements for nominations for election to
        the board of directors or for proposing matters that can be acted upon
        by stockholders at stockholder meetings.

  In addition, Section 203 of the Delaware General Corporations Law and
the terms of our stock option plans may discourage, delay or prevent a change in
control of the Company.

                                       22
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

  Through December 31, 2000, all of our recognized revenues have been
denominated in United States dollars and were from both domestic and
international customers. Our exposure to foreign currency exchange rate changes
has been immaterial. We expect that future license and service revenues will
continue to be derived from international markets and may be denominated in the
currency of the applicable market. Through December 31, 2000, we have expanded
our international operations and have hired personnel in Europe and Asia
Pacific. We have incurred limited operating expenses denominated in foreign
currencies. Our future operating results may become subject to significant
fluctuations based upon changes in the exchange rates of foreign currencies in
relation to the United States dollar. We expect to continue to engage in
international sales denominated in United States dollars. An increase in the
value of the United States dollar relative to foreign currencies could make our
products less competitive in international markets. Although we will continue to
monitor our exposure to currency fluctuations and, when appropriate, may use
economic hedging techniques in the future to minimize the effect of these
fluctuations, we cannot assure you that exchange rate fluctuations will not
adversely affect our financial results in the future. Through December 31, 2000,
the Company had not engaged in foreign currency hedging activities.

Interest Rate Risk

  Our exposure to financial market risk, including changes in interest rates,
relates primarily to our investment portfolio.  We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed rate securities with
maturities not exceeding 18 months.  We do not invest in any derivative
instruments.  The fair value of our investment portfolio or related income would
not be significantly impacted by either a 100 basis point increase or decrease
in interest rates due mainly to the fixed-rate, and relatively short-term nature
of our available-for-sale investment portfolio.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The financial statements required by this item are submitted as a separate
section of this Form 10-K.  See Item 14.


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

  There were no matters to be reported under this item.

                                       23
<PAGE>

                                   PART III

  Certain information required by Part III is omitted from this Report on Form
10-K since we will file a definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on June 7, 2001, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  (a) Executive Officers

      The following table sets forth certain information regarding our executive
officers as of March 1, 2001:


          Name             Age               Office(s)
          ----             ---               ---------

  Monte Zweben............  37  President and Chief Executive Officer
  John E. Calonico, Jr....  44  Vice President and Chief Financial Officer
  Robert E. Cell..........  32  Vice President, Corporate Development
  William H. Evans........  42  Vice President and General Manager, Asia-Pacific
  Scott D. Hanham.........  50  Vice President, Product Development and Services
  Eric C. Jensen..........  38  Vice President, Legal Affairs and General
                                Counsel
  Jeffrey G. Johnson......  43  Vice President, Sales
  Laurent Pacalin.........  42  Vice President, Marketing
  Jeanne K. Urich.........  48  Vice President, Global Professional Services and
                                Training


  Monte Zweben has served as our Chairman, President and Chief Executive Officer
since June 1998. From November 1997 to June 1998, Mr. Zweben was an Entrepreneur
in Residence at Matrix Partners and Institutional Venture Partners, two venture
capital firms. From October 1996 to November 1997, Mr. Zweben was Vice President
and General Manager at PeopleSoft, Inc., a provider of enterprise applications.
From 1992 to December 1996, Mr. Zweben was Chairman, President and Chief
Executive Officer of Red Pepper Software Company. From September 1986 to
December 1992, Mr. Zweben was the Deputy Branch Chief of the NASA Ames Research
Center's Artificial Intelligence Branch. Mr. Zweben serves on the Board of
Directors of Advent Software, Inc.

  John E. Calonico, Jr. has served as our Vice President and Chief Financial
Officer since March 2000. From February 1999 to February 2000, Mr. Calonico
served as Vice President and Chief Financial Officer of GlobalCenter, Inc., a
division of Global Crossing Ltd., a provider of complex web hosting and Internet
access services. From November 1997 to January 1999, Mr. Calonico served as Vice
President of Finance for BEA Systems, Inc, a provider of middleware for
enterprise software applications. From April 1990 to November 1997, Mr. Calonico
held various management positions including Vice President of Finance at
Autodesk, Inc., a supplier of digital content creation, management and
distribution tools.

  Robert E. Cell has served as our Vice President of Corporate Development since
March 2000. From November 1997 to March 2000, Mr. Cell served in various
management positions at Kellogg Company, including Vice President, Corporate
Development and Vice President, General Manager of Lender's, a division of
Kellogg. From March 1996 to November 1997, Mr. Cell served in various management
positions at Deloitte & Touche LLP, an accounting firm, including Managing
Director of Deloitte & Touche's Great Lakes Corporate Finance practice. From
June 1993 to March 1996, Mr. Cell held various management positions at Coopers &
Lybrand LLP, an accounting firm.

  William H. Evans has served as our Vice President and General Manager, Asia-
Pacific since January 2001 and prior to that he was our Vice President of
Marketing since June 1998.  From October 1997 to June 1998, Mr. Evans served as
an independent consultant in the software industry.  From April 1995 to October
1997, Mr. Evans held various positions at Objectivity, Inc., a developer of
database management software, including both Vice President of Marketing and
Vice President and General Manager of the Aziza Business Unit.

  Scott D. Hanham has served as our Vice President of Product Development and
Services since August 1998. From January 1995 to July 1998, Dr. Hanham was
Director, Quality and Process Management at Sun Microsystems, Inc.

                                       24
<PAGE>

  Eric C. Jensen has served as our Vice President, Legal Affairs, General
Counsel and Secretary since July 2000.  Mr. Jensen has been a partner at the law
firm of Cooley Godward LLP since 1994.

  Jeffrey G. Johnson has served as our Vice President of Sales since September
1998. From January 1998 to September 1998, Mr. Johnson was on sabbatical. From
October 1997 to December 1997, Mr. Johnson was Vice President of National
Accounts for the manufacturing business unit of PeopleSoft, Inc. From June 1996
to October 1997, Mr. Johnson was the Director of Sales for Red Pepper Software
Company. From November 1993 to June 1996, Mr. Johnson was Director of Sales for
SAP America's Western Region.

  Laurent Pacalin has served as our Vice President of Marketing since January
2001. From August 1999 to September 2000, Mr. Pacalin served as Vice President
of business development and product management for Corio Inc., a provider of
enterprise application services. From August 1994 to August 1999, Mr. Pacalin
served in various management positions including Vice President, Americas
Marketing and Vice President Business Development, Enterprise Applications at
Oracle Corporation, a provider of Systems software and Internet business
applications software.

  Jeanne K. Urich has served as our Vice President of Global Professional
Services and Training since February 2001. From March 2000 to December 2000, Ms.
Urich served as Senior Vice President of Global e-Business Professional Services
and Training for Nortel Networks Corporation, a leading global supplier of
networking solutions and services. From July 1998 to March 2000, Ms. Urich
served in a similar position at Clarify, Inc. a provider of customer
relationship management software. From January 1998 to July 1998, Ms. Urich was
worldwide director of technology services at Compaq Corporation, a leading
global provider of technology and solutions. From July 1996 to December 1997,
Ms. Urich served in a similar position at Tandem Computers, a supplier of
computer products and services. From July 1976 to July 1996, Ms. Urich held
various management positions including director of services marketing and
business development at Digital Equipment Corporation, a supplier of computer
products and services.

  (b) The information required by this Item is incorporated by reference to the
section entitled "Election of Directors" in the Proxy Statement.


ITEM 11.  EXECUTIVE COMPENSATION

  The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this Item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.

                                       25
<PAGE>

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

(a) The following documents are filed as part of this Report:

     1. Financial Statements

          Independent Auditors' Report

          Consolidated Financial Statements:

             Balance Sheets

             Statements of Operations

             Statements of Stockholders' Equity and Comprehensive Loss

             Statements of Cash Flows

          Notes to Consolidated Financial Statements

     2. Financial Statement Schedule

                Schedule II--Valuation and Qualifying Accounts
                                (In thousands)

<TABLE>
<CAPTION>

                                                                                             Additions
                                                                                 Balance at  charged to              Balance at
                                                                                 beginning   costs and                 end of
                          Description                                            of period    expenses   Write-offs    period
                          -----------                                           ----------  ----------  ----------  ----------
<S>                                                                              <C>         <C>         <C>         <C>
Year ended December 31, 1999
  Allowance for doubtful accounts.............................................     $ --      $  225      $   --        $225

Year ended December 31, 2000
  Allowance for doubtful accounts.............................................     $225      $2,695      $2,067        $853

</TABLE>


                                       26
<PAGE>

     3. Exhibits

<TABLE>
<CAPTION>
  Exhibit
  Number     Description
  <S>        <C>
   3.1       Amended and Restated Certificate of Incorporation of the Registrant./1/

   3.2       Amended and Restated Bylaws of the Registrant/2/

   4.1       Specimen Stock Certificate./3/

  10.1       2000 Equity Incentive Plan, as amended./ 4/

  10.2       2000 Employee Stock Purchase Plan, as amended./ 4/

  10.3       2000 Non-Employee Directors' Stock Option Plan. /3/

  10.4       Commercial Office Lease Agreement by and between Peninsula Office Park
             Associates, L.P. and Registrant, as amended. /3/

  10.5       Agreement and Plan of Merger by and between the Registrant and Blue
             Martini LLC dated January 12, 1999./3/

  10.6       Form of Class A Units Agreements by and between the Registrant and
             certain investors of the Registrant./3/

  10.7       Form of Restricted Class B Units Agreement by and between the
             Registrant and certain investors of the Registrant./3/

  10.8       Series B Preferred Stock Purchase Agreement by and between the
             Registrant and certain investors of the Registrant dated January 13,
             1999./3/

  10.9       Series C Preferred Stock Purchase Agreement by and between the
             Registrant and certain investors of the Registrant dated July 20,
             1999./3/

 10.10       Investor Rights Agreement by and between the Registrant and certain
             investors of the Registrant dated July 20, 1999./ 3/

 10.11       Form of Indemnity Agreement by and between the Registrant and each of
             its directors and executive officers./ 3/

 10.12       License and Marketing Agreement by and between the Registrant and
             Neuron Data, Inc., now Blaze Software, Inc., dated March 31, 1999, as
             amended./ 3/

 10.13       ISV Software and License Agreement between the Registrant and BEA
             Systems, Inc., dated January 29, 1999, as amended./3/

 10.14       Agreement by and between the Registrant and John E. Calonico, Jr./3/

 10.15       Blue Martini Software Training Facility Agreement between the
             Registrant and Diversified Computer Consultants of California, Inc.,
             dated March 1, 2000./ 3/

 10.16       Master Lease Agreement between the Registrant and Comdisco, Inc., dated
             December 6, 1999./ 3/

 10.17       First Amendment to Lease between Peninsula Office Park Associates,
             L.P., and Registrant, dated May 12, 1999./ 5/

 10.18       Second Amendment to Lease between Peninsula Office Park Associates,
             L.P., and Registrant, dated August 5, 1999./ 5/
</TABLE>

                                       27
<PAGE>

<TABLE>
 <S>         <C>
 10.19       Third Amendment to Lease between Peninsula Office Park Associates,
             L.P., and Registrant, dated January 11, 2000./5/

 10.20       Sublease between Virage, Inc. and Registrant, dated August 15, 2000./5/

 10.21       Blue Martini Software Training Facility Agreement between Diversified
             Computer Consultants, LLC and Registrant, dated September 13, 2000./5/

 10.22       Agreement by and between the Registrant and Laurent Pacalin./4/

 10.23       Agreement by and between the Registrant and Jeanne Urich./4/

 10.24       Fourth Amendment to Lease between Peninsula Office Park Associates, L.P., and
             Registrant, dated December 20, 2000./4/

 10.25       Fifth Amendment to Lease between Peninsula Office Park Associates,
             L.P., and Registrant, dated February 16, 2001./4/

 10.26       First Amendment to the Sublease between Virage, Inc. and Registrant
             dated December 1, 2000./4/

 10.27       Amendment to the License and Marketing Agreement by and between the
             Registrant and Neuron Data, Inc., now Blaze Software, Inc., dated
             December 22, 2000.+/4/

 10.28       Lease Agreement between 411 Borel LLC and Registrant, dated February 5,
             2001./4/

  23.1       Consent of KPMG LLP, Independent Auditors./4/

  24.1       Power of Attorney is contained on the signature pages.
</TABLE>

----------------
 +   Confidential treatment requested with respect to certain portions of this
     exhibit. Omitted portions have been filed separately with the Securities
     and Exchange Commission.

/1/  Incorporated by reference to the Registrant's Form 10-Q for the six-month
     period ended June 30, 2000.
/2/  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (No. 333-55374).
/3/  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (No. 333-36062), as amended.
/4/  Filed herewith.
/5/  Incorporated by reference to the Registrant's Form 10-Q for the nine-month
     period ended September 30, 2000.

 (b) Reports on Form 8-K


       No reports on Form 8-K were filed during the fourth quarter ended
     December 31, 2000.

                                       28
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Blue Martini Software, Inc.:

   We have audited the accompanying consolidated balance sheets of Blue Martini
Software, Inc. and subsidiaries as of December 31, 1999 and 2000 and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for the period from June 5, 1998 (Inception) to December 31,
1998, and for the years ended December 31, 1999 and 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blue Martini
Software, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for the period from June 5,
1998 (Inception) to December 31, 1998, and for the years ended December 31, 1999
and 2000, in conformity with accounting principles generally accepted in the
United States of America.

                                       /s/ KPMG LLP

Mountain View, California
January 24, 2001

                                       29
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                                    ---------------------
                                 Assets                                                                1999        2000
                                                                                                    ---------    --------
<S>                                                                                                 <C>          <C>
Current assets:
 Cash and cash equivalents....................................................................   $ 10,362      $ 40,101
 Short-term investments.......................................................................      2,562        62,183
  Accounts receivable, net of allowance for doubtful accounts of $225 and $853
   in 1999 and 2000, respectively.............................................................      3,649        12,584
 Prepaid expenses and other current assets....................................................        656         6,942
                                                                                                 --------      --------
    Total current assets......................................................................     17,229       121,810

Property and equipment, net...................................................................      2,761         8,713
Long-term investments.........................................................................         --        51,402
Intangible assets and other, net..............................................................        370         6,373
                                                                                                 --------      --------
    Total assets..............................................................................   $ 20,360      $188,298
                                                                                                 ========      ========

                   Liabilities and Stockholders' Equity

Current liabilities:
 Accounts payable.............................................................................   $  1,874      $  4,434
 Accrued employee compensation................................................................      2,578         9,411
 Other current liabilities....................................................................      1,074        14,233
 Deferred revenues............................................................................      3,577        15,249
 Current portion of long-term obligations.....................................................        418           209
                                                                                                 --------      --------
    Total current liabilities.................................................................      9,521        43,536
Long-term obligations, less current portion...................................................        544           117
                                                                                                 --------      --------
    Total liabilities.........................................................................     10,065        43,653
                                                                                                 --------      --------
Commitments

Stockholders' equity:
  Convertible preferred stock, $0.001 par value; 7,200 shares and 5,000 shares
     authorized at December 31, 1999 and 2000, respectively; 5,824 shares and
     no shares issued and outstanding at December 31, 1999 and 2000, respectively.............          6            --
  Common stock, $0.001 par value, 46,000 shares and 500,000 shares authorized at
   December 31, 1999 and 2000, respectively; 31,411 shares and 68,964 shares
   issued and outstanding at December 31, 1999 and 2000, respectively.........................         31            69
 Additional paid-in-capital...................................................................     31,640       260,943
 Deferred stock compensation..................................................................     (8,926)      (42,106)
 Accumulated other comprehensive income.......................................................         --           282
 Accumulated deficit..........................................................................    (12,456)      (74,543)
                                                                                                 --------      --------
    Total stockholders' equity................................................................     10,295       144,645
                                                                                                 --------      --------
    Total liabilities and stockholders' equity................................................   $ 20,360      $188,298
                                                                                                 ========      ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       30
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                June 5, 1998
                                               (Inception) to         Year Ended
                                                December 31,         December 31,
                                                                ---------------------
                                                    1998          1999         2000
                                               --------------   --------     --------
<S>                                            <C>              <C>          <C>
Revenues:
 License.....................................      $    --      $  7,205     $ 42,650
 Service.....................................           --         4,027       31,601
                                                   -------      --------     --------
     Total revenues..........................           --        11,232       74,251
                                                   -------      --------     --------
Cost of revenues:
 License.....................................           --           719        3,754
 Service.....................................           --         5,480       41,868
                                                   -------      --------     --------
     Total cost of revenues..................           --         6,199       45,622
                                                   -------      --------     --------
     Gross profit............................           --         5,033       28,629
                                                   -------      --------     --------
Operating expenses:
 Sales and marketing.........................          725         7,736       52,961
 Research and development....................          562         7,076       21,277
 General and administrative..................          310         1,348       21,223
                                                   -------      --------     --------
     Total operating expenses................        1,597        16,160       95,461
                                                   -------      --------     --------
     Loss from operations....................       (1,597)      (11,127)     (66,832)
Interest income and other, net...............           15           253        4,745
                                                   -------      --------     --------
     Net loss................................      $(1,582)     $(10,874)    $(62,087)
                                                   =======      ========     ========

Basic and diluted net loss per common share..      $ (0.07)     $  (0.47)    $  (1.52)
                                                   =======      ========     ========

Shares used in computing basic and diluted
 net loss per common share...................       22,000        22,964       40,870
                                                   =======      ========     ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       31
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

    Consolidated Statements of Stockholders' Equity and Comprehensive Loss

                 June 5, 1998 (Inception) to December 31, 2000
                                (In thousands)


<TABLE>
<CAPTION>
                                                                       Convertible
                                                                     Preferred Stock           Common Stock         Additional
                                                                   -------------------     -------------------       Paid-In
                                                                   Shares       Amount     Shares       Amount        Capital
                                                                   ------       ------     ------       ------      ----------
<S>                                                                <C>          <C>        <C>          <C>         <C>
Issuance of common stock.........................................      --     $   --        22,000      $   22       $     48
Issuance of common stock for employee stock options..............      --         --         8,253           8             43
Issuance of series A convertible preferred stock.................   1,116          1            --          --          1,249
Deferred compensation relating to stock option grants............      --         --            --          --          2,223
Amortization of stock compensation...............................      --         --            --          --             --
Net loss.........................................................      --         --            --          --             --
                                                                   ------     ------        ------      ------       --------
Balances, December 31, 1998......................................   1,116          1        30,253          30          3,563
Issuance of common stock.........................................      --         --            24          --              6
Issuance of common stock for employee stock options..............      --         --         1,676           2            203
Repurchases of common stock......................................      --         --          (542)         (1)            (6)
Issuance of series B convertible preferred stock.................   2,631          3            --          --          4,997
Issuance of series C convertible preferred stock.................   2,077          2            --          --         12,448
Deferred compensation relating to stock option grants............      --         --            --          --         10,382
Amortization of stock compensation...............................      --         --            --          --             --
Non-employee stock compensation..................................      --         --            --          --             47
Net loss.........................................................      --         --            --          --             --
                                                                   ------     ------        ------      ------       --------
Balances, December 31, 1999......................................   5,824          6        31,411          31         31,640
Net loss.........................................................      --         --            --          --             --
Net unrealized change in investment securities...................      --         --            --          --             --

Comprehensive loss...............................................

Issuance of common stock.........................................      --         --            66          --            100
Issuance of common stock for employee stock options..............      --         --         5,714           6          4,649
Repurchases of common stock......................................      --         --          (149)         --            (92)
Issuance of common stock in conjunction with initial
   public offering, net of offerings costs of $14,049............      --         --         8,625           9        158,432
Conversion of convertible preferred stock to common
   stock.........................................................  (5,824)        (6)       23,297          23            (17)
Deferred compensation relating to stock option grants............      --         --            --          --         50,602
Amortization of stock compensation and warrants..................      --         --            --          --             --
Non-employee stock compensation..................................      --         --            --          --          1,621
Issuance of common stock warrant in connection with
   marketing agreement...........................................      --         --            --          --         13,832
Issuance of common stock warrant in connection with lease
   finance arrangement...........................................      --         --            --          --            176
                                                                   ------     ------        ------      ------       --------
Balances, December 31, 2000......................................      --     $   --        68,964      $   69       $260,943
                                                                   ======     ======        ======      ======       ========

<CAPTION>
                                                                                    Accumulated
                                                                     Deferred          Other                          Total
                                                                       Stock       Comprehensive    Accumulated    Stockholders'
                                                                   Compensation        Income         Deficit         Equity
                                                                   ------------    -------------    -----------    -------------
<S>                                                                <C>             <C>              <C>            <C>
Issuance of common stock.........................................    $     --            --           $     --        $     70
Issuance of common stock for employee stock options..............          --            --                 --              51
Issuance of series A convertible preferred stock.................          --            --                 --           1,250
Deferred compensation relating to stock option grants............      (2,223)           --                 --              --
Amortization of stock compensation...............................         528            --                 --             528
Net loss.........................................................          --            --             (1,582)         (1,582)
                                                                     --------          ----           --------        --------
Balances, December 31, 1998......................................      (1,695)           --             (1,582)            317
Issuance of common stock.........................................          --            --                 --               6
Issuance of common stock for employee stock options..............          --            --                 --             205
Repurchases of common stock......................................          --            --                 --              (7)
Issuance of series B convertible preferred stock.................          --            --                 --           5,000
Issuance of series C convertible preferred stock.................          --            --                 --          12,450
Deferred compensation relating to stock option grants............     (10,382)           --                 --              --
Amortization of stock compensation...............................       3,151            --                 --           3,151
Non-employee stock compensation..................................          --            --                 --              47
Net loss.........................................................          --            --            (10,874)        (10,874)
                                                                     --------          ----           --------        --------
Balances, December 31, 1999......................................      (8,926)           --            (12,456)         10,295
Net loss.........................................................          --            --            (62,087)        (62,087)
Net unrealized change in investment securities...................          --           282                 --             282
                                                                                                                      --------
Comprehensive loss...............................................                                                      (61,805)
                                                                                                                      --------
Issuance of common stock.........................................          --            --                 --             100
Issuance of common stock for employee stock options..............          --            --                 --           4,655
Repurchases of common stock......................................          --            --                 --             (92)
Issuance of common stock in conjunction with initial
   public offering, net of offerings costs of $14,049............          --            --                 --         158,441
Conversion of convertible preferred stock to common
   stock.........................................................          --            --                 --              --
Deferred compensation relating to stock option grants............     (50,602)           --                 --              --
Amortization of stock compensation and warrants..................      31,254            --                 --          31,254
Non-employee stock compensation..................................          --            --                 --           1,621
Issuance of common stock warrant in connection with
   marketing agreement...........................................     (13,832)           --                 --              --
Issuance of common stock warrant in connection with lease
   finance arrangement...........................................          --            --                 --             176
                                                                     --------          ----           --------        --------
Balances, December 31, 2000......................................     (42,106)         $282           $(74,543)       $144,645
                                                                     ========          ====           ========        ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       32
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


                                (In thousands)

<TABLE>
<CAPTION>

                                                                                       June 5, 1998         Year Ended
                                                                                      (Inception) to       December 31,
                                                                                       December 31,   ---------------------
                                                                                           1998          1999        2000
                                                                                      --------------  ---------   ---------
<S>                                                                                   <C>             <C>         <C>
Cash flows from operating activities:
  Net loss..........................................................................      $(1,582)    $ (10,874)  $ (62,087)
  Adjustments to reconcile net loss to net cash used in operating
     activities:
Depreciation and amortization.......................................................            8           788       4,093
    Amortization of stock compensation and warrants.................................          528         3,198      33,051
    Provision for doubtful accounts.................................................           --           225       2,695
  Changes in operating assets and liabilities:
    Accounts receivable.............................................................         (130)       (3,744)    (11,630)
    Prepaid expenses and other current assets.......................................          (48)         (608)     (6,286)
    Accounts payable, accrued employee compensation and other current liabilities...          240         5,286      18,302
    Deferred revenues...............................................................          130         3,447      11,672
                                                                                          -------     ---------   ---------
      Net cash used in operating activities.........................................         (854)       (2,282)    (10,190)
                                                                                          -------     ---------   ---------
Cash flows from investing activities:
  Purchases of property and equipment...............................................          (82)       (3,108)     (9,613)
  Purchase of intangible assets.....................................................           --            --      (1,750)
  Purchases of available-for-sale investments.......................................           --        (2,562)   (116,570)
  Maturities of available-for-sale investments......................................           --            --       5,489
  Other assets......................................................................         (167)         (203)        170
                                                                                          -------     ---------   ---------
  Net cash used for investing activities............................................         (249)       (5,873)   (122,274)
                                                                                          -------     ---------   ---------
Cash flows from financing activities:
  Net proceeds from issuance of convertible preferred stock.........................        1,250        17,450          --
  Net proceeds from issuance of common stock........................................          121           211       4,755
  Repurchases of common stock.......................................................           --            (7)        (92)
  Net proceeds from initial public offering of common stock.........................           --            --     158,441
  Proceeds from bank borrowings.....................................................           --           750          --
  Repayment of debt and capital lease obligations...................................           (7)         (148)       (901)
                                                                                          -------     ---------   ---------
      Net cash provided by financing activities.....................................        1,364        18,256     162,203
                                                                                          -------     ---------   ---------
Net increase in cash and cash equivalents...........................................          261        10,101      29,739
Cash and cash equivalents at beginning of period....................................           --           261      10,362
                                                                                          -------     ---------   ---------
Cash and cash equivalents at end of period..........................................      $   261     $  10,362   $  40,101
                                                                                          =======     =========   =========

 Supplemental disclosures of noncash investing and financing activities:
  Property and equipment acquired under capital lease
   obligations......................................................................      $    62     $     305   $     265
                                                                                          =======     =========   =========
  Acquisition of intangible assets on short-term installment plan...................      $    --     $      --   $   4,250
                                                                                          =======     =========   =========
  Deferred stock compensation.......................................................      $ 2,223     $  10,382   $  50,602
                                                                                          =======     =========   =========
Warrants issued in connection with lease financing and marketing arrangement........      $    --     $      --   $  14,008
                                                                                          =======     =========   =========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       33
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                          December 31, 1999 and 2000


1. The Company

  Blue Martini Software, Inc. (the "Company") develops, markets and supports a
suite of applications that help companies to understand, target and interact
with their customers and partners. The suite, Blue Martini 4, consists of four
modules that can be used individually or integrated as a complete business suite
for managing catalogs, content, transactions, analysis and personalization.

  Blue Martini LLC, a Delaware limited liability company, was founded on June 5,
1998. On January 12, 1999, Blue Martini LLC merged into Blue Martini Software,
Inc., a Delaware corporation, with Blue Martini Software, Inc. being the
surviving entity. See Note 8.

2. Summary of Significant Accounting Policies

 Principles of Consolidation

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

 Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

 Revenue Recognition

  The Company has adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9, since its inception.

  To date, the Company has derived its revenues from licenses of its software
product and the sale of professional services, technical support and training
services. The Company sells its product primarily through a direct sales force.

  The Company's standard license agreement provides for an initial fee to use
the software product in perpetuity. License revenues are recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is considered fixed or determinable and collectibility is
probable, assuming no significant future obligations or customer acceptance
rights exists. If an acceptance period is contractually provided, license
revenues are recognized upon the earlier of customer acceptance or the
expiration of that period. In instances where delivery is electronic and all
other criteria for revenue recognition has been achieved, the product is
considered to have been delivered when the customer either takes possession of
the software via a download or the access code to download the software from the
Internet has been provided to the customer. The Company's software does not
require significant production, customization or modification.

                                       34
<PAGE>

                  BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


  Revenues recognized from multiple-element software arrangements are allocated
to each element of the arrangement based on the relative fair values of the
elements. The fair value of professional services, technical support and
training have been determined based on the Company's specific objective evidence
of fair value based on the price charged when the elements are sold separately.
License revenues are recorded under the residual method described in SOP 98-9
for arrangements in which licenses are sold with these elements. However, the
entire fee related to arrangements that require the Company to deliver specified
additional upgrades is deferred until delivery of the specified upgrade has
occurred, unless the Company has vendor-specific objective evidence of fair
value for the upgrade. Fees related to contracts that require the Company to
deliver unspecified additional products are deferred and recognized ratably over
the contract term.

  Fees for technical support are deferred and recognized ratably over the term
of the support period. Revenues from professional services and training are
recognized when the services are performed.

  The Company considers all arrangements with payment terms extending beyond 12
months not to be fixed or determinable. If the contract fee is not fixed or
determinable, revenues are recognized as payments become due from the customer.
If collectibility is not considered probable, revenues are recognized when the
fee is collected.

  Deferred revenues generally result from the following: deferred technical
support, cash received for professional services not yet rendered and license
revenues deferred relating to arrangements where the Company has received cash
and is required to deliver either unspecified additional products or specified
upgrades for which the Company does not have vendor-specific objective evidence
of fair value.

 Cash, Cash Equivalents and Short and Long-Term Investments

  The Company considers all highly liquid investments with remaining maturities
of three months or less at the date of purchase to be cash equivalents. Cash and
cash equivalents include money market funds, commercial paper and various
deposit accounts. Cash equivalents are recorded at cost, which approximates fair
value.

  The Company's investments are classified as "available-for-sale" and are
carried at fair value based on quoted market prices. These investments consist
of corporate obligations that included commercial paper, corporate bonds and
notes, U.S. government agency securities and asset-backed securities. Those
investments with original maturities greater than three months and less than
twelve months are considered short-term investments and those with original
maturities greater than twelve months are considered long-term investments.
Unrealized holding gains and losses, net of the related tax effect, are excluded
from earnings and are reported as a separate component of other comprehensive
income until realized. Realized gains and losses from the sale of available-for-
sale securities are determined on the specific identification basis.

 Concentration of Credit Risk

  The Company places its cash, cash equivalents and investments with financial
institutions with high credit ratings. The Company's accounts receivable are
derived from licenses and services provided to customers principally in North
America. The Company performs ongoing evaluations of its customers' financial
condition and generally requires no collateral from its customers on accounts
receivable. Revenues and accounts receivable from significant customers are
summarized in Note 10.

                                       35
<PAGE>

                  BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


 Property and Equipment

  Property and equipment are recorded at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the respective assets. Depreciation of computer equipment is provided
for on a straight-line method over estimated useful lives ranging from 18 to 36
months, while furniture and office equipment are depreciated using the straight-
line method over estimated useful lives of 36 to 60 months. Leasehold
improvements and assets recorded under capital leases are amortized over the
estimated useful lives of the assets or the lease term, whichever is shorter,
and range from 36 to 60 months.

 Impairment of Long-lived Assets

  The Company evaluates its long-lived assets to determine whether any
impairment of these assets has occurred whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. In making such determination, the estimated future undiscounted
cash flows associated with assets to be held and used would be compared to the
asset's carrying amount to determine if a write-down to fair value is required.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. No impairments of long-lived assets have been
experienced to date.

 Advertising

  The Company expenses advertising costs as incurred. Advertising costs expensed
from June 5, 1998 (Inception) through December 31, 1998 and for the years ended
December 31, 1999 and 2000 were $8,000, $722,000 and $7,590,000, respectively.
In 2000, advertising agency fees and production costs in the amount of $1.3
million were paid to a company whose chairman and chief creative officer is also
a member of the Company's board of directors. During 2000, the Company
reimbursed this firm for third-party direct advertising placement fees of
approximately $7.0 million. At December 31, 2000, the Company had prepaid third-
party direct advertising placement fees to this company totaling $814,000.

 Software Development Costs

  Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility has been
established at which time such costs are capitalized, subject to recoverability.
Technology feasibility is established upon the completion of an integrated
working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have not
been significant. Accordingly, the Company has charged all costs to research and
development expense in the period incurred.

  Included in intangible assets and other in the accompanying consolidated
balance sheet at December 31, 2000 are rights to certain software licenses and
patents purchased for $6 million in December 2000. These intangible assets are
being amortized to cost of revenues on a straight-line basis over the lesser of
estimated product life or three years.

                                       36
<PAGE>

                  BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)

 Income Taxes

  Effective January 1999, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities from a change in tax rates is recognized in income in the period the
change is enacted. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amounts to be recovered.

  Prior to January 1999, the Company was taxed under the partnership provisions
of the Internal Revenue Code. Under those provisions, the Company did not pay
federal or state corporate income taxes on its taxable income. Instead, the
Company's unit holders were individually responsible for federal and state
income taxes.

 Stock Compensation

  The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees, Statement of Financial
Accounting Standard ("SFAS") Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans and SFAS
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB No. 25, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.

  Under APB No. 25, compensation expense is based on the difference, if any, on
the date of the grant, between the fair value of the Company's stock and the
exercise price. SFAS No. 123 defines a fair-value based method of accounting for
an employee stock option or similar equity investment. The pro forma disclosures
of the difference between compensation expense included in net loss and the
related cost measured by the fair value method are presented in Note 8.

  The Company accounts for equity instruments issued to non-employees using the
fair value method in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

  Equity instruments issued to non-employees that are fully vested and non-
forfeitable are measured at fair value at the issuance date and expensed in the
period over which the benefit is expected to be received. Equity instruments
issued to non-employees which are either unvested or forfeitable, for which
counter-party performance is required for the equity instrument to be earned,
are measured initially at fair value and subsequently adjusted for changes in
fair value until the earlier of: 1) the date at which a commitment for
performance by the counter-party to earn the equity instrument is reached or 2)
the date at which the counter-party's performance is complete.

 Foreign Currency

  During 2000, the company established various foreign subsidiaries. The
financial statements of foreign subsidiaries are measured using the local
currency of the subsidiary as the functional currency. Accordingly, assets and
liabilities of the subsidiaries are translated at current rates of exchange at
the balance sheet date and all revenue and expense items are translated using
weighted-average exchange rates. The resultant gains or losses from translation
at December 31, 2000 were not significant.

  At December 31, 2000 the Company did not hold any foreign currency derivative
instruments.

                                       37
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)

 Accumulated Other Comprehensive Income

  Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are recorded as an element of
stockholders' equity and are excluded from net income.

 Net Loss Per Common Share

  Basic net loss per common share is computed using the weighted average number
of outstanding shares of common stock during the period, excluding shares of
restricted stock subject to repurchase. Dilutive net loss per common share is
computed using the weighted average number of common shares outstanding during
the period and, when dilutive, potential common shares from options and warrants
to purchase common stock, and common stock subject to repurchase, using the
treasury stock method, and from convertible preferred stock, using the "if-
converted" method. Potential shares consist of convertible preferred stock,
unvested restricted common stock, stock options and warrants.

  The following potential common shares have been excluded from the calculation
of diluted net loss per share for all periods presented because the effect would
have been anti-dilutive (in thousands):

<TABLE>
<CAPTION>
                                                                              June 5, 1998        Year Ended
                                                                             (Inception) to       December 31,
                                                                               December 31,    ----------------
                                                                                  1998          1999      2000
                                                                             --------------    ------    ------
<S>                                                                          <C>               <C>        <C>
Shares issuable under stock options.........................................         --         4,248     8,674
Shares of restricted stock subject to repurchase............................      8,252         6,981     8,056
Shares issuable pursuant to warrants........................................         --            --     2,445
Shares of convertible preferred stock on an
 "as-if-converted" basis....................................................      4,464        23,297        --
</TABLE>

  The weighted average exercise price of stock options was $0.21 at December 31,
1999 and $8.86 at December 31, 2000. The weighted average purchase price of
restricted stock was $0.01 for the period ended December 31, 1998; $0.04 for the
year ended December 31, 1999; and $0.50 for the year ended December 31, 2000.
The average exercise price of outstanding warrants was $4.94 at December 31,
2000.

 Common Stock Splits

  In February 2000 and April 2000, respectively, the Company's Board of
Directors and stockholders approved a two-for-one stock split, effected in the
form of a stock dividend. All common share and per common share information
presented in these consolidated financial statements have been adjusted to
reflect these common stock splits.

 Recent Accounting Pronouncements

  In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Accounting for changes in the values of those derivatives depends on the
intended use of the derivatives and whether they qualify for hedge accounting.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for fiscal years
beginning after June 15, 2000. The Company has not entered into derivatives
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to affect
its consolidated financial statements.

                                       38
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


  In December 1999 the Securities and Exchange Commission ("SEC") published
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and provides interpretations regarding the application of generally
accepted accounting principles to revenue recognition where there is an absence
of authoritative literature addressing a specific arrangement or a specific
industry. SAB 101 was effective for the Company in the fourth quarter of fiscal
2000. The Company's adoption of SAB 101 did not have a material effect on its
consolidated financial statements.

  In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25. This Interpretation clarifies the application of Opinion 25 for certain
issues including: (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. In
general, this Interpretation was effective July 1, 2000. The Company's adoption
of Interpretation No. 44 did not have a material effect on the Company's
financial position or results of operations.


3. Investments

  The following is a summary of available-for-sale investments (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31, 2000
                                                        ---------------------------------------------
                                                                     Gross        Gross     Estimated
                                                                  Unrealized   Unrealized     Fair
                                                          Cost       Gains       Losses       Value
                                                        --------  -----------  -----------  ---------
<S>                                                     <C>       <C>          <C>          <C>
Short-term Investments:
 Corporate obligations................................  $ 49,163       $  21     $     (8)   $ 49,176
 Government agency....................................     1,508           9           --       1,517
 Asset-backed securities..............................    11,468          22           --      11,490
                                                        --------       -----     --------    --------
                                                          62,139          52           (8)     62,183
                                                        --------       -----     --------    --------

Long-term Investments:
 Corporate obligations................................    44,206         180           --      44,386
 Government agency....................................     6,958          58           --       7,016
                                                        --------       -----     --------    --------
                                                          51,164         238           --      51,402
                                                        --------       -----     --------    --------
                                                        $113,303       $ 290     $     (8)   $113,585
                                                        ========       =====     ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                      December 31, 1999
                                                        ---------------------------------------------
                                                                    Gross        Gross      Estimated
                                                                  Unrealized   Unrealized      Fair
                                                          Cost      Gains        Losses       Value
                                                        --------  ----------   ----------   ---------
<S>                                                     <C>       <C>          <C>          <C>
Short-term Investments:
 Corporate obligations................................   $ 2,562  $       --   $       --   $   2,562
                                                         =======  ==========   ==========   =========
</TABLE>

  The contractual maturities of the Company's short-term investments at December
31, 2000, were one year or less while the Company's long-term marketable
securities had contractual maturities between one and two years. Expected
maturities may differ from contractual maturities because the issuers of the
securities have the right to prepay or call obligations without prepayment
penalties.

                                       39
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


4. Accounts Receivable

     Accounts receivable consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                        -----------------
                                                                          1999      2000
                                                                        -------   -------
<S>                                                                     <C>      <C>
Accounts receivable...................................................   $3,013   $13,437
Unbilled receivables..................................................      861        --
                                                                         ------   -------
                                                                          3,874    13,437
Allowance for doubtful accounts.......................................      225       853
                                                                         ------   -------
                                                                         $3,649   $12,584
                                                                         ======   =======
</TABLE>

5. Property and Equipment

     Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                        -----------------
                                                                          1999      2000
                                                                        -------   -------
<S>                                                                     <C>      <C>
Computer equipment....................................................   $2,996   $11,637
Furniture and office equipment........................................      344     1,358
Leasehold improvements................................................      217       440
                                                                         ------   -------
                                                                          3,557    13,435
Less accumulated depreciation and amortization........................      796     4,722
                                                                         ------   -------
                                                                         $2,761   $ 8,713
                                                                         ======   =======
</TABLE>

  Equipment held under capital leases totaled $367,000 and $633,000 as of
December 31, 1999 and 2000, respectively. Accumulated amortization for equipment
under capital leases totaled $107,000 and $301,000 as of December 31, 1999 and
2000, respectively.


6. Borrowings

  At December 31, 1999, the Company had $700,000 outstanding under a loan
agreement with a bank. The loan was repaid and the underlying agreement was
terminated in 2000. The maximum credit available under this loan agreement was
$750,000 and was collateralized by certain assets of the Company, including
property and equipment and accounts receivables. The loan bore interest at the
bank's prime rate (8.50% at December 31, 1999).

  In January 2000, the Company signed an agreement with a leasing company for an
equipment lease line of credit of $1,500,000 that expired unused in December
2000. In connection with this agreement, the Company issued a warrant to the
leasing company for 45,000 shares of common stock at an exercise price of $1.50
per share. See Note 8.

                                       40
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


7. Commitments and Contingencies

  The Company leases certain facilities, including its corporate headquarters,
under operating leases. Rent expense for the period from June 5, 1998
(Inception) through December 31, 1998 and for the years ended December 31, 1999
and 2000 was $72,000, $434,000, and $3,973,000, respectively.

  Future minimum lease payments as of December 31, 2000 were as follows (in
thousands):

<TABLE>
<CAPTION>
   Year Ending                                               Capital Operating
   December 31,                                              Leases    Leases
   ------------                                             -------- ---------
   <S>                                                      <C>      <C>
   2001....................................................   $244    $ 6,397
   2002....................................................    127      4,836
   2003....................................................     --      3,373
   2004....................................................     --      3,245
   2005....................................................     --      2,825
   Thereafter..............................................     --        935
                                                              ----    -------
   Total...................................................    371    $21,611
                                                                      =======
   Less amount representing interest.......................     45
                                                              ----
   Present value of capital lease obligations..............    326
   Less current portion....................................    209
                                                              ----
   Long-term portion.......................................   $117
                                                              ====
</TABLE>

  The Company obtained letters of credit from financial institutions totaling
$3,543,000 as of December 31, 2000, in lieu of security deposits for leased
office space. No amounts have been drawn against the letter of credits.

  The Company licenses technologies from third party software providers that are
incorporated into our product. Under the terms of these license agreements,
which expire at various dates through June 2007, the Company pays royalties at
various rates and amounts, generally based on unit sales or revenues. Royalty
expense was $761,000 and $3,840,000 for the years ended December 31, 1999 and
2000, respectively. Such costs are included in the cost of license revenues and
also in cost of service revenues to the extent royalties are paid for
maintenance contracts sold.

8. Stockholders' Equity

  Blue Martini LLC, a Delaware limited liability company, was formed on June 5,
1998 with two classes of ownership: class A units and class B units. On January
12, 1999, Blue Martini LLC changed its legal form from a limited liability
company to a corporation. This change was effected through a merger between Blue
Martini Software, Inc. and Blue Martini LLC, with Blue Martini Software, Inc.
being the surviving entity. In connection with this merger, the class A unit
holders exchanged their units for an equal number of shares of series A
convertible preferred stock and the class B unit holders exchanged their units
for an equal number of shares of common stock of Blue Martini Software, Inc. As
the various rights and preferences of the two classes of ownership were
identical before and after the merger and the holders were identical and had the
same ownership percentages before and after the merger, this transaction has
accordingly been accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests and has been reflected in
the accompanying financial statements as if it had occurred at the issuance of
the original ownership units.

                                       41
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


 Initial Public Offering

  On July 28, 2000, the Company closed its initial public offering of 8,625,000
shares of its common stock, which included 1,125,000 shares issued in connection
with the exercise of the underwriters' overallotment, at $20 per share.  Net
proceeds of the offering were approximately $158.4 million, after deducting
underwriter discounts, commissions and other offering expenses.  Simultaneously
with the closing of the initial public offering, all 5,824,317 shares of the
Company's convertible preferred stock were automatically converted into
23,297,268 shares of common stock.

 Common Stock

  Each share of common stock has the right to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are legally
available and when declared by the board of directors subject to the rights of
holders of all classes of stock having priority rights as to dividends. No cash
dividends have been declared or paid through December 31, 2000.

 Convertible Preferred Stock

  In conjunction with the Company's initial public offering, the number of
authorized shares of convertible preferred stock, par $0.001, per share, was
decreased from 7,200,000 shares to 5,000,000 shares. As of December 31, 2000,
there were no shares of convertible preferred stock issued or outstanding.

 Warrants

  In January 2000, the Company granted a fully exercisable warrant to purchase
45,000 shares of common stock at an exercise price of $1.50 per share in
connection with an equipment lease agreement (see Note 6). Such warrants were
outstanding as of December 31, 2000 and expire 10 years after issuance. The fair
value of the warrants was $176,000, calculated based upon the Black-Scholes
option pricing model using $25.00 as the fair value of the underlying common
stock and the following weighted average assumptions: no dividends; contractual
life of 10 years; risk-free interest rate of 6.6%; and expected volatility of
75%. This amount was amortized over the one-year lease term.

  In April 2000, the Company entered into a non-exclusive marketing and business
development agreement with a systems integrator to promote and market Blue
Martini's products in Europe, the Middle East and Africa. As part of this
marketing agreement, the Company issued a warrant to purchase 2,400,000 shares
of common stock at an exercise price of $5.00 per share. Such warrant was
outstanding at December 31, 2000. The warrant is fully vested and non-
forfeitable and is exercisable at the end of eight years and can be exercised
sooner upon the achievement of performance milestones during the first four
years of the marketing agreement. The fair value of this warrant, based on an
independent valuation, was $13.8 million. The warrant valuation was determined
using a Black-Scholes model that assumed a risk-free interest rate of 6.2%,
expected volatility of 80%, no dividends and a contractual life of eight years.
The value of this warrant is being amortized over the four-year term of the
marketing agreement and is included as a non-cash component of marketing and
sales expense in our consolidated statement of operations, totaling $2,304,000
in 2000.

                                       42
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


 Stock Plans

  2000 Equity Incentive Plan

  In April 2000, the Company's board of directors approved the Equity Incentive
Plan, an amendment and restatement of the 1998 Equity Incentive Plan ("Incentive
Plan"). The Company is authorized to issue up to 30 million shares in connection
with the Incentive Plan to employees and consultants. For a period of ten years
commencing on January 1, 2001, the share reserve will increase automatically
each January 1/st/ by the greater of 5% of the Company's "diluted shares
outstanding" (as defined by the plan), or the number of shares granted under the
Incentive Plan during the prior twelve-month period. All options available for
grant under the 1998 Plan were transferred to the 2000 Plan on its effective
date and have substantially the same terms. The Incentive Plan provides for the
issuance of stock purchase rights, incentive stock options or nonstatutory stock
options. At December 31, 2000, a total of 6.5 million shares were available for
future issuance under the Incentive Plan.

  The stock purchase rights are subject to a restricted stock purchase agreement
whereby the Company has the right to repurchase the stock upon the voluntary or
involuntary termination of the purchaser's employment from the Company at the
original issuance price. The Company's repurchase right lapses at a rate
determined by the board of directors, but at a minimum rate of 25% per year. As
of December 31, 2000, approximately 8,056,000 shares of common stock had been
issued to employees upon the exercise of unvested options, which are subject to
repurchase, at a weighted average repurchase price of $0.50 per share.

  Under the Incentive Plan, the exercise price for incentive stock options is at
least 100% of the stock's fair market value on the date of grant for employees
owning 10% or less of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of all
classes of stock and no less than 85% for employees owning 10% or less of the
voting power of all classes of stock.

  The Incentive Plan is administered by the board of directors, which has the
authority to designate participants, determine the number and type of options to
be granted, the time at which options are exercisable, the method of payment and
any other terms or conditions of the options. Options generally have a term of
10 years and become exercisable immediately, and vest at 25% upon completion of
one year of service from the vesting commencement date and ratably over the next
36 months.

 2000 Non-employee Directors' Stock Option Plan

  In April 2000, the Company's board of directors approved the 2000 Non-employee
Directors' Stock Option Plan ("Directors' Plan") under which 300,000 common
shares were reserved for issuance. At December 31, 2000, a total of 175,000
shares were available for future issuance under the Directors' Plan. For a
period of ten years commencing on January 1, 2001, the share reserve will
increase automatically each January 1/st/ by the greater of 0.25% of the
Company's "diluted shares outstanding" (as defined by the plan) or the number of
shares granted under the Directors' Plan during the prior twelve-month period.

                                       43
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


  Activity under the Incentive and Directors' Plans was as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                June 5, 1998
                                                               (Inception) to                Year Ended December 31,
                                                              December 31, 1998            1999                 2000
                                                           ---------------------- --------------------- --------------------
                                                                        Weighted              Weighted             Weighted
                                                                         Average               Average              Average
                                                            Number of   Exercise  Number of   Exercise  Number of  Exercise
                                                             Shares       Price    Shares       Price    Shares      Price
                                                            ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                         <C>        <C>        <C>        <C>        <C>        <C>
Outstanding, beginning of period........................         --       $  --        --      $   --     4,248     $ 0.21
Granted.................................................      8,253        0.01     6,316        0.19    10,503       7.91
Exercised...............................................     (8,253)       0.01    (1,676)       0.13    (5,714)      0.81
Canceled................................................         --          --      (392)       0.16      (363)      5.63
                                                             ------                ------               -------
Outstanding, end of period..............................         --          --     4,248        0.21     8,674       8.86
                                                             ======                ======               =======
Exercisable, end of period..............................         --          --        10        0.13     7,093       5.71
                                                             ======                ======               =======

Weighted average fair value of options granted with
 exercise prices equal to fair value at date of grant...         --          --        --          --     2,006     $22.37
Weighted average fair value of options granted with
 exercise price less than fair value at date of grant...      8,253        0.27     6,316        1.68     8,497     $ 4.49
</TABLE>

  The following table summarizes information about stock options as of December
31, 2000 (option amounts in thousands):

<TABLE>
<CAPTION>

                              Options Outstanding                   Options Exercisable
               ---------------------------------------------- -----------------------------
                                        Weighted
                                        Average     Weighted                       Weighted
                             Number    Remaining    Average         Number         Average
               Exercise        of     Contractual   Exercise          of           Exercise
                Prices       Options  Life (Years)   Price          Options         Price
            -------------    -------  ------------  --------  -------------------  --------
            <S>              <C>      <C>           <C>       <C>                  <C>
            $ 0.13-$ 0.25       426         8.72     $ 0.20                  426    $ 0.20
                   $ 1.50     2,979         9.16       1.50                2,979      1.50
                     2.50       187         9.22       2.50                  187      2.50
            $ 6.00-  9.00     2,315         9.39       7.51                2,135      7.54
            $12.00-$15.25     1,420         9.67      12.00                  990     12.00
            $20.00-$29.00     1,001         9.76      18.20                  376     20.00
            $30.13-$42.75       286         9.80      33.93                   --        --
            $45.50-$47.25        60         9.71      46.39                   --        --
                              -----                                        -----
                              8,674                  $ 8.86                7,093    $ 5.71
                              =====                                        =====
</TABLE>

                                       44
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)


2000 Employee Stock Purchase Plan

  In April 2000, the Company's board of directors approved the 2000 Employee
Stock Purchase Plan under which 4,000,000 shares have been reserved for
issuance. For a period of ten years commencing on January 1, 2001, the share
reserve will increase automatically each January 1/st/ by the greater of 2.5% of
the Company's "diluted shares outstanding" (as defined by the plan) or the
number of shares granted under the Employee Stock Purchase Plan during the prior
twelve-month period. The 2000 Employee Stock Purchase Plan contains successive
six-month offering periods and the share price of stock purchased under the plan
is 85% of the lower of the fair value of the common stock either at the
beginning or the end of the period. As of December 31, 2000, no shares had been
issued under this plan and $2,619,000 of employee contributions were included in
other accrued liabilities at such date.

 Stock Compensation

  During the period from inception through December 31, 1998 and the years ended
December 31, 1999 and 2000, the Company issued options to certain employees
under the Incentive Plan with exercise prices below the amount subsequently
determined to be the fair value of the common stock at the date of grant for
financial reporting purposes. In accordance with the requirements of APB No. 25,
the Company has recorded deferred stock compensation for the differences between
the exercise price of the options and the deemed fair market value of the
Company's stock at the date of grant. The Company recorded deferred stock
compensation of $2,223,000 for the period from inception through December 31,
1998 and $10,382,000 and $50,602,000 and for the years ended December 31, 1999
and 2000, respectively. The deferred stock compensation is being amortized to
expense over the period during which the options vest, generally four years
using a method consistent with Interpretation No. 28 ("FIN 28"). Under the FIN
28 method, each vested tranche of options is accounted for as a separate option
grant awarded for past service. Accordingly, the compensation expense is
recognized over the period during which the services have been provided.

  For the years ended December 31, 1999 and 2000, the Company granted 90,000 and
172,000 immediately vested and exercisable common stock options, respectively,
to non-employees and recorded related stock compensation of $47,000 and
$1,621,000, respectively. The recorded amounts reflects the fair value of these
stock options at their respective grant dates, calculated based upon the Black-
Scholes option pricing model using the fair values of the underlying common
stock on the grant dates and the following weighted-average assumptions: no
dividends; contractual life of 10 years; risk free interest rate of 6.0%; and,
expected volatility of 75%.

  The amortization of deferred stock compensation, combined with the expense
associated with stock options granted to non-employees, relates to the following
items in the accompanying consolidated statements of operations (in thousands):

<TABLE>
<CAPTION>


                                        June 5, 1998     Year Ended
                                       (Inception) to    December 31,
                                         December 31,  ---------------
                                             1998       1999     2000
                                            -----      ------  -------
     <S>                               <C>             <C>     <C>
     Cost of revenues...............        $  --      $  436  $ 7,192
     Sales and marketing............          332       1,398    7,001
     Research and development.......           91       1,088    6,606
     General and administrative.....          105         276    9,772
                                            -----      ------  -------
                                            $ 528      $3,198  $30,571
                                            =====      ======  =======
</TABLE>

                                       45
<PAGE>

                 BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)

  The Company has adopted the disclosure only provisions of SFAS No. 123.  Had
compensation cost been determined based on the fair value at the grant date for
the awards for the period from inception through December 31, 1998 and the years
ended December 31, 1999 and 2000, the Company's net loss would have been as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                June 5, 1998           Year Ended
                                                               (Inception) to          December 31,
                                                                December 31,    -----------------------
                                                                   1998           1999           2000
                                                                 -------        --------       --------
<S>                                                              <C>            <C>        <C>
Net loss:
 As reported................................................     $(1,582)       $(10,874)      $(62,087)
 Pro forma..................................................     $(1,584)       $(10,918)      $(78,020)
Basic and diluted net loss per common share:
 As reported................................................     $ (0.07)       $  (0.47)      $  (1.52)
 Pro forma..................................................     $ (0.07)       $  (0.48)      $  (1.91)
</TABLE>

  The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option-pricing model, using the following assumptions: no
dividends, expected five year lives, and zero expected volatility for the period
from inception through December 31 1998, the year ended December 31, 1999, and
for the period up until the filing of our registration statement on Form S-1
with the Securities and Exchange Commission on May 2, 2000, and 100% for the
remainder of the year ended December 31, 2000; and risk-free interest rate of
4.9%, 5.7% and 6.6% for the period from inception through December 31, 1998 and
for the years ended December 31, 1999 and 2000, respectively.

9. Income Taxes

  The differences between the income tax expense (benefit) computed at the
federal statutory rate and the Company's tax provision for all periods presented
after January 12, 1999 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          Period from        Year Ended
                                                                       January 12, 1999       December
                                                                               to                31,
                                                                      December 31, 1999         2000
                                                                      -----------------      ----------
<S>                                                                   <C>                    <C>
Federal tax at statutory rate.......................................      $  (3,697)          $(21,730)
Net operating losses not benefited..................................          2,485             10,697
Deferred compensation...............................................          1,071             10,642
Other...............................................................            141                391
                                                                          ---------           --------
                                                                          $      --           $     --
                                                                          =========           ========
</TABLE>

 The individual components of the Company's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                      ----------------------
                                                                        1999          2000
                                                                      --------     ---------
<S>                                                                   <C>          <C>
Deferred tax assets:
 Accruals and reserves.............................................   $ 1,353      $  4,312
 Net operating loss carryforwards..................................     1,693         8,734
 Credit carryforwards..............................................       579         1,970
 Other.............................................................        89           485
                                                                      -------      --------
 Total deferred tax assets.........................................     3,714      $ 15,501

 Less valuation allowance..........................................    (3,714)      (15,501)
                                                                      -------      --------
  Net deferred tax assets..........................................   $    --      $     --
                                                                      =======      ========
</TABLE>

                                       46
<PAGE>

                  BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)

     Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The net change in the
total valuation allowance for the years ended December 31, 1999 and 2000 were
increases of $3,662,000 and $11,787,000, respectively.

     The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $20,998,000 and $15,696,000, respectively,
available to reduce future income subject to income taxes.  The Company can
carryforward the net operating loss arising from the Subchapter C corporation
period, which began January 12, 1999.  For the period the Company operated as a
limited liability company, the Company has elected to be treated as a
partnership for tax purposes.  Therefore net operating losses incurred as a
flow-through entity prior to January 12, 1999 are not available to reduce future
income subject to income taxes.  The Company recorded no net deferred tax assets
or liabilities at the date of the change in tax status as the gross deferred tax
assets existing at that date were fully offset by a valuation allowance.

     The federal net operating loss carryforwards expire in 2020. The California
net operating loss carryforwards expire in 2010.

     As of December 31, 2000 the Company had research and other credit
carryforwards for federal and California income tax purposes of approximately
$1,158,000 and $812,000, respectively available to reduce future income taxes.
The federal credits expire beginning in 2019; the California credit may be
carried forward indefinitely.

     The Tax Reform Act of 1986 imposes restrictions on the utilization of net
operating loss and tax credit carryforwards in the event of an "ownership
change" as defined by the Internal Revenue Code.  The Company's ability to
utilize its net operating loss and tax credit carryforwards is subject to
restriction pursuant to these provisions.

10. Significant Customer Information and Segment Reporting

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments in annual and interim financial
statements.  It also establishes standards for related disclosures about
products and services, geographic areas and major customers.  The method for
determining what information to report is based on the way management organizes
the operating segments within the Company for making operating decisions and
assessing financial performance.

     The Company's chief operating decision-maker is considered to be the chief
executive officer ("CEO").  The CEO reviews financial information presented for
purposes of making operating decisions and assessing financial performance.  The
financial information is identical to the information presented in the
accompanying consolidated statements of operations and the Company had no
significant foreign operations through December 31, 1999.  For the year ended
December 31, 2000, revenues derived from customers outside the United States,
principally in Europe, Asia and Latin America, represented 19% of consolidated
revenues.  On this basis, the Company is organized and operates in a single
segment: the design, development and marketing of software solutions.

                                       47
<PAGE>

                  BLUE MARTINI SOFTWARE, INC. AND SUBSIDIARIES

            Notes to Consolidated Financial Statements--(continued)

     Disaggregated information by major product is as follows (in thousands):

                                                          Year Ended
                                                         December 31,
                                                       -----------------
                                                          1999      2000
                                                       -------   -------
Revenues:
 License............................................   $ 7,205   $42,650
 Service:
  Consulting and training...........................     3,664    26,519
  Maintenance.......................................       363     5,082
                                                       -------   -------
                                                       $11,232   $74,251
                                                       =======   =======

     Significant customer information is as follows: For the year ended December
31, 2000, no individual customer accounted for more than 10% of consolidated
revenues. At December 31, 2000, the receivable balance from one customer
represented 11% of net accounts receivable outstanding. For the year ended
December 31, 1999, three customers individually accounted for 19%, 19% and 10%
of the Company's consolidated revenues. At December 31, 1999, receivable
balances from three customers accounted for 30%, 12% and 10% of net accounts
receivable outstanding.

     One of the Company's directors sits on the board of directors of one of the
customers which accounted for 19% of revenues in the year ended December 31,
1999.

                                       48
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 21, 2001.

                                        Blue Martini Software, Inc.



                                        By:     /s/ MONTE ZWEBEN
                                           -----------------------------
                                                Monte Zweben
                                                Chairman, President and
                                                Chief Executive Officer



                               POWER OF ATTORNEY

     Know All Persons By These Presents, that each person whose signature
appears below constitutes and appoints Monte Zweben and John E. Calonico, Jr.,
and each or any one of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming our
signatures as they may be signed by ours said attorney-in-fact and any and all
amendments to this Annual Report on Form 10-K.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.


<TABLE>
<CAPTION>
               Signature                                      Title                                   Date
----------------------------------------        -----------------------------------              ---------------
<S>                                             <C>                                               <C>
     /s/ MONTE ZWEBEN                           Chairman, President and Chief                     March 21, 2001
----------------------------------------        Executive Officer
     Monte Zweben                               (Principal Executive Officer)

     /s/ JOHN E. CALONICO, JR.                  Vice President and Chief Financial                March 21, 2001
----------------------------------------        Officer (Principal Financial and
     John E. Calonico, Jr.                      Accounting  Officer)


     /s/ JAMES C. GAITHER                       Director                                          March 21, 2001
----------------------------------------
     James C. Gaither

     /s/ A. MICHAEL SPENCE                      Director                                          March 21, 2001
----------------------------------------
     A. Michael Spence

     /s/ ANDREW W. VERHALEN                     Director                                          March 21, 2001
----------------------------------------
     Andrew W. Verhalen
</TABLE>

                                       49
<PAGE>

<TABLE>
<S>                                             <C>                                               <C>
     /s/ EDWARD H. VICK                         Director                                          March 21, 2001
----------------------------------------
     Edward H. Vick

     /s/ WILLIAM F. ZUENDT                      Director                                          March 21, 2001
----------------------------------------
     William F. Zuendt
</TABLE>

                                       50
<PAGE>

                               INDEX TO EXHIBITS
                               -----------------


Exhibit        Description
Number

  3.1          Amended and Restated Certificate of Incorporation of the
               Registrant./1/

  3.2          Amended and Restated Bylaws of the Registrant/2/

  4.1          Specimen Stock Certificate./3/

 10.1          2000 Equity Incentive Plan, as amended./4/

 10.2          2000 Employee Stock Purchase Plan, as amended./4/

 10.3          2000 Non-Employee Directors' Stock Option Plan./3/

 10.4          Commercial Office Lease Agreement by and between Peninsula Office
               Park Associates, L.P. and Registrant, as amended./3/

 10.5          Agreement and Plan of Merger by and between the Registrant and
               Blue Martini LLC dated January 12, 1999./3/

 10.6          Form of Class A Units Agreements by and between the Registrant
               and certain investors of the Registrant./3/

 10.7          Form of Restricted Class B Units Agreement by and between the
               Registrant and certain investors of the Registrant./3/

 10.8          Series B Preferred Stock Purchase Agreement by and between the
               Registrant and certain investors of the Registrant dated January
               13, 1999./3/

 10.9          Series C Preferred Stock Purchase Agreement by and between the
               Registrant and certain investors of the Registrant dated July 20,
               1999./3/

 10.10         Investor Rights Agreement by and between the Registrant and
               certain investors of the Registrant dated July 20, 1999./3/

 10.11         Form of Indemnity Agreement by and between the Registrant and
               each of its directors and executive officers./3/

 10.12         License and Marketing Agreement by and between the Registrant and
               Neuron Data, Inc., now Blaze Software, Inc., dated March 31,
               1999, as amended./3/

 10.13         ISV Software and License Agreement between the Registrant and BEA
               Systems, Inc., dated January 29, 1999, as amended./3/

 10.14         Agreement by and between the Registrant and John E. Calonico,
               Jr./3/

 10.15         Blue Martini Software Training Facility Agreement between the
               Registrant and Diversified Computer Consultants of California,
               Inc., dated March 1, 2000./3/

 10.16         Master Lease Agreement between the Registrant and Comdisco, Inc.,
               dated December 6, 1999./3/

                                       51
<PAGE>

 10.17         First Amendment to Lease between Peninsula Office Park
               Associates, L.P., and Registrant, dated May 12, 1999./5/

 10.18         Second Amendment to Lease between Peninsula Office Park
               Associates, L.P., and Registrant, dated August 5, 1999./5/

 10.19         Third Amendment to Lease between Peninsula Office Park
               Associates, L.P., and Registrant, dated January 11, 2000./5/

 10.20         Sublease between Virage, Inc. and Registrant, dated August 15,
               2000./5/

 10.21         Blue Martini Software Training Facility Agreement between
               Diversified Computer Consultants, LLC and Registrant, dated
               September 13, 2000./5/

 10.22         Agreement by and between the Registrant and Laurent Pacalin./4/

 10.23         Agreement by and between the Registrant and Jeanne Urich./4/

 10.24         Fourth Amendment to Lease between Peninsula Office Park
               Associates, L.P., and Registrant, dated December 20, 2000./4/

 10.25         Fifth Amendment to Lease between Peninsula Office Park
               Associates, L.P., and Registrant, dated February 16, 2001./4/

 10.26         First Amendment to the Sublease between Virage, Inc. and
               Registrant dated December 1, 2000./4/

 10.27         Amendment to the License and Marketing Agreement by and between
               the Registrant and Neuron Data, Inc., now Blaze Software, Inc.,
               dated December 22, 2000. +/4/

 10.28         Lease Agreement between 411 Borel LLC and Registrant, dated
               February 5, 2001./4/

 23.1          Consent of KPMG LLP, Independent Auditors./4/

 24.1          Power of Attorney is contained on the signature pages.

________________________________________________________________________________

+    Confidential treatment requested with respect to certain portions of this
     exhibit. Omitted portions have been filed separately with the Securities
     and Exchange Commission.

/1/  Incorporated by reference to the Registrant's Form 10-Q for the six-month
     period ended June 30, 2000.

/2/  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (No. 333-55374).

/3/  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (No. 333-36062), as amended.

/4/  Filed herewith.

/5/  Incorporated by reference to the Registrant's Form 10-Q for the nine-month
     period ended September 30, 2000.

                                       52