As filed with the Securities And Exchange Commission on June 28, 2000

Registration No. 333-36062
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

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

Delaware 7372 94-3319751
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)

2600 Campus Drive, San Mateo, CA 94403, (650) 356-4000
(Address, including zip code, and telephone number, including area code, of the
Registrant's principal executive offices)

MONTE ZWEBEN
Chairman, President and Chief Executive Officer
Blue Martini Software, Inc.
2600 Campus Drive, San Mateo, CA 94403, (650) 356-4000
(Name, address, including zip code and telephone number, including area code,
of agent for service)

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COPIES TO:

James C. Gaither, Esq. William H. Hinman, Jr., Esq.
Eric C. Jensen, Esq. Shearman & Sterling
Cooley Godward LLP 1550 El Camino Real
Five Palo Alto Square Menlo Park, CA 94025
3000 El Camino Real (650) 330-2200
Palo Alto, CA 94306
(650) 843-5000

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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CALCULATION OF REGISTRATION FEE

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Proposed
Title Proposed Maximum
of Each Class of Maximum Offering Proposed Maximum
Securities Amount to be Price Aggregate Amount of
to be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee(3)
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Common
Stock,
$0.001 par
value.... 8,625,000 $13.00 $112,125,000 $29,601
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(1) Includes 1,125,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.

(2) Estimated solely for the purpose of calculating the amount of the
Registration Fee in accordance with Rule 457(o) of the Securities Act of
1933, as amended.

(3) $19,800 of the Registration Fee was previously paid on May 2, 2000.

Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. These +
+securities may not be sold until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell nor does it seek an offer to buy these securities in any +
+jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion. Dated June 28, 2000.

7,500,000 Shares

[LOGO OF BLUE MARTINI SOFTWARE APPEARS HERE]

Common Stock

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This is an initial public offering of shares of common stock of Blue Martini
Software, Inc. All of the 7,500,000 shares of common stock are being sold by
Blue Martini.

Prior to this offering, there has been no public market for the common stock.
Blue Martini's common stock has been approved for listing on The Nasdaq
National Market under the symbol "BLUE". It is currently estimated that the
initial public offering price per share will be between $11.00 and $13.00.

See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.

-----------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

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Per
Share Total
----- -----

Initial public offering price................................. $ $
Underwriting discount......................................... $ $
Proceeds, before expenses, to Blue Martini.................... $ $

To the extent that the underwriters sell more than 7,500,000 shares of common
stock, the underwriters have the option to purchase up to an additional
1,125,000 shares from Blue Martini at the initial public offering price less
the underwriting discount.

-----------

The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.

Goldman, Sachs & Co.

Dain Rauscher Wessels

Thomas Weisel Partners LLC

U.S. Bancorp Piper Jaffray

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Prospectus dated , 2000.

The inside front cover features images of the Blue Martini solution. These
include images of: Blue Martini's demonstration website, a mobile telephone, a
handheld electronic device and a call center representative. These images are
arranged in a circle surrounding the Blue Martini Software logo. At the bottom
of the page appears the language "Blue Martini provides software and services
that enable companies to build brand equity across Internet-related and
traditional touch points. These touch points include websites, mobile wireless
devices and call centers operated by our customers."

Blue Martini provides software and services that enable companies to build
brand equity across Internet-related and traditional touch points. These touch
points include websites, mobile wireless devices and call centers operated by
our customers.

SUMMARY

You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus. Unless otherwise indicated, all
information contained in this prospectus assumes:

. no exercise of the underwriters' over-allotment option;

. the conversion of each outstanding share of preferred stock into four
shares of common stock; and

. no exercise of outstanding stock options or warrants.

Our Business

We provide software and services that enable companies to build brand equity
through direct customer interaction across Internet-related customer "touch
points," such as websites, mobile wireless devices and on-line trading
exchanges and traditional customer touch points, such as stores and call
centers. We believe that our software enables companies to increase revenues by
coordinating customer interactions across these touch points. Our
comprehensive, packaged software application is designed to simplify deployment
and accelerate our customers' time to benefit while reducing their total cost
of ownership. We have targeted a number of large, vertical markets where we
believe brand is paramount, such as retail, manufacturing, financial services,
telecommunications, consumer goods and media. Our customers range from large,
traditional companies that have adopted Internet-enabled or "e-business"
strategies to rapidly growing Internet companies. As of March 31, 2000, we had
licensed our software to 35 customers.

For the quarter ended March 31, 2000, our revenues totaled $10.7 million, of
which 57% were derived from the licensing of our software product and 43% were
derived from the sale of related services such as training, technical support
and consulting services. In 1999, our revenues totaled $11.2 million, of which
64% were derived from software licenses and 36% were derived from the sale of
related services. A relatively small number of customers have accounted for a
significant portion of our total revenues. In the year ended December 31, 1999,
three customers accounted for 48% of our total revenues, while in the quarter
ended March 31, 2000, two customers accounted for 22% of our total revenues. We
have experienced net losses in each quarterly period since our inception,
including a net loss of $11.6 million for the quarter ended March 31, 2000. As
of March 31, 2000, we had an accumulated deficit of $24.0 million.

Our Market Opportunity

The use and acceptance of the Internet as a medium for interacting with
customers are evolving at rates significantly faster than those experienced by
traditional media. According to estimates by International Data Corporation,
business-to-business and business-to-consumer transactions are expected to grow
from an aggregate of $111 billion at the end of 1999 to $1.6 trillion by the
end of 2003. The increasing importance and prevalence of the Internet has
further heightened the importance of brand equity and awareness. A powerful
brand can attract and retain customers, generating higher revenues and
increasing customer value.

We believe that companies must be more responsive to their customers' needs
than ever before and, in order to compete more effectively, must coordinate
their on-line branding, marketing and merchandising efforts with their
traditional sales channels. To address this need, we have developed integrated
software applications that are designed to offer the following capabilities:

. Product Management. Our software enables companies to richly, accurately
and persuasively describe their products and product hierarchies,
establish pricing and create promotions.

. Content Management. Our software enables companies to author, manage,
approve and track the development and use of content, such as text,
graphics, audio and video.

. Transaction Execution. Our software enables companies to conduct
business on their websites, over the phone, via wireless devices and
through other sales channels, including taking orders and managing
returns.

. Analysis. Our software's analytic capabilities increase companies'
ability to more accurately identify market segments and to more
effectively target customers by analyzing purchase histories and
modeling customer behavior.

. Personalization. Our software's algorithms enable companies to
effectively target customers across multiple touch points with
meaningful and relevant products, promotions and content.

Our Strategy

Our objective is to be the leading provider of software applications and
services that enable companies worldwide to build brand equity through direct
customer interaction across multiple touch points.

Key elements of our product strategy are to:

. Enable consistent and personalized customer interaction across multiple
touch points;

. Provide integrated software applications targeted at business line
managers; and

. Integrate operational and analytical applications to enable effective
customer interaction and ongoing business improvements.

Key elements of our sales and marketing strategy are to:

. Target large, vertical markets where brand equity is paramount;

. Leverage relationships with systems integrators to focus on license
revenues;

. Expand our international presence; and

. Address smaller, or mid-market, companies.

Achieving our strategic objectives is subject to a number of significant
risks. Our goals will not be achieved and our business harmed if we fail to:

. Successfully develop new and enhanced versions of our product;

. Anticipate changes in technology;

. Develop and maintain strong relationships with systems integrators;

. Support a wide variety of hardware, software applications and operating
systems through our product;

. Develop a product that successfully functions for customers with a large
number of transactions;

. Sell our product in international markets;

. Expand and manage our sales force and development activities;

. Increase the number of our customers and expand into new markets;

. Successfully compete with the large number of competitors in our
industry.

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Following the completion of this offering, our directors, executive officers
and holders of 5% or more of outstanding common stock will beneficially own
approximately 69% of our common stock.

We were formed in June 1998 as Blue Martini LLC, a Delaware limited
liability company, and merged into Blue Martini Software, Inc., a Delaware
corporation, in January 1999. Our principal executive offices are located at
2600 Campus Drive, San Mateo, California 94403 and our telephone number is
(650) 356-4000. Information contained on our website shall not be deemed to be
a part of this prospectus. "Blue Martini Software" is our registered trademark.
This prospectus also includes trademarks owned by other parties.

The Offering

Common stock offered............................... 7,500,000 shares

Common stock to be outstanding after the offering . 67,423,338 shares

Use of proceeds.................................... For operating activities,
including expansion of our
sales and marketing
organizations, product
development activities,
capital expenditures and
other general corporate
purposes, including
general and administrative
operations and the
repayment of indebtedness.

Proposed Nasdaq National Market symbol............. BLUE

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of May 31, 2000, and excludes:

. 5,791,800 shares subject to options outstanding as of May 31, 2000, at a
weighted average exercise price of $3.10 per share;

. 2,445,000 shares subject to outstanding warrants as of May 31, 2000, at
a weighted average exercise price of $4.94 per share;

. 9,378,500 additional shares that are available for future grant under
our stock option plans as of May 31, 2000; and

. 4,000,000 shares that we could issue under our employee stock purchase
plan as of May 31, 2000.

Summary Financial Data

June 5, 1998 Three Months
(Inception) to Year Ended Ended March 31,
December 31, December 31, -----------------
1998 1999 1999 2000
-------------- ------------ ------- --------
(In thousands, except per share data)

Statements of Operations Data:
Total revenues.................. $ -- $ 11,232 $ 241 $ 10,681
Gross profit.................... -- 5,033 121 3,883
Loss from operations............ (1,597) (11,127) (1,644) (11,627)
Net loss ....................... (1,582) (10,874) (1,613) (11,567)
Basic and diluted net loss per
common share................... $ (0.07) $ (0.47) $ (0.07) $ (0.46)
Shares used in computing basic
and diluted net loss per common
share.......................... 22,000 22,964 22,000 25,108
======= ======== ======= ========

Pro forma basic and diluted net
loss per common share.......... $ (0.26) $ (0.24)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per common share.......... 41,348 48,452
======== ========

The following table presents a summary of our balance sheet as of March 31,
2000:

. on an actual basis;

. on a pro forma basis after giving effect to the conversion of our
outstanding convertible preferred stock into 23,297,000 shares of common
stock immediately prior to the closing of the offering; and

. on a pro forma as adjusted basis to reflect the sale of 7,500,000 shares
of common stock at an assumed initial public offering price of $12.00
per share after deducting underwriting discounts and commissions and
estimated offering expenses.

Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(In thousands)

Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $13,632 $13,632 $ 95,432
Working capital......... 1,023 1,023 82,823
Total assets............ 27,788 27,788 109,588
Long-term obligations,
less current portion... 602 602 602
Total stockholders'
equity................. 6,537 6,537 88,337

RISK FACTORS

An investment in our common stock is risky. You should carefully consider
the risks described below before deciding whether to invest in our common
stock. The occurrence of any of the following risks could harm our business,
financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose part or all of your
investment.

Risks Related To Our Business

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 March 1999, and our sales and service
organizations are new and still growing. Due to our short operating history,
our future financial performance is not predictable and may disappoint
investors and result in a significant decline in our stock price.

We have incurred losses during our operating history and expect losses to
continue for the next several years 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 $11.6 million for the quarter ended March 31, 2000. As of
March 31, 2000, we had an accumulated deficit of $24.0 million. We expect to
continue to incur losses on both a quarterly and annual basis for the next few
years. 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 this offering.
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.

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

Our product 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
product has been deployed by only a limited number of customers and, therefore,
we cannot assure you that our product is able to meet our customers' demands
for large scale usage. If our customers experience difficulty with our product
during periods of high traffic or usage, it could damage our reputation and
reduce our revenues.

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 revenues. The loss or delay of individual orders could have a
significant impact on revenues and operating

results. In 1999 Levi Strauss & Co. accounted for 19% of our total revenues,
Deluxe Corporation accounted for 19% of our total revenues and Harley-Davidson,
Inc. accounted for 10% of our total revenues, and combined these customers
accounted for an aggregate of 48% of our total revenues in 1999. EighteenGlobal
plc accounted for 12% of our total revenues in the quarter ended March 31, 2000
and ibeauty.com, Inc. accounted for 10% of our total revenues in that period,
and combined, these customers accounted for an aggregate of 22% of our total
revenues in that period. We expect that revenues from a limited number of new
customers will continue to account for a large percentage of total revenues in
future quarters. 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 product 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 only a portion of our revenues
each quarter is recognized from deferred revenues, our quarterly results will
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts may not result in revenues in the quarter in which the
contract was signed and commissions and royalties become payable, and we may
not be able to predict accurately when revenues from these contracts will be
recognized.

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

All of our revenues to date have been derived from the licensing of our
software product and the sale of related services. For the quarter ended March
31, 2000, 57% of our total revenues were derived from the licensing of our
product. Our future revenues will depend, in significant part, on our
successful development and license of new and enhanced versions of our product
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.

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

The period between initial contact with a prospective customer and the
licensing of our product varies, but is typically five to seven months. The
licensing of our product is often an enterprise-wide decision by our customers
that involves a significant commitment of resources by us and the prospective
customer. Customers generally consider a wide range of issues before committing
to purchase our product, including product benefits, cost and time of
implementation, ability to operate with existing and future computer systems
and ability to accommodate increased transaction volume and product
reliability. As part of the sales process, we spend a significant amount of
resources informing prospective customers about the use and benefits of our
product, which may not result in a sale, therefore reducing our margins. As a
result of this sales cycle, our revenues are unpredictable and could vary
significantly from quarter to quarter causing our operating results to vary
significantly from quarter to quarter.

Our failure to develop and maintain strong relationships with systems
integrators would harm our ability to market our product, which could reduce
future revenues and increase our expenses.

A significant portion of our sales are influenced by the recommendation of
our product by systems integrators, consulting firms and other third parties
that help deploy our product 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 product and could recommend or give higher priority to the products
and services of other companies or to their own products. A significant shift
by these companies toward favoring competing products could negatively affect
our software license and service revenues.

Some systems integrators also engage in joint marketing and sales efforts
with us. If our relationships with systems integrators fail, we will have to
devote substantially more resources to the sales and marketing of our product.
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
systems integrators than we do, and as a result these systems integrators 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 product.

Systems integrators assist our customers with the installation and
deployment of our product, in addition to those 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 product,
which would result in 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 product
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 product 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 product.

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

Errors may be found from time to time in our existing, new or enhanced
products after commencement of commercial shipments, resulting in loss of
revenues or injury to our reputation. We have in the past discovered software
errors in our product and, as a result, have experienced delays in the shipment
of our product.

Errors in our product may be caused by defects in third-party software
incorporated into our product. 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 product for critical business applications such
as e-commerce, any errors, defects or other performance problems of our product
could result in damage to the businesses of our customers. 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.

We depend on technologies licensed to us by third parties, and the loss or
inability to maintain these licenses could prevent or delay sales of our
product.

We license technologies from third party software providers that are
incorporated into our product. We anticipate that we will continue to license
technologies 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
March 2004. We may not be able to renew our license agreements for this
software on commercially reasonable terms, if at all. The loss of these
technologies or other third-party technologies 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.

If we fail to introduce new versions and releases of our product 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 product. To date, these delays have not had a
material impact on our revenues. If we are unable to ship or implement
enhancements to our product when planned or at all, or fail to achieve timely
market acceptance of these enhancements, we may suffer lost sales and could
fail to increase our revenues. Our future operating results will depend on
demand for our product, 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 intend to establish offices in the United Kingdom and elsewhere in
Europe, Asia and Latin America. If we fail to sell our product 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;

. 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 product, sell our services and develop new products may be harmed.

We must manage our growth effectively in order to successfully license our
product, 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 continue to increase
the scope of our operations and have added a substantial number of employees.
For example, the number of our employees grew from 23 people at March 31, 1999
to 304 people at May 31, 2000. In particular, our consulting services,
technical support and training organizations grew from three people at March
31, 1999 to 146 people at May 31, 2000. In addition, we need to obtain
additional office space in Northern California to accommodate our growth. We
may not be able to obtain space at commercially reasonable rates, if at all.
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.

In particular, we are currently migrating to a new accounting software
package designed to allow greater flexibility in reporting and tracking
financial results. If we fail to install this software in an efficient and
timely manner, or if the new system fails to adequately support our level of
operations, then we could incur substantial additional expenses to remedy these
failures.

Risks Related to the Software Industry

Competition in our markets is intense and could reduce our sales and prevent us
from achieving profitability.

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

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

. Component Vendors. We compete with component vendors such as Art
Technology Group, 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.

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 product.

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 product 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. We do not have employment agreements with any of
our key personnel except an agreement with John E. Calonico, Jr., our Vice
President, Chief Financial Officer and Secretary.

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 targeted 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 product from Internet-based customers and reduced demand
for additional services from current Internet-based customers.

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 product 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 2001, 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 product and services.

Businesses use our software 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 software product. More importantly, even the
perception of privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of our product.

We have no issued patents. If we are unable to protect our intellectual
property, we may lose a valuable asset or incur costly litigation to protect
our rights.

Our success and ability to compete depend upon our proprietary rights and
intellectual property. We rely on trademark, trade secret and copyright laws to
protect our intellectual property. We have

no issued patents and have filed two patent applications. Since we do not have
any issued patents, existing laws afford only limited protection for our
intellectual property. Despite our efforts to protect our intellectual
property, a third party could copy or obtain the source code to our software or
other proprietary information without authorization, or could develop software
competitive to ours. Our means of protecting our proprietary rights may not be
adequate, and our competitors may independently develop similar technology or
duplicate our product.

We may have to litigate to enforce our intellectual property rights, to
protect our trade secrets or know-how or to determine their scope, validity or
enforceability. This enforcement would be expensive, could cause the diversion
of our resources and may not prove successful. If we are unable to protect our
intellectual property, we may lose a valuable asset.

If we become subject to intellectual property infringement claims, these claims
could be costly and time-consuming to defend, divert management attention,
cause product delays and harm our revenues and results of operations.

Third parties could claim that we have infringed their intellectual property
rights by claiming that our product infringes their patents, trade secrets or
copyrights. Any claims, with or 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, or at all.

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

The market for our product 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 product 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.

Risks Related to this Offering

We may require additional funding and our failure to raise the additional
capital necessary to expand our operations and invest in new products could
reduce our ability to compete, result in lower revenues and may prevent us from
taking advantage of market opportunities.

Developing comprehensive software applications is time consuming and
requires a substantial investment in research and development. In addition, the
sales of our product require a large investment in a direct sales force and in
the sales process. We expect that the net proceeds from this offering will be
sufficient to meet our working capital and capital expenditure needs for the
next twelve to eighteen months. After that, we may need to raise additional
funds, and we may not be able to obtain additional financing on favorable
terms, or at all. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to, among other things:

. develop or enhance our product and services;

. acquire technologies, products or businesses;

. expand operations in the United States or internationally;

. hire, train and retain employees; or

. respond to competitive pressures or unanticipated capital requirements.

Our failure to do any of these things could result in lower revenues and
could harm our business.

New investors in our common stock will experience immediate and substantial
dilution.

The initial public offering price will be substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $10.66 in net tangible
book value per share of common stock, based on the assumed initial public
offering price of $12.00 per share. In addition, the number of shares available
for issuance under our stock option and employee stock purchase plans will
automatically increase without stockholder approval. Investors will incur
additional dilution upon the exercise of outstanding stock options. See
"Dilution."

Our directors and executive officers will retain significant control over Blue
Martini Software after the offering, which may lead to conflicts with other
stockholders over corporate governance.

Following the completion of this offering, our directors, executive officers
and holders of 5% or more of our outstanding common stock will beneficially own
approximately 69.0% of our outstanding common stock. Monte Zweben, our
Chairman, President and Chief Executive Officer, together with related
entities, will own approximately 40.4% of our common stock after this offering.
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.

Our stock price may be volatile because of factors beyond our control, and you
may lose all or a part of your investment.

The market prices of stock for technology companies, particularly following
an initial public offering, frequently reach levels that bear no relationship
to the past or present operating performance of those companies. These market
prices may not be sustainable and may be subject to wide variations. For
example, since January 1, 2000 the Dow Jones Internet Composite Index has
declined more than 30%. Our stock may be volatile because our shares have not
been publicly traded. Following this offering, the market price for our common
stock may experience a substantial decline. The market price of our common
stock may fluctuate significantly in response to a number of factors, most of
which are beyond our control, including:

. changes in securities analysts' estimates of our financial performance;

. fluctuations in stock market prices and volumes, particularly among
securities of technology companies;

. the discussion of our company or stock price in online investor
communities such as chat rooms;

. changes in market valuations of similar companies;

. announcements by us or our competitors of significant contracts, new
technologies, acquisitions, commercial relationships, joint ventures or
capital commitments;

. variations in our quarterly operating results;

. loss of a major customer or failure to complete significant commercial
contracts;

. loss of a relationship with a major systems integrator; and

. additions or departures of key personnel.

An active public market for our common stock may not develop or be sustained
after the offering. We negotiated and determined the initial public offering
price with representatives of the underwriters and this price may not be
indicative of prices that will prevail in the trading market. As a result, you
may be unable to sell your shares of common stock at or above the offering
price.

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 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.

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 Blue Martini.

There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.

Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock within a short period of time
after this offering 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. See "Shares Eligible for Future Sale."

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts, but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "potential," "continue," "may," "will," "should," "could"
and "estimates," and variations of these words and similar expressions, are
intended to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control and difficult to predict
and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus.

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 7,500,000 shares of
common stock that we are offering will be approximately $81.8 million, at an
assumed initial public offering price of $12.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $94.4 million.

We intend to use the net proceeds from this offering for operating
activities, capital expenditures, repayment of outstanding indebtedness and
other general corporate purposes. While the exact use of these proceeds has not
been specifically determined, we currently estimate that we will incur at least
$100 million in operating expenses over the next 12 months to expand our sales
and marketing organizations, grow our consulting services, training and
customer support functions, increase our software development activities and
increase our spending to support general and administrative operations. These
operating expenses will be partially offset by cash received from the licensing
of our software product, sale of related services and the exercise, if any, of
stock options and warrants. Additionally, we anticipate capital expenditures of
approximately $10 million over the next 12 months and that we will repay
existing indebtedness of $600,000.

The amounts and timing of these expenditures and cash inflows will vary
depending on a number of factors, including the amount of cash generated from
operations, competitive and technological developments and the rate of growth,
if any, of our business. We may use a portion of the net proceeds to invest in
or acquire additional businesses, products and technologies, or to establish
joint ventures that we believe will complement our current and future business.
Pending these uses, we will invest the net proceeds of this offering in short-
term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never paid or declared any cash dividends. We currently expect to
retain earnings for use in the operation and expansion of our business, and
therefore do not anticipate paying any cash dividends for the foreseeable
future.

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2000:

. on an actual basis;

. on a pro forma basis after giving effect to the conversion of our
outstanding convertible preferred stock into 23,296,000 shares of common
stock immediately prior to the closing of the offering; and

Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands, except
per share amounts)

Long-term obligations, less current portion.... $ 602 $ 602 $ 602
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
actual--7,200 shares authorized; 5,824 shares
issued and outstanding; aggregate liquidation
preference of $18,712; pro forma--5,000
shares authorized; no shares issued and
outstanding.................................. 6 -- --
Common stock, $0.001 par value; actual--46,000
shares authorized; 35,361 shares issued and
outstanding; pro forma--500,000 shares
authorized; 58,657 shares issued and
outstanding; pro forma as adjusted--500,000
shares authorized; 66,157 shares issued and
outstanding.................................. 35 59 67
Additional paid-in-capital.................... 69,361 69,343 151,135
Deferred stock compensation................... (38,842) (38,842) (38,842)
Accumulated deficit........................... (24,023) (24,023) (24,023)
-------- -------- --------
Total stockholders' equity................... 6,537 6,537 88,337
-------- -------- --------
Total capitalization......................... $ 7,139 $ 7,139 $ 88,939
======== ======== ========

The number of shares outstanding excludes as of May 31, 2000:

. 5,791,800 shares subject to options outstanding as of May 31, 2000, at a
weighted average exercise price of $3.10 per share;

. 2,445,000 shares subject to outstanding warrants as of May 31, 2000 at a
weighted average exercise price of $4.94 per share;

. 9,378,500 additional shares that are available for future grant under
our stock option plans as of May 31, 2000; and

. 4,000,000 shares that we could issue under our employee stock purchase
plan as of May 31, 2000.

DILUTION

Our pro forma net tangible book value as of March 31, 2000 was approximately
$6.5 million, or approximately $0.11 per share. Net tangible book value per
share represents the amount of our total tangible assets less total liabilities
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all outstanding shares of preferred stock into shares of
common stock upon completion of this offering.

Dilution in net tangible book value per share represents the difference
between the amount per share paid by new investors purchasing shares of common
stock in this offering and the net tangible book value per share immediately
after completion of this offering. Our net tangible book value as of March 31,
2000 would have been approximately $88.3 million or $1.34 per share, after
giving effect to the sale of 7,500,000 shares of our common stock in this
offering at an assumed initial public offering price of $12.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. This amount represents an immediate increase in net tangible
book value of $1.23 per share to existing stockholders and an immediate
dilution in net tangible book value of $10.66 per share to new investors
purchasing shares of common stock in this offering, as illustrated in the
following table:

Assumed initial public offering price per share............... $12.00
Pro forma net tangible book value per share as of March 31,
2000....................................................... $0.11
Increase per share attributable to new investors............ 1.23
-----
Pro forma net tangible book value per share after this
offering..................................................... 1.34
------
Dilution per share to new investors........................... $10.66
======

The table below summarizes:

. on the pro forma basis described above, the number of shares of common
stock purchased from us, the total consideration paid to us and the
average price per share paid to us by existing stockholders as of March
31, 2000;

. the total consideration payable to us by option and warrant holders upon
the exercise of options or warrants outstanding as of May 31, 2000 and
the average price per share; and

. the total consideration to be paid by new investors purchasing shares of
common stock in this offering at an assumed initial public offering
price of $12.00 per share, before deducting the estimated underwriting
discount and offering expenses payable by us.

Shares Total
Purchased Consideration Average
-------------- ---------------- Price
Number Percent Amount Percent Per Share
------ ------- -------- ------- ---------
(In thousands, except percentages and
per share data)

Existing stockholders at
March 31, 2000.............. 58,657 78.8% $ 20,914 14.8% $ 0.36
Option and warrant holders at
May 31, 2000................ 8,237 11.1% 30,033 21.3% 3.65
New investors................ 7,500 10.1% 90,000 63.9% 12.00
------ ------ -------- ------
Total...................... 74,394 100.0% $140,947 100.0%
====== ====== ======== ======

The above information assumes no exercise of the underwriters' over-
allotment option and does not include stock options or warrants granted after
May 31, 2000. To the extent any of these additional stock options and warrants
are exercised, there will be further dilution to new investors.

SELECTED FINANCIAL DATA

This section presents historical financial data of Blue Martini. You should
carefully read the financial statements included in this prospectus, including
the notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.

We derived the statement of operations data for the period from June 5, 1998
(Inception) to December 31, 1998 and the year ended December 31, 1999 and
balance sheet data as of December 31, 1998 and 1999 from the audited financial
statements included in this prospectus. KPMG LLP, our independent auditors,
audited these financial statements. We derived the statement of operations data
for the three months ended March 31, 1999 and 2000 and balance sheet data as of
March 31, 2000 from the unaudited financial statements included in this
prospectus. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations for these
periods and financial condition at that date. The historical results presented
below are not necessarily indicative of future results. The pro forma
information in the following table gives effect to the automatic conversion of
all outstanding shares of our preferred stock into common stock upon the
closing of this offering.

June 5, 1998 Three Months
(Inception) to Year Ended Ended March 31,
December 31, December 31, ------------------
1998 1999 1999 2000
-------------- ------------ -------- --------
(In thousands, except per share data)

Statement of Operations Data:
Revenues:
License....................... $ -- $ 7,205 $ 25 $ 6,070
Service....................... -- 4,027 216 4,611
-------- -------- -------- --------
Total revenues............... -- 11,232 241 10,681
-------- -------- -------- --------
Cost of revenues:
License....................... -- 719 3 561
Service....................... -- 5,480 117 6,237
-------- -------- -------- --------
Total cost of revenues....... -- 6,199 120 6,798
-------- -------- -------- --------
Gross profit................. -- 5,033 121 3,883
-------- -------- -------- --------
Operating expenses:
Sales and marketing........... 725 7,736 524 8,580
Research and development...... 562 7,076 994 4,402
General and administrative.... 310 1,348 247 2,528
-------- -------- -------- --------
Total operating expenses..... 1,597 16,160 1,765 15,510
-------- -------- -------- --------
Loss from operations......... (1,597) (11,127) (1,644) (11,627)

Interest and other, net........ 15 253 31 60
-------- -------- -------- --------
Net loss..................... $ (1,582) $(10,874) $ (1,613) $(11,567)
======== ======== ======== ========
Basic and diluted net loss per
common share.................. $ (0.07) $ (0.47) $ (0.07) $ (0.46)
======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
common share.................. 22,000 22,964 22,000 25,108
======== ======== ======== ========
Pro forma basic and diluted net
loss per common share......... $ (0.26) $ (0.24)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per common share......... 41,348 48,452
======== ========

December 31,
------------ March 31,
1998 1999 2000
---- ------- ---------
(In thousands)

Balance Sheet Data:
Cash, cash equivalents and short-term investments....... $261 $12,924 $13,632
Working capital ........................................ 53 7,708 1,023
Total assets ........................................... 742 20,360 27,788
Long-term obligations, less current portion............. 39 544 602
Total stockholders' equity.............................. 317 10,295 6,537

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may
differ materially from those anticipated in these forward-looking statements as
a result of the factors set forth under "Risk Factors" and elsewhere in this
prospectus.

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.

Our revenues are derived from the licensing of our software product and the
sale of related services. The license agreement for our software product
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 from the
Internet 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. To date, all customers who have licensed our
software product have purchased maintenance contracts for technical support.
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. To date, 30 of
our customers have purchased additional consulting services and training from
us to support their implementations. 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 software product through a direct sales force. We also engage
in alliances with systems integrators and technology vendors to assist us in
marketing and selling our software product and related services. While our
revenues to date have been derived principally from customers in the United
States, two customers in Europe accounted for 19% of our revenues for the
quarter ended March 31, 2000. We believe international revenues will represent
a more significant portion of our total revenues in the future. 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 and slow summer purchasing patterns.

To date, we have derived a significant portion of our revenues in each
quarter from a small number of customers. In 1999, we derived a significant
portion of our total revenues from three customers: Levi Strauss & Co., 19%;
Deluxe Corporation, 19%; and Harley-Davidson, Inc., 10%. For the quarter ended
March 31, 2000, EighteenGlobal plc represented 12% of our total revenues and
ibeauty.com, Inc. represented 10% of our total revenues. While we do not
anticipate that any one customer will represent more than 10% of total revenues
in 2000, 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 an anticipated license contract
is 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, our business and operating results
could be harmed.

We believe our success requires expanding our customer base, continuing to
enhance our software product and growing our professional services, technical
support and training organizations. We expect that our operating expenses will
increase as 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 next few years. 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 the recognition of revenues from one or more license contracts
could cause 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:

Three
Months Ended
Year Ended March 31,
December 31, ---------------
1999 1999 2000
------------ ------ ------

Revenues:
License........................................ 64 % 10 % 57 %
Service........................................ 36 90 43
--- ------ ------
Total revenues............................... 100 100 100
--- ------ ------
Cost of revenues:
License........................................ 6 1 5
Service........................................ 49 49 59
--- ------ ------
Total cost of revenues....................... 55 50 64
--- ------ ------
Gross profit................................. 45 50 36
--- ------ ------
Operating expenses:
Sales and marketing............................ 69 217 80
Research and development....................... 63 412 41
General and administrative..................... 12 103 24
--- ------ ------
Total operating expenses..................... 144 732 145
--- ------ ------
Loss from operations......................... (99) (682) (109)
Interest and other, net.......................... 2 13 1
--- ------ ------
Net loss..................................... (97)% (669)% (108)%
=== ====== ======

Revenues

License. Our software product was commercially released in March 1999, and
we recognized no license revenues before that date. License revenues increased
from $25,000 for the three months ended March 31, 1999 to $6.1 million for the
three months ended March 31, 2000 due to an increase in software licenses to
new customers. License revenues were $7.2 million in 1999.

Service. Service revenues increased from $216,000 for the three months ended
March 31, 1999 to $4.6 million for the three months ended March 31, 2000. This
increase was due to an increase in the number of consulting service engagements
and customer maintenance agreements, as well as an increase in training
revenues. Service revenues were $4.0 million in 1999, reflecting revenues from
our consulting services, technical support and training organizations
established during the year and maintenance revenues associated with new
product licenses. We expect that our service revenues will increase 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.

Cost of Revenues

License. Cost of license revenues consists of royalties payable to third
parties for software that is either embedded in or bundled with our product.
Cost of license revenues increased from $3,000 for the three months ended March
31, 1999 to $561,000 for the three months ended March 31, 2000. These amounts
represented 12% and 9% of license revenues for these periods. The increase in
cost of license revenues in absolute dollars was principally the result of
growth in license revenues resulting in increased royalties payable to third
parties. In 1999, cost of license revenues was $719,000 and represented 10% of
license revenues for the period. 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 as a percentage of total revenues as a result of royalty
agreements with declining royalty rates.

Service. Cost of service revenues consists primarily of salaries and other
personnel-related expenses, as well as depreciation on equipment used to
provide consulting services, technical support and training. Cost of service
revenues increased from $117,000 for the three months ended March 31, 1999 to
$6.2 million for the three months ended March 31, 2000. These amounts
represented 54% and 135% of service revenues for these periods. The increase in
absolute dollars resulted from the expansion of our consulting services,
technical support and training organizations to support the growth in new
licenses and a $1.1 million increase in amortization of deferred stock
compensation. For 1999, cost of service revenues was $5.5 million and
represented 136% of related service revenues reflecting the significant costs
incurred in establishing our consulting services, technical support and
training organizations. We expect cost of service revenues to increase in
absolute dollars in the future as we continue to expand our consulting
services, technical support and training organizations to meet anticipated
growth. While cost of services, when expressed as a percentage of related
service revenues, may fluctuate in the near term as additional personnel are
hired, 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 as well as costs of marketing
programs including trade shows, advertisements, promotional activities and
media events. Sales and marketing expenses increased from $524,000 for the
three months ended March 31, 1999 to $8.6 million for the three months ended
March 31, 2000. Of this increase, $4.3 million was attributable to an increase
in sales and marketing personnel expenses and commissions to sales personnel
associated with higher revenues, and $1.6 million was due to increased spending
for marketing programs. In addition, amortization of stock compensation
accounted for $1.2 million of the increase. For 1999, sales and marketing
expenses were $7.7 million as compared with $725,000 for the period from
inception to December 31, 1998. The increase in sales and marketing expenses
resulted from a full year of operations in 1999, hiring and training of
additional sales and marketing personnel, which accounted for $4.2 million of
the increase, a $389,000 increase in spending on advertising and marketing
campaigns and a $1.1 million increase in amortization of deferred stock
compensation. We believe sales and marketing expenses will continue to increase
in absolute dollars in the future due to the planned growth of our sales force,
the establishment of additional sales offices in both domestic and foreign
locations and increases in marketing programs.

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 arrangement, we
issued a warrant to purchase 2,400,000 shares of our series C convertible
preferred stock at an exercise price of $5.00 per share on an as-converted
basis. The warrant is exercisable at the end of eight years and can be
exercised sooner upon the achievement of performance thresholds during the
first four years of the agreement. The fair value of this warrant, which is
expected to be between $12 to $15 million, will be capitalized and amortized
over the service period and included as a non-cash component of marketing and
sales expense in our statement of operations.

Research and Development. Research and development expenses consist
primarily of salaries and related expenses for engineering personnel, 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 $994,000 for the three
months ended March 31, 1999 to $4.4 million for the three months ended March
31, 2000. The growth in expenses was primarily due to a $1.1 million increase
in personnel-related expenses resulting from the addition of engineering
personnel to support the development and enhancement of our product and a
$2.1 million increase in the amortization of deferred stock compensation.
Research and development expenses increased from $562,000 for the period from
inception to December 31, 1998 to $7.1 million for 1999. Research and
development expenses increased over the prior period due to a full year of
operations in 1999, including $4.4 million related to an increase in the number
of engineering and consulting personnel and a $1.0 million increase in the
amortization of deferred stock compensation. We expect research and development
expenses to increase significantly in absolute dollars in future periods.

General and Administrative. General and administrative expenses include
costs associated with our finance, human resources, legal and other
administrative functions and consist principally of salaries and related
expenses, professional fees and equipment depreciation. General and
administrative expenses increased from $247,000 for the three months ended
March 31, 1999 to $2.5 million for the three months ended March 31, 2000. Of
this increase, $501,000 was attributable to increased professional fees,
$384,000 was attributable to an increase in personnel-related costs and $1.0
million was attributable to an increase in the amortization of deferred stock
compensation. General and administrative expenses increased from $310,000 for
the period from inception to December 31, 1998 to $1.3 million for 1999,
reflecting a $452,000 increase in expenses for administrative personnel and
professional fees, as well as a $171,000 increase in amortization of deferred
stock compensation. We believe general and administrative expenses will
continue to increase in absolute dollars in future periods as we hire
additional staff, invest in infrastructure projects to support our continued
growth and incur expenses associated with operating as a public company.

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 for 1999 and $34.3 million for the three
months ended March 31, 2000. We are amortizing deferred stock compensation to
expense over the period during which the options vest, generally four years
using a method consistent with Financial Accounting Standards Board
Interpretation No. 28. Under this 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. Such amortization amounted to $528,000 for the
period from inception to December 31, 1998, $3.2 million in 1999 and $4.4
million for the three months ended March 31, 2000.

During the year ended December 31, 1999 and the three months ended March 31,
2000, we granted immediately vested and exercisable stock options to non-
employees. In connection with these grants, we recorded non-cash compensation
expense of $47,000 in 1999 and $1.4 million for the three months ended March
31, 2000 which reflects the fair value of these 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 statement of operations (in thousands):

June 5, 1998 Three Months
(Inception) to Year Ended Ended
December 31, December 31, March 31,
1998 1999 2000
-------------- ------------ ------------

Cost of revenues................. $ -- $ 436 $1,103
Sales and marketing.............. 332 1,398 1,392
Research and development......... 91 1,088 2,167
General and administrative....... 105 276 1,099
---- ------ ------
$528 $3,198 $5,761
==== ====== ======

Amortization of deferred stock compensation is estimated to total $23.2
million for 2000, $12.6 million for 2001, $5.6 million for 2002, $1.7 million
for 2003 and $31,000 for 2004. Amortization of deferred stock compensation will
be reduced in future periods to the extent options are terminated prior to full
vesting.

Interest and Other, Net

Interest and other, net consists of interest income from cash, cash
equivalents and available-for-sale short-term investments, partially offset by
interest expense associated with capital leases and bank borrowings. Interest
and other, net increased from $31,000 for the three months ended March 31, 1999
to $60,000 for the three months ended March 31, 2000 due primarily to higher
average balances of cash, cash equivalents and short-term investments. Interest
and other, net increased from $15,000 for the period from inception to December
31, 1998 to $253,000 in 1999 due to a full year of operations and an increase
in average cash, cash equivalents and short-term investment balances.

Income Taxes

From inception to December 31, 1999, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
December 31, 1999, we had approximately $4.3 million of federal and $2.2
million 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 2019 and 2004,
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 asset. See Note 10 of the notes to our 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 statement of operations data for our most
recent five quarters. This information has been derived from our unaudited
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. You should read this statement of
operations data in conjunction with our audited financial statements and
related notes appearing elsewhere in this prospectus. 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.

Three Months Ended
---------------------------------------------------
June
Mar. 31, 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000
-------- ------- --------- -------- --------
(In thousands)

Statement of Operations
Data:
Revenues:
License............... $ 25 $ 1,066 $ 1,934 $ 4,180 $ 6,070
Service............... 216 410 1,661 1,740 4,611
------- ------- ------- ------- --------
Total revenues...... 241 1,476 3,595 5,920 10,681
------- ------- ------- ------- --------
Cost of revenues:
License............... 3 214 170 332 561
Service............... 117 353 1,824 3,186 6,237
------- ------- ------- ------- --------
Total cost of
revenues........... 120 567 1,994 3,518 6,798
------- ------- ------- ------- --------
Gross profit........ 121 909 1,601 2,402 3,883
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing... 524 935 2,133 4,144 8,580
Research and
development.......... 994 1,587 1,951 2,544 4,402
General and
administrative....... 247 314 315 472 2,528
------- ------- ------- ------- --------
Total operating
expenses........... 1,765 2,836 4,399 7,160 15,510
------- ------- ------- ------- --------
Loss from
operations......... (1,644) (1,927) (2,798) (4,758) (11,627)
Interest and other,
net.................... 31 13 97 112 60
------- ------- ------- ------- --------
Net loss............ $(1,613) $(1,914) $(2,701) $(4,646) $(11,567)
======= ======= ======= ======= ========
As a Percentage of Total
Revenues:
Revenues:
License............... 10 % 72 % 54 % 71 % 57 %
Service............... 90 28 46 29 43
------- ------- ------- ------- --------
Total revenues...... 100 100 100 100 100
------- ------- ------- ------- --------
Cost of revenues:
License............... 1 14 5 5 5
Service............... 49 24 51 54 59
------- ------- ------- ------- --------
Total cost of
revenues........... 50 38 56 59 64
------- ------- ------- ------- --------
Gross profit........ 50 62 44 41 36
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing... 217 64 59 70 80
Research and
development.......... 412 108 54 43 41
General and
administrative....... 103 21 9 8 24
------- ------- ------- ------- --------
Total operating
expenses........... 732 193 122 121 145
------- ------- ------- ------- --------
Loss from
operations......... (682) (131) (78) (80) (109)
Interest and other,
net.................... 13 1 3 2 1
------- ------- ------- ------- --------
Net loss............ (669)% (130)% (75)% (78)% (108)%
======= ======= ======= ======= ========

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;

. 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 plan to significantly increase 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

Since inception, we have financed our operations with $18.7 million from the
sale of our preferred stock, $2.2 million from the sale of our common stock and
$750,000 of borrowings under a secured loan agreement. As of March 31, 2000, we
had cash, cash equivalents and short-term investments of $13.6 million and $1.5
million available under an equipment lease facility.

As of March 31, 2000, we had outstanding borrowings of $625,000 under a
secured loan agreement. The loan agreement provides for borrowing of up to
$750,000 and is collateralized by equipment and other assets. This borrowing
bears interest at the bank's prime rate plus 0.50% per annum. At March 31,
2000, we also had capital lease obligations of $476,000.

Net cash used in operating activities was $854,000 for the period from
inception to December 31, 1998 and $2.3 million in 1999 and cash provided by
operating activities was

$2.1 million for the three months ended March 31, 2000. Net cash used in
operating activities from inception to December 31, 1998 and for 1999 was
primarily the result of net losses of $1.6 million for the period from
inception to December 31, 1998 and $10.9 million in 1999, after adjusting for
stock compensation of $528,000 for the period from inception to December 31,
1998 and $3.2 million in 1999. For the three months ended March 31, 2000, cash
provided by operations was $2.1 million, which reflected a net loss of $11.6
million, amortization of stock compensation of $5.8 million, and changes in
operating assets and liabilities.

Net cash used for investing activities was $249,000 from inception to
December 31, 1998, $5.9 million for 1999 and $2.4 million for the three months
ended March 31, 2000. The cash used for investing activities was related to the
purchase of computer hardware and software, office furniture and equipment and
short-term investments.

At March 31, 2000, we had rental obligations of approximately $1.7 million
for the remaining nine months of 2000, $2.5 million for the year ending
December 31, 2001, $2.5 million for the year ending December 31, 2002, $2.3
million for the year ending December 31, 2003, $1.3 million for the year ending
December 31, 2004 and $108,000 thereafter. A substantial portion of our
operating lease commitments relate to our headquarters and principal facility
in San Mateo, California and our training facility in Redwood City, California.

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 March 31, 2000, we had outstanding options to purchase 5.3
million shares of our common stock at a weighted average exercise price of
$1.25 per share, and had approximately 1.4 million additional shares reserved
for future grant under our stock option plans. In addition, we have issued
warrants to purchase 2,445,000 shares of series C convertible preferred stock,
on an as-converted basis, 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 significant 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 the net proceeds from this offering, together with
our available cash balances and credit facilities, will be sufficient to meet
our presently anticipated working capital, capital expenditure and business
expansion requirements for the next twelve to eighteen months. However, we may
require additional funds within this time period. 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.

Qualitative and Quantitative Disclosures about Market Risk

Foreign Currency Exchange Rate Risk

Through March 31, 2000, all of our recognized revenues have been denominated
in United States dollars and were primarily from customers in the United
States. Our exposure to foreign currency exchange rate changes has been
immaterial. We expect, however, that future license and service revenues may
also be derived from international markets and may be denominated in the

currency of the applicable market. In addition, as we expand our international
operations and hire personnel in Europe and Asia Pacific, we will have
operating expenses denominated in foreign currencies. As a result, our
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. Furthermore, to the extent that we 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 financial
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.

Interest Rate Risk

Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, 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, short-term securities. We do not have 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, short-term nature
of our available-for-sale investment portfolio.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, entitled
Accounting for Derivative Instruments and Hedging Activities, SFAS No. 133. We
are required to adopt SFAS No. 133, as amended, for the year ending December
31, 2001. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. Because we currently hold no derivative
financial instruments and do not currently engage in hedging activities, the
adoption of SFAS No. 133 is not expected to have a material impact on our
financial condition or results of operations.

In December 1999, the Securities and Exchange Commission, or SEC, released
Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial
Statements, and amended by SAB No. 101A, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The SEC has recently indicated that it intends to issue
further guidance with respect to adoptions of specific issues addressed by SAB
No. 101. Until such time as this additional guidance is issued, we are unable
to assess the impact, if any, it may have on its financial position or results
of operations.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of the Accounting
Principals Board, or APB, Opinion No. 25. This Interpretation clarifies the
application of APB Opinion 25 including:

. the definition of employee for purposes of applying APB Opinion 25;

. the criteria for determining whether a plan qualifies as a
noncompensatory plan;

. the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and

. the accounting for an exchange of stock compensation awards in a
business combination.

In general, this Interpretation is effective July 1, 2000. We do not expect
the adoption of Interpretation No. 44 to have a material effect on our
financial position or results of operations.

BUSINESS

Overview

We provide software and services that enable companies to build brand equity
through direct customer interaction across Internet-related customer touch
points, such as websites, mobile wireless devices and on-line trading exchanges
and traditional customer touch points, such as stores and call centers. We
believe that our software enables companies to increase revenues by
coordinating customer interactions across these touch points. Our
comprehensive, packaged application is designed to simplify deployment and
accelerate our customers' time to benefit while reducing their total cost of
ownership. We have targeted a number of large vertical markets where we believe
brand is paramount such as retail, manufacturing, financial services,
telecommunications, consumer goods and media. Our customers range from large,
traditional companies that have adopted Internet-enabled, or "e-business"
strategies to rapidly growing Internet companies. As of March 31, 2000, we had
licensed our software to 35 customers.

Industry Background

Growth of the Internet and Electronic Commerce

The emergence of the Internet has enabled the delivery of diverse types of
content and the sale of products and services to a worldwide audience.
Moreover, unlike traditional media such as print, radio and television, the
Internet can be used to deliver targeted information to specific constituencies
and to receive real-time feedback from current and prospective customers.
Consequently, the use and acceptance of the Internet as a medium for
interacting with customers are growing at rates significantly faster than those
experienced by traditional media. According to estimates by International Data
Corporation, or IDC, 196 million people were connected to the Internet at the
end of 1999, with that total expected to grow to 602 million by the end of
2003. During that same period, IDC expects on-line commerce transactions,
including both business-to-business and business-to-consumer transactions, to
grow from $111 billion to $1.6 trillion. With the widespread adoption of the
Internet by traditional companies and the emergence of Internet-based
businesses and on-line trading networks such as exchanges and marketplaces,
competitors are becoming more plentiful and are often only a click away from a
company's customers. As a result, we believe that companies must be more
responsive to their customers' needs than ever before and, to compete more
effectively, must seamlessly integrate their on-line brand, marketing and
merchandising efforts with their traditional sales channels.

Traditional Approaches Fall Short

With the advent of electronic commerce in the mid-1990s, companies had few,
if any, choices in building their software infrastructure for conducting
business over the Internet. The first generation of electronic commerce
applications deployed by electronic commerce pioneers were, therefore,
typically developed internally. These software applications were often
insufficiently flexible to adapt readily to changing, and often increasing,
customer requirements. Furthermore, large internal information technology, or
IT, staffs evolved to maintain and enhance these applications. These IT staffs
often proved difficult and expensive to hire, train and retain. The burden
placed upon them from increasing traffic and complexity has also grown
significantly over time. In addition, unlike third-party applications
providers, individual companies are unable to spread the expense of substantial
in-house development, integration and maintenance efforts across a broad
customer base.

The next generation of electronic commerce applications were typically
assembled from software components--transaction processing software,
personalization tools and content management--made available by tool and
platform vendors. These components provided both in-house and independent
developers with the tools and building blocks for assembling electronic
commerce

applications, reducing the time, complexity and expense typically associated
with fully customized approaches. Nevertheless, building these applications
continues to require extensive and ongoing customization and integration by
staffs of highly specialized and expensive IT personnel. While a number of
third-party applications offering transaction, content management,
personalization and/or analytical capabilities have been introduced, none
provides a solution to all of a company's needs on a fully integrated basis.
Consequently, companies implementing these component, or point, solutions still
face significant and costly integration challenges at the same time that they
need to respond quickly to increasing competition and accelerating
technological change.

The challenge of component integration for a company's Internet presence is
further heightened by the ongoing demand for more functionality. The first
generation of providers of electronic commerce websites typically assembled a
catalog of products and presented it via simple, static web pages.
Subsequently, many companies revised their websites to include additional
functionality, such as personalized recommendations, search and streamlined
purchasing. As electronic commerce websites evolved further, gift registries
and loyalty programs appeared. As customer expectations have increased, this
process of innovation and functionality enhancement has become a continuous
cycle. The requirement of continually developing this new functionality
internally compounds the burden on typically scarce and expensive IT resources
of integrating, maintaining and upgrading point solutions.

Need to Serve Customers Consistently Across Multiple Touch Points

The advent of electronic commerce has required many companies to interact
with their customers, whether businesses or consumers, through both Internet-
related touch points, such as websites, mobile wireless devices and on-line
trading exchanges and traditional touch points, such as stores and call
centers. In order to compete more effectively, many companies are taking a
hybrid, or "clicks and mortar," approach to their marketing, sales and customer
service functions, dividing them across these touch points. Ideally, each of
these touch points should be consistent and coordinated with the others,
providing companies with a unified, up-to-date view of the customer and
providing customers with a consistent face that is personalized to their
individual requirements and unique characteristics. Companies that are unable
to serve customers consistently across multiple touch points run the risk of
inefficient and ineffective marketing, sales, service and support efforts,
which can lead to dissatisfied customers, damage to brand and reputation and
ultimately lost revenues.

Increasing Importance of Brand Equity and Awareness

In most industries, a company's brand is its most strategic asset. A brand
embodies the value a company's products or services delivered to its customers.
Brands simplify choice for customers, speeding purchase decisions and
eliminating time-consuming rounds of competitive evaluation. A strong brand can
enable a company to achieve premium pricing for its products and services,
accelerate revenue and profitability growth rates, provide a barrier to entry
to competitors and reduce marketing costs. In industries where companies do not
sell directly to the end users of their products, brand is often the only means
by which they can differentiate themselves and convey the value that their
products deliver to the customer. The increasing importance and prevalence of
the Internet has further heightened the importance of brand equity and
awareness. A powerful brand can attract and retain customers, generating higher
revenues and increasing profitability. Conversely, mismanaging a brand can
drive customer traffic elsewhere, particularly on the Internet where
competitors are only a click away. To compete effectively, many companies are
seeking a solution that enables them to manage a brand successfully across both
new and traditional channels.

The Internet Business Application Opportunity

We believe a significant market opportunity exists for a solution that
enables companies to effectively integrate their Internet strategies with their
other marketing, sales and customer service efforts. Additionally, an
integrated solution is required that offers a wide range of functionality and

permits companies to interact on a consistent and personalized basis across
multiple touch points. A comprehensive, easily deployed solution that
integrates operational and analytical applications allows a company to leverage
resources, build brand equity, enhance customer interactions and increase
revenues.

The Blue Martini Solution

Our software and services enable companies to interact more effectively with
customers across multiple touch points. We provide integrated software
applications that allow companies to extend their brands across their Internet-
based and traditional sales/marketing and merchandising efforts.

Our software is designed to provide the following benefits to our customers:

Build and Enhance Brand Equity and Awareness. Our software 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 on-line trading
exchanges. This coordinated approach is designed to enable companies to
effectively build and enhance brand equity and awareness across multiple touch
points.

Generate Revenues Through Sales Channels By Coordinating Across Multiple
Touch Points. By coordinating interaction across multiple touch points, our
software enables companies to increase revenues through multiple sales
channels, such as stores, call centers, websites and on-line trading exchanges.
This coordination allows companies to avoid 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.

Convert Browsers into Long-Term and Profitable Customers. The publishing
capabilities of our software are designed to enable companies to publish new
content rapidly and frequently. Our software 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 and increasing the likelihood of purchases. Additionally,
our software 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
software is designed to enable companies to deploy their Internet-enabled
solutions in as little as eight weeks and begin generating revenues
substantially earlier than would be possible with other solutions. Deployments
of in-house developed or third-party point solutions for electronic commerce
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 software enable 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 software applications are
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 their core competencies. In addition, because our software 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.

Our software integrates five key capabilities that we believe are required
by companies employing Internet strategies:

Product Management. Our software enables companies to richly, accurately and
persuasively describe their products and product hierarchies, establish pricing
and create promotions. Companies can specify as many product attributes as
necessary, vary attributes by product or product type and change product
attributes over time. This flexibility allows more accurate customer targeting
and a more compelling presentation of products for sale.

Content Management. Our software enables companies to author, manage,
approve and track the development and use of content, such as text, graphics,
audio and video. Companies can use this content for product presentation,
information, entertainment and brand and community building.

Transaction Execution. Our software enables companies to conduct business on
their websites, over the phone, via wireless devices and through other sales
channels, including taking orders and managing returns.

Analysis. Our software can analyze customer purchase histories and model
customer behavior. This analysis is designed to enable our customers to
accurately identify market segments and determine strategies to target
customers more effectively.

Personalization. Our software's algorithms enable companies to target
customers across multiple touch points with meaningful and relevant products,
promotions and content to increase visitor frequency and duration as well as
the likelihood, size and profitability of a transaction.

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

Open. Through adherence to non-proprietary software standards as well as
through the support of pre-built, pre-tested interfaces to leading packaged
enterprise resource planning and customer relationship management software
packages, our software is designed to be easy to implement within companies.
Our software also interoperates with a wide variety of pre-existing
applications, standards and protocols, unifying the various aspects of IT
infrastructure.

Scalable. Our software architecture is designed to support a large number of
concurrent users. The software 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 software
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 software 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 software continues the customer session on an
alternative application server.

Integrated. The adoption of applications 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 software matches and links operational and analytical capabilities,
enabling both deeper analysis and faster reaction times in operations.

Strategy

Key elements of our product strategy are to:

Enable Consistent and Personalized Customer Interaction Across Multiple
Touch Points. As the importance of consistent and personalized customer
interaction continues to grow, we plan to continually enhance the distinctive
capabilities of our software and develop new capabilities to expand our market
opportunities and establish ourselves as the worldwide leader in providing
Internet applications and services. We continue to focus on providing companies
with software to immerse their customers in their brand by providing their
customers with a consistent and personalized experience across multiple touch
points.

Provide Integrated Software Applications Targeted at Business Line
Managers. To address the shortcomings of custom-developed and point-based
electronic commerce software products, we plan to continue to develop
integrated software applications to conduct Internet-enabled business
throughout a company. We plan to continue to design our software to be usable
by business line managers, who typically have little or no technical training,
but are closest to customers and best able to ascertain their demands and
desires.

Integrate Operational and Analytical Applications to Enable Effective
Customer Interaction and Ongoing Business Improvements. We plan to continue to
support direct interaction between our operational and analytical applications.
This enables a company to adapt and refine customer interactions on an ongoing
basis, creating a powerful and personalized customer experience. It also
permits adjustments to business processes in response to customer feedback and
the success or failure of various sales and marketing initiatives.

Key elements of our sales and marketing strategy are to:

Target Large, Vertical Markets Where Brand Equity is Paramount. Initially,
we are focusing our marketing and sales efforts on those large, vertical
markets where brand equity and awareness are critical, such as retail,
manufacturing, financial services, telecommunications, media and travel. Within
these markets, we intend to target the leaders, both with respect to market
share and business practices, in the belief that having these leaders as our
customers will motivate other companies to use our software as well.

Leverage Relationships with Systems Integrators to Focus on License
Revenues. Our business model is predicated on the licensing of our software. We
intend to continue to pursue additional relationships with systems integrators
to enable us to achieve a high-margin, software-driven business model with a
minimum investment in consulting and integration services over time. These
relationships with systems integrators are also designed to enable us to extend
the reach of our sales and marketing efforts. Initially, however, it is our
intention to directly provide consulting services to both ensure customer
satisfaction and to train other consultants in the implementation of our
software.

Expand Our International Presence. We intend to expand our sales and
marketing operations in Europe, Asia and Latin America to take advantage of the
growing penetration of the Internet in these geographies. We plan to localize
our product for these markets. We also intend to focus on building distribution
channels for our products in these markets, including entering into
relationships with systems integrators.

Address Smaller, or Mid-Market, Companies. We believe that there is a
significant opportunity to sell specific modules of our product to smaller, or
mid-market, companies who want to coordinate their different touch points. We
intend to license our product to these companies using an application service
provider model to make the adoption of our product cheaper for these smaller
companies.

Products

We offer both software and services. Our Customer Interaction System is a
comprehensive, packaged software application for building brand across multiple
touch points. We complement our software with training, deployment and support
services, as well as assisting businesses in using the analytical capabilities
provided by our software.

Software

The Customer Interaction System consists of pre-integrated modules that can
be implemented individually or together. Because we offer an integrated
application rather than a collection of tools that can be used to develop an
application, we expect our customers to enjoy faster time to benefit and lower
total cost of ownership.

The Customer Interaction System is deployed by IT professionals and systems
integrators and is used on an ongoing basis by business users within an
organization to manage products and merchandise, to manage images and other
rich media content, to analyze and administer customer profiles and transaction
histories. The Customer Interaction System provides our customers with the
software necessary to operate high-volume websites as well as wireless and
telephone interactions with their customers. The Customer Interaction System is
divided into four subsystems: Operations; Analysis and Targeting; Interaction;
and Tools and Integration. The four subsystems consist of thirteen modules
which are shown below:

[A three-dimensional diagram shows the relationship among the four subsystems,
"Operations," "Analysis and Targeting," "Interaction," and "Integration," and
our twelve modules: "Merchandise Management," "Content Management," "Customer
Management," "Date Warehousing and Reporting," "Data Mining and Visualization,"
"Personalization," "Customer Collaboration," "Website," "Call Center," "Mobile
Wireless," "Tools" and "Workflow." "Business Users" appears on an arrow that
points to the left side of the diagram. "Customers" appears on an arrow that
points to the right side of the diagram. Above the diagram appear two headed
arrows and the words "POS Systems," "ERP Applications," "CRM Applications,"
"Fulfillment Applications," "Shopping Services," "Taxation Services," "Payment
Services" and "Email Services."]

Operations Subsystem

The Operations subsystem allows business users to define products, create
and manage content, price their offerings and manage customer information
without dependence upon IT professionals. The Operations subsystem consists of
the following modules:

Product Management Module. The Product Management module manages products,
product lines, product attributes, assortments, promotions and pricing data.
The Product Management module also suggests complementary products, or "cross-
sells," and more profitable substitutes, or "up-sells." Our customers may use
as many attributes as necessary to describe their products in full detail,
allowing their customers to obtain the information they require to make
informed decisions. This data can be imported from external systems or
maintained entirely within the application.

The Product Management module allows business users to create and implement
promotions, to highlight products or categories or to assist with inventory
level management. The Product Management module allows a business user to add
new products to a product line without re-entering the product attributes
already entered in that product line, minimizing the effort required for
managing products. In combination with the Content Management module, business
users can link products and content together in one system for more effective,
targeted merchandising.

Content Management Module. The Content Management module stores and
categorizes simple and rich media, tracks changes among multiple versions of
text and supports team-based development strategies for large and complex
websites. The Content Management module manages and controls media assets such
as website templates, product images and brand building content. Users can
assign content-, product- and market-specific attributes to each item.

The Content Management module supports images, text, HTML templates, audio,
video and other types of content. In combination with the Product Management
module, business users may link product and content in one system for more
effective merchandising.

Customer Management Module. The Customer Management module captures profiles
across customer touch points via the Interaction subsystem and manages customer
data. Profile data can be extracted from a record of the sequence of web pages
viewed by a visitor, responses to survey questions, summaries of order history
or external databases. The Customer Management module delivers value-added
customer services including loyalty programs, gift registries, gift
certificates, employee purchasing and express buying.

The Customer Management module ensures there is a uniform view of the
customer across touch points. The Customer Management module also ensures that
customers are recognized when they return to the store, whether on-line or off,
enabling organizations to treat a customer who returns every day differently
than someone who returns less frequently. Companies can continue to learn about
visitors to their websites and enhance profiling information as visitors
advance from anonymous browsers to registered users to buyers.

Analysis and Targeting Subsystem

The Analysis and Targeting subsystem allows business users to obtain timely
and critical information regarding which products are selling, which customers
are more profitable and which merchandising or marketing strategies are more
successful. With the results determined using the analytical tools, business
users can better understand their customers and to personalize subsequent
customer interactions. The Analysis and Targeting subsystem consists of the
following modules:

Data Warehousing and Reporting Module. The Data Warehousing and Reporting
module provides tools for automatically extracting operational data obtained
from multiple touch points. The

extracted data is made available in a data warehouse to enable quick answers to
complex questions about orders, customers, products and sources of revenues and
to allow business users to understand the effectiveness of their decisions.

The Data Warehousing and Reporting module allows business users to generate
reports on customer orders based on attributes such as geographies, units and
revenues of items sold. For example, reports describing conversion ratios of
each promotion allow business users to make informed decisions about which
promotions are most effective. Other reports list revenues, profits, visits,
page views and browsing time for each customer session. With these reports,
business users can understand sources of revenue and profitability by
aggregating values for groups such as new and returning customers, or
registered and unregistered customers.

Data Mining and Visualization Module. The Data Mining and Visualization
module complements our reporting capabilities with data transformation and
analysis capabilities. While reports answer specific inquiries, data mining
assists marketers in addressing issues that are difficult to articulate or
quantify, such as determining which customer attributes are associated with
buying behaviors. Data mining is also used to predict customer behavior,
customer purchases or long-term value of the customer. Moreover, the results of
mining on-line shopping data can be used across other channels to increase
revenue and customer loyalty.

Large amounts of data can be difficult to understand and interpret. Our
integrated data visualization tools quickly render large amounts of data
graphically in presentations that make sense not only to highly trained
analysts, but also to marketers with key business insights. These advanced
visualization tools present customer segmentations, operational characteristics
and other results in three dimensional, easily navigable forms and facilitate
interactive analysis by business users.

Personalization Module. The Personalization module enables personalization
and targeted selling to end customers through the Interaction subsystem. In
addition, the Personalization module generates rules for personalized content,
complementary products, more profitable substitute products, product
assortments and promotional campaigns based upon the results of data mining
analyses. Businesses can create or modify rules manually to leverage their own
expertise and understanding of customer requirements.

Interaction Subsystem

The Interaction subsystem connects and targets customers across Internet-
related touch points such as websites, mobile wireless devices and on-line
trading exchanges, as well as across traditional touch points such as stores
and call centers. Built-in collaboration enables customers to work and shop
together as well as allowing sales representatives and call center agents to
guide customers. Because all modules of the Interaction subsystem share the
same underlying architecture, product catalog, content, customer database and
personalization capabilities, customers can move easily between the touch
points, maintaining their contact information, preferences and order history.
The Interaction subsystem consists of the following modules.

Website Module. The Website module is designed to run large webstores
securely and reliably. This module is designed to handle spikes in demand by
enabling a customer request to be satisfied by the server able to most rapidly
fulfill the request. The Interaction subsystem is designed to manage large
numbers of users. By adding additional servers, the capacity of the system can
be increased. The use of multiple servers also improves system availability, by
allowing sessions to continue uninterrupted in the event of web, applications
or catalog database server failure or in the event of website updates. Full
text and parametric search help end customers locate products quickly,
increasing sales and reducing requirements for support.

Call Center Module. The Call Center module empowers customer service
representatives to serve customers better by allowing them to place or modify
product orders received by telephone by using the customer profile and
preferences submitted by customers from the website or other touch points. With
Call Center, contact center representatives create and edit orders, deepen
customer profiles, check on customer order status or history, process returns,
recommend complementary products and more profitable substitute products and
provide customer accommodations. The browser-based interface allows for remote
operation, provides a familiar interface and minimizes training.

Mobile Wireless Module. The Mobile Wireless module offers the capabilities
of the Customer Interaction System in a wireless device. With in-store wireless
handheld devices, shoppers can browse the bricks and mortar store while
scanning items. Scanned items can be captured for gift and wedding registries,
permanent shopping lists or for immediate sale. In addition, the complementary
and substitute product information in our Product Management module can be
combined with personalization to target promotions and other products and
services to browsing customers.

Our Mobile Wireless module also enables sales staff to merchandise goods
more effectively by providing them with customer-specific preferences and
relevant promotions. For example, as a customer heads to a dressing room with a
product, a salesperson can scan the tag on the item to suggest additional
information and complementary products, increasing both the likelihood and
potential size of the sale.

The Mobile Wireless module currently supports PalmOS-based devices from
Symbol Technologies.

Customer Collaboration Module. The Customer Collaboration module, scheduled
to be commercially available in July 2000, will allow a customer to link
browsers with a friend or a sales or support person to conduct on-line shopping
together on a website.

The Browse Together functionality will support collaborative browsing
between two customers in different locations, or between a salesperson and a
customer. For example, two friends can browse and purchase clothes together,
despite the fact that they may be located in different cities. Similarly, a
salesperson or customer service representative can lead a customer through a
website to help her locate the content or products in which she is interested.

The Chat functionality will allow linked users to communicate through a
text-based chat feature. Participants will be able to exchange opinions and
ideas easily as they navigate through the website. Customer service
representatives will be able to provide additional contextual information to
the customer. Text-based chat is designed for customers who do not have access
to a telephone while on-line.

Tools and Integration Subsystem

The Tools and Integration subsystem allows customization and configuration
of the Customer Interaction System, offers workflow capabilities to smooth
operations and provides adapters to link our software to legacy systems,
packaged applications and syndicated data providers. The Tools and Integration
subsystem consist of the following modules:

Tools Module. The Tools module enables our customers to adapt the Customer
Interaction System to their specific requirements. This module provides tools
for operating a website and other customer touch points, enabling rapid
response in changing environments and allowing for immediate error correction.
This module also provides tools that enable rapid deployment of new products
and content, remote website administration and emergency updates to production
sites. For example, if a

computer server is mistakenly priced at $899 rather than $8,990 on a website,
an administrator can bypass the normal data publishing process and correct the
error on the live website within minutes.

Workflow Module. The Workflow module allows customers to graphically build
and tune the business processes needed for day-to-day operations, from the
creation of a new promotion to the addition of a new line of products. With our
Workflow module, business users can define participants involved in a process
and can specify the process via a simple graphical interface. This interface
also allows business users to initiate and manage workflow processes, including
user-specific tasks.

Integration Module. The Customer Interaction System is an open system
designed for use in conjunction with both an organization's existing systems
and complementary systems from third parties. All the modules of the Customer
Interaction System can be integrated with a company's existing customer
relationship management software, enterprise resource planning software, retail
software and supply chain management software, making possible real-time
product availability checks, cross-platform content gathering, accurate tax
calculation, fraud protected credit card authorization and precise
determination of shipping costs. The Integration module provides a collection
of adapters, each tuned to a particular integration challenge. The adapters
offer both support for open standards as well as support for links to packaged
applications like SAP and PeopleSoft. With the tools provided, customers can
integrate systems in both a batch and interactive manner.

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.

Professional Services. We offer professional services to our customers for
the deployment of the Customer Interaction System 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 such as Andersen Consulting, Inforte and Viant. 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
such as marchFIRST, Inc.

Technical Support Services. We offer a comprehensive collection of support
services designed to respond to inquiries and rapidly resolve issues. Our
technical support services are available to our customers worldwide under
maintenance agreements. We field questions via our call center, through email
and in person for customers that have our consultants on site.

Our standard technical support services include responding to inquiries
regarding installation, administration and basic usage. Our customers or their
representatives may log product questions by phone or through the Internet via
our Technical Support WebAccess module, and can track our responses in a
similar fashion. Maintenance upgrades and release upgrades are also included
with our standard technical support package.

Training Services. 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 software, but also educate business users on
key concepts such as personalization and data mining. We offer courses in our
facilities in Redwood City, California.

E-Business Intelligence Services. We offer our customers subscription-based,
value-added data analysis services. Our E-Business Intelligence Services
process and analyze transaction,

clickstream, customer and product data to produce insights that can improve
business results. These investigations are performed by a dedicated team of
consultants trained in target marketing, merchandising, data mining
technologies and statistical methods. Results are presented to clients in easy-
to-understand Business Intelligence Briefings that combine statistics, business
rules, customer profiles and plain-English business advice. These briefings
provide information to enable critical sales and marketing decisions. Our E-
Business Intelligence Services investigations are performed using the product
management, targeting and analysis capabilities of our Customer Interaction
System. Our customers use E-Business Intelligence Services to target
promotions, assortments, products and content more effectively to the right
customers at the right time.

E-Business Intelligence Services are available on a six-month renewable
subscription basis. Our customers may choose from a number of subscription
levels designed to meet their specific needs.

Alliances

Our alliances include those with systems integrators, independent software
vendors, platform vendors and other services providers. All alliances are
terminable at will upon thirty days notice by either party.

Systems Integrators. Systems integrator alliance members lead the
integration projects at our customer sites. For systems integrator alliance
members, we offer benefits including discounted training fees, dedicated
account managers and access to our customers and prospects. In return, systems
integrators pay a fee, commit to train their consultants and share their own
customer and prospect lists with us. Our systems integrator alliance members
help us develop customer relationships, and similarly we recommend our systems
integrator alliance members to our customers. Our customers pay us directly for
our product and pay our systems integrator alliance members directly for their
services. By recruiting, training and managing personnel to deploy our
software, systems integrator alliance members permit us to focus on developing
and providing our software and on providing additional technical expertise
periodically required during consulting service engagements. Our systems
integrator alliance members are Andersen Consulting, eForce, CFT Consulting,
Emerald Solutions, Ernst & Young, Inforte Corporation, marchFIRST, Inc., Techna
and Viant Corporation.

Independent Software Vendors. Our independent software vendor alliance
members deliver software products to our customers that complement our
software. Our independent software vendor alliance members provide fulfillment,
supply chain management and customer relationship management software. Our
independent software vendor alliance members help us develop customer
relationships, and similarly we recommend our independent software vendor
alliance members to our customers. Our customers pay directly for our product
and pay our independent software vendor alliance members directly for their
services. Our independent software vendor program is designed to facilitate the
delivery of packaged adapters that connect the Customer Interaction System to
our alliance members' software. Delivery of packaged adapters requires software
development and validation of the packaged software for each release of the
Customer Interaction System. Our independent software vendor alliance members
are Siebel Systems, Inc. and Yantra Corporation.

Platform Vendors. Platform vendor alliance members provide the hardware and
software foundations to our customers for the deployment of our Customer
Interaction System. Our platform vendor alliance members sell hardware,
operating system and database products. We perform all software development
work to ensure that our software supports the platforms of our alliance
members. Our customers pay us directly for our product and pay our platform
vendor alliance members directly for their products. Our platform vendor
alliance members are IBM, Microsoft Corporation, Oracle and Sun Microsystems.

Services Providers. Our services provider alliance members provide on-line
services that complement our Customer Interaction System to our customers and
include syndicated data providers, Internet delivery providers, taxation
providers and payment providers. Our customers pay us directly for our product
and pay our services provider alliance members directly for their services.
Some of our services provider alliance members also pay us fees when our
customers select their products. Our services provider alliance members are
Acxiom Corporation, Akamai Technologies, Inc., Cybersource and Taxware
International, Inc.

Total revenues from all of these alliance members represented less than 1%
of our total revenues in the quarter ended March 31, 2000, and for the year
ended December 31, 1999.

Technology

Our Customer Interaction System 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 software 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 software 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 Customer Interaction System 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.

Blue Martini Customer Interaction System Architecture

A schematic diagram showing the relationship among two subsystems: "Operations
and Analysis & Targeting Subsystems," and "Interaction Subsystem." The
schematic shows the distributed architecture of our software.

Customers

Our customers range from large, traditional companies that have adopted
Internet strategies to rapidly growing Internet companies. As of March 31, 2000
we had licensed our software to 35 customers. We have targeted a number of
large, vertical markets where we believe brand is paramount such as retail,
manufacturing, financial services, telecommunications, media and travel. In
1999, Levi Strauss & Co. accounted for 19% of our total revenues, Deluxe
Corporation accounted for 19% of our total revenues and Harley-Davidson, Inc.
accounted for 10% of our total revenues. For the quarter ended March 31, 2000,
EighteenGlobal plc represented 12% of our total revenues and ibeauty.com, Inc.
represented 10% of our total revenues.

The following are case studies of representative customers from different
industries, each of whom has accounted for at least $500,000 of our revenues.

Harley-Davidson, Inc. With more than 600 authorized dealers throughout the
United States, Harley-Davidson considers its dealership network to be critical
to its success. To further support this dealer channel, Harley-Davidson wanted
to leverage its existing content-based website and enhance the customer
experience through a web storefront without creating competition among its
sales

channels. The new Genuine Harley-Davidson RoadStore website was conceived to
provide accessories to customers, with fulfillment by local dealers. According
to Harley-Davidson, our product helps The RoadStore recommend complementary
products and drive dealer traffic while protecting the interests of the
company's dealer channel.

Gymboree Corporation. The Gymboree Corporation is a retailer of products and
services for children from birth to age seven. With more than 600 stores around
the world, the company uses our product to provide a personalized on-line
shopping experience to complement its in-store service. Gymboree introduces
over thirty new lines of clothing per year, and chose our product to help
support the company's on-line merchandising and brand-building activities.
Gymboree selected our software to replace an existing platform because of the
Customer Interaction System's broad functionality and rapid deployment
capability. CFT Consulting is serving as systems integrator at Gymboree for the
deployment of the CIS.

Gloss.com, Inc. On-line beauty electronic retailer Gloss.com, Inc., which
was recently acquired by Estee Lauder Companies, Inc., chose our product for
its website. The company currently offers a personalized on-line shopping
experience tailored to the needs and interests of each individual customer.
Gloss.com features 80 brands and 5,000 brand-name products as well as providing
beauty, fashion and entertainment information to consumers. Gloss.com delivers
features like gift registries and personalized product assortments, and was
integrated to PeopleSoft's enterprise resource planning application by Inforte
Corporation. Our product facilitates assortment management and electronic
merchandising for the company's website.

ePearle/Pearle Europe. Pearle Europe BV, associated with the United States
operations of Pearle Vision, operates three brands in five countries. Over 600
stores across Europe provide one-stop, total eye care. Pearle Europe teamed
with Andersen Consulting to develop ePearle, an initiative to blend Pearle's
off-line store fronts with a new on-line presence. Our software, implemented by
Andersen Consulting, provides the foundation on which ePearle runs multiple
websites and multiple language sites per country to support customer demand for
localized content. Our product helps bring product assortment and eye care
information for products to ePearle customers in an easy and user-friendly
manner.

Sales and Marketing

Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and indirect selling efforts through systems integrators
and independent software vendors. Our principal target accounts consist of
large, traditional companies and rapidly growing Internet companies for whom a
powerful brand experience, close customer contact and customer knowledge are
critical. These accounts include companies in the retail, manufacturing,
financial services, telecommunications, media and travel vertical markets.

As of May 31, 2000 our direct sales organization consisted of 54 managers,
account executives, product consultants and business development professionals,
divided into five regional teams. 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. 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 systems
integrator alliance members. Systems integrators 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 systems integrators alliance members,
adding additional systems integrator alliance members and opening other
channels such as entering relationships with application service providers to
reach mid-market companies.

Our marketing efforts are conducted by a marketing organization, which as of
May 31, 2000 consisted of 23 professionals. Such efforts include management of
alliances, as well as corporate, industry and product marketing. We plan to
significantly increase such efforts in the near term.

Research and Development

Since inception, we have devoted significant resources to develop our
product 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 software. Our product development organization is responsible for product
architecture and technology, engineering, quality and production.

As of May 31, 2000, we had 57 employees engaged in research and development
and quality assurance. For the year ended December 31, 1999 our research and
development expenses totaled $7.1 million. For the first quarter of 2000,
research and development expenses totaled $4.4 million. We expect to continue
to devote substantial resources to our research and development activities.

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. We compete with providers of stand-alone
point solutions, component vendors and enterprise resource planning software,
customer relationship management software and supply chain management software
vendors as well as with internal IT departments.

Many of our competitors have greater resources and broader 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;

. coverage of direct sales force;

. ease and speed of product implementation;

. vendor and product reputation;

. 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.

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
March 2004. 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 equivalent technology, if available, is developed or
licensed and successfully integrated into our product.

We license the modules of our Customer Interaction System 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 Customer Interaction System 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 and
use information that we regard as proprietary. 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.
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.

There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future, third parties may claim that we or our current or future
products infringe their intellectual property. Any claims, with or without
merit, could be time-consuming to resolve, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, may not be available
on terms acceptable to us, if at all, which could harm our business.

Employees

As of May 31, 2000, we had 304 full-time employees, of whom 298 were based
in North America and 6 were based in Europe. Of these employees, 77 are in
sales and marketing, 57 are in product development, 146 were in professional
services, technical support and training and 24 were in finance, human
resources, 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.

Facilities

Our headquarters and principal facility is located in approximately 26,000
square feet of office space in San Mateo, California under a lease that expires
in August 2004. We conduct training in approximately 11,000 square feet of
leased space in Redwood City, California under a lease that expires in March
2003 with an option to extend for one year and we lease sales offices in
Atlanta, Georgia; Milford, Massachusetts; and Newport Beach, California. We are
seeking additional space in Northern California to meet our expansion plans.

MANAGEMENT

Directors And Executive Officers

The following table sets forth information about our directors and executive
officers as of May 31, 2000:

Name Age Position
---- --- --------

Monte Zweben............ 36 Chairman, President and Chief Executive Officer

John E. Calonico, Jr. .. 43 Vice President, Chief Financial Officer and Secretary

Robert E. Cell.......... 31 Vice President of Corporate Development

William H. Evans........ 41 Vice President of Marketing

Scott D. Hanham......... 49 Vice President of Product Development and Services

Jeffrey G. Johnson...... 42 Vice President of Sales

James C. Gaither(1)..... 62 Director

A. Michael Spence(2).... 56 Director

Andrew W. Verhalen(1)... 43 Director

Edward H. Vick(2)....... 56 Director

William F. Zuendt(2).... 53 Director

- --------
(1) Member of Compensation Committee

(2) Member of Audit Committee

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, Chief Financial
Officer and Secretary 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 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.

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.

James C. Gaither has served as a Director since August 1998. Since 1971, Mr.
Gaither has been a partner at the law firm of Cooley Godward LLP. Mr. Gaither
is a Director of Amylin Pharmaceuticals, Inc., Basic American, Inc., nVidia
Corporation, Siebel Systems, Inc. and Levi Strauss & Co.

A. Michael Spence, Ph.D. has served as a Director since August 1998. Dr.
Spence currently serves as Professor of Management in the Graduate School of
Business at Stanford University. From 1990 until 1999, Dr. Spence served as
Phillip H. Knight Professor and Dean of the Graduate School of Business at
Stanford University. Dr. Spence also serves as a Director of eGain
Communications Corp., General Mills, Inc., Nike, Inc. and Siebel Systems, Inc.

Andrew W. Verhalen has served as a Director since January 1999. Mr. Verhalen
has been a general partner of entities associated with Matrix Partners since
April 1992. From 1986 to 1991, Mr. Verhalen served as a divisional Vice
President and General Manager at 3Com Corporation. Mr. Verhalen currently
serves on the Board of Directors of Alteon WebSystems, Inc., Copper Mountain
Networks, Inc., Phone.com, Inc., Turnstone Systems, Inc. and WatchGuard
Technologies, Inc.

Edward H. Vick has served as a Director since February 2000. Since November
1997, Mr. Vick has served as Chief Creative Officer at Young & Rubicam Inc., an
advertising company, and since December 1999, Mr. Vick has also served as
Chairman of the Board of Young & Rubicam Inc. From January 1992 to December
1999, Mr. Vick held various management positions at Young & Rubicam Inc.

William F. Zuendt has served as a Director since August 1998. Mr. Zuendt
retired as President and Chief Operating Officer of Wells Fargo & Company, a
bank holding company, and its principal subsidiary, Wells Fargo Bank in 1997
after serving in that position since 1994. Mr. Zuendt is a Director of 3Com
Corporation, Advent Software, Inc. and Be, Incorporated.

Board Composition

We have authorized six directors. Upon the closing of this offering and as
provided by the terms of our fourth amended and restated certificate of
incorporation, our board of directors will be divided into three classes and
each class will have a term of three years. As a result, a portion of our board
of directors will be elected each year. The division of the three classes,
their election dates and the directors in each class are as follows:

Class of Director Date of Election Directors in Class
----------------- ---------------- ------------------

I 2001 annual meeting of stockholders A. Michael Spence
Andrew W. Verhalen

II 2002 annual meeting of stockholders Edward H. Vick
William F. Zuendt

III 2003 annual meeting of stockholders James C. Gaither
Monte Zweben

At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes of control or management of Blue Martini.

Board Committees

Audit Committee. Our audit committee currently consists of Dr. Spence and
Messrs. Vick and Zuendt. The audit committee reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent accountants.

Compensation Committee. Our compensation committee currently consists of
Messrs. Gaither and Verhalen. The compensation committee administers our stock
option plans, reviews and approves the compensation and benefits of all our
officers and establishes and reviews general policies relating to employee
compensation and benefits.

Director Compensation

Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings. Members of the
board are reimbursed for their reasonable expenses in attending board and board
committee meetings.

In October 1998, Dr. Spence and Messrs. Gaither and Zuendt each purchased
381,844 shares of our common stock at a purchase price of $0.01 per share,
including 214,787 shares that were subject to a right of repurchase as of May
31, 2000. In February 2000, Mr. Vick was granted an option to purchase 200,000
shares of our common stock with an exercise price of $1.50 per share that will
vest 25% after 1 year of service and 1/48th per month thereafter over three
years.

According to our 2000 non-employee directors' stock option plan, each
current non-employee director will be granted an option to purchase up to
25,000 shares of our common stock on the effective date of this offering and
each new non-employee director will receive the same option on a director's
election or appointment to the board, if later. Non-employee directors will be
granted an option to purchase up to 7,500 shares of our common stock on the day
after each annual meeting of stockholders after the effective date of this
offering. Also, non-employee directors who serve as committee members will be
granted an option to purchase up to 5,000 shares of our common stock

on the day after each of our annual meeting of stockholders. The exercise price
of each option will be the fair market value of a share of our common stock on
the date of grant of the option.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Messrs. Gaither and Verhalen serve as members of the compensation committee.

Executive Compensation

The following table shows information concerning compensation earned in 1999
for our Chairman, President and Chief Executive Officer and our three other
most highly compensated executive officers, whose compensation, as defined by
the Securities and Exchange Commission, exceeded $100,000 in 1999. The
information in the table includes salaries, bonuses, stock options granted and
other miscellaneous compensation. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constituted less than 10% of the total annual salary and bonus of each of the
named executive officers in 1999.

Summary Compensation Table

Long-Term
Compensation
Annual ------------
Compensation Securities
---------------- Underlying Other
Name and Principal Position Salary Bonus Options Compensation
--------------------------- -------- ------- ------------ ------------

Monte Zweben..................... $153,077 $75,000 -- --
Chairman, President and
Chief Executive Officer

Williams H. Evans................ 171,346 10,000 -- --
Vice President of Marketing

Scott D. Hanham.................. 155,769 42,500 400,000 --
Vice President of Product
Development and Services

Jeffrey G. Johnson............... 135,000 73,928(1) -- --
Vice President of Sales

- --------
(1) Includes sales commissions of $39,628.

Option Grants in Last Fiscal Year

The following table shows each grant of stock options during 1999 to the
individuals listed on the previous table.

The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash or by promissory notes.

The potential realizable value is calculated based on the ten-year term of
the option and the market value at the time of grant. Based on the rules
promulgated by the Securities and Exchange Commission, we have assumed a stock
price appreciation of 5% and 10% from the date of this offering. These
assumptions do not represent our prediction of our stock price performance. The
potential realizable values at 5% and 10% appreciation are calculated by:

. multiplying the number of shares of common stock subject to a given
option by the assumed initial public offering price of $12.00 per share;

. assuming that the total stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table from the date
of this offering until the expiration of the options; and

. subtracting from that result the total option exercise price.

The shares listed in the following table under "Number of Securities
Underlying Options Granted" have a ten-year term, subject to earlier
termination if the optionee's service with us ceases.

Percentages shown under "Percent of Total Options Granted to Employees in
1999" are based on a total of approximately 6,310,000 options granted to our
employees under our stock option plans during 1999.

Potential Realizable Value
at Annual Rates of Price
Percent of Appreciation for
Number of Total Options Individual Grants Option Term
Securities Granted to ------------------------- --------------------------
Underlying Employees in Exercise Price Expiration
Name Options Granted 1999 per Share Date 5% 10%
- ---- ---------------- ------------- -------------- ---------- ------------ -------------

Monte Zweben(1)......... -- -- -- -- -- --
William H. Evans........ -- -- -- -- -- --
Scott D. Hanham......... 400,000 6.33% $0.25 11/16/09 $ 7,455,665 $ 11,544,920
Jeffrey G. Johnson...... -- -- -- -- -- --

- --------
(1) In April 2000, Mr. Zweben received an option to purchase 600,000 shares of
our common stock at an exercise price of $6.00 per share, which the board
of directors determined to be the fair market value of our common stock.
This option will vest monthly over three years beginning June 5, 2002.

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

The following table presents the number of shares acquired and the value
realized upon exercise of stock options during 1999 and the number of shares of
our common stock subject to "exercisable" and "unexercisable" stock options
held as of December 31, 1999 by our Chairman, President and Chief Executive
Officer and each of the other executive officers on the summary compensation
table. Amounts shown under the column "Value Realized" are based on the initial
public offering price of $12.00 per share, without taking into account any
taxes that may be payable in connection with the transaction, multiplied by the
number of shares underlying the option, less the exercise price payable for
these shares.

Securities Value of
Underlying Unexercised
Number of Shares Unexercised In-The-Money
Acquired Upon Options at Options at
Exercise Value Realized December 31, 1999 December 31, 1999
---------------- -------------- -------------------- --------------------
Name Vested Unvested Vested Unvested
- ---- -------- --------- -------- ---------

Monte Zweben............ -- -- -- -- -- --
William H. Evans........ -- -- -- -- -- --
Scott D. Hanham......... 1,200,000(1) $14,290,000 -- -- -- --
Jeffrey G. Johnson...... -- -- -- -- -- --

- --------
(1) Includes 941,667 shares subject to a right of repurchase as of December 31,
1999.

Employee Benefit Plans

2000 Equity Incentive Plan

We adopted our 2000 equity incentive plan in April 2000. The incentive plan
is an amendment and restatement of our 1998 Equity Incentive Plan.

Administration. The board administers the incentive plan unless it delegates
administration to a committee. The board or this committee has the authority to
construe, interpret and amend the incentive plan and determine:

. the grant recipients;

. the grant dates;

. the number of shares subject to the award;

. the exercisability and vesting of the award;

. the exercise price;

. the type of consideration; and

. the other terms of the award.

Share Reserve. We have reserved a total of 30,000,000 shares of our common
stock for issuance under the incentive plan. On January 1 of each year for 10
years, starting on January 1, 2001, the share reserve will automatically be
increased by a number of shares equal to the greater of:

. 5% of our outstanding shares on a fully-diluted basis; or

. that number of shares subject to stock awards made under the incentive
plan during the prior 12-month period.

However, the automatic increase is subject to reduction by the board, and no
more than 200,000,000 shares of the share reserve, as increased, may be used
for incentive stock options. If the recipient of a stock award does not
purchase the shares subject to the stock award before the stock award expires
or terminates, the shares that are not purchased again become available for
issuance under the incentive plan.

Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to our employees. The board also may
grant nonstatutory stock options, stock bonuses and restricted stock purchase
awards to our employees, directors and consultants.

. A stock option is a contractual right to purchase a specified number of
our shares at a specified price, called the exercise price, for a
specified period of time.

. An incentive stock option is a stock option that has met the
requirements of Section 422 of the Internal Revenue Code. This type of
option is free from regular tax at both the date of grant and the date
of exercise. However, the difference between the fair market value on
date of exercise and the exercise price is an item of alternative
minimum tax unless there is a disqualifying disposition in the year of
exercise. If two holding period tests are met--two years between grant
date and sale date and one year between exercise date and sale date--all
profit on the sale of our shares acquired by exercising the incentive
stock option is long-term capital gain income. However, if either of the
holding periods is not met, there has been a disqualifying disposition,
and a portion of any profit will be taxed at ordinary income rates.

. A nonstatutory stock option is a stock option not meeting the Internal
Revenue Code criteria for qualifying incentive stock options and,
therefore, triggering a tax upon exercise. This type of option requires
payment of state and federal income tax and, if applicable, other taxes
on the difference between the exercise price and the fair market value
on the exercise date.

. A restricted stock purchase award is our offer to sell our shares at a
price either at or near the fair market value of the shares. A stock
bonus is a grant of our shares at no cost to the recipient in
consideration for past services performed.

The board may not grant an incentive stock option to any person who, at the
time of the grant, owns or is deemed to own stock possessing more than 10% of
our total combined voting power or the total combined voting power of an
affiliate of ours, unless the exercise price is at least 110% of the fair
market value of the stock on the grant date and the option term is five years
or less.

Limits on Option Grants. There are limits on the number of shares that the
board may grant under an option.

. Section 162(m) of the Internal Revenue Code denies a deduction to
publicly held corporations for compensation paid to the chief executive
officer and the four highest compensated officers in a taxable year to
the extent that the compensation for each officer exceeds $1,000,000.
When we become subject to Section 162(m), to prevent options granted
under the incentive plan from being included in compensation, the board
may not grant options under the incentive plan to an employee covering
an aggregate of more than 10,000,000 shares in any calendar year.

. In addition, an employee may not receive incentive stock options that
exceed the $100,000 per year limitation provide in Section 422(d) of the
Internal Revenue Code. In calculating the $100,000 per year limitation,
we determine the aggregate number of shares under all incentive stock
options granted to that employee that will become exercisable for the
first time during a calendar year. For this purpose, we include
incentive stock options granted under the incentive plan as well as
under any other stock plans that we maintain. We then determine the
aggregate fair market value of the stock as of the grant date of the
option. Taking the options into account in the order in which they were
granted, we treat only the options covering the first $100,000 worth of
stock as incentive stock options. We treat any options covering stock in
excess of $100,000 as nonstatutory stock options.

Option Terms. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock
on the grant date. It may grant nonstatutory stock options at a discount. If
the value of our shares declines after the date of grant, the board may offer
option holders the opportunity to replace their outstanding higher-priced
options with new lower-priced options. To the extent required by Section 162(m)
of the Internal Revenue Code, the repriced option is considered to be canceled
and a new option granted, but both options will be counted against the Section
162(m) limit discussed above.

The maximum option term is 10 years. The board may provide for exercise
periods of any length in individual option grants. However, generally an option
terminates three months after the option holder's service to us terminates. If
this termination is due to the option holder's disability, the exercise period
generally is extended to 12 months. If this termination is due to the option
holder's death or if the option holder dies within three months after the
option holder's service terminates, the exercise period generally is extended
to 18 months following the option holder's death.

The board may provide for the transferability of nonstatutory stock options
but not incentive stock options. However, the option holder may designate a
beneficiary to exercise either type of option following the option holder's
death. If the option holder does not designate a beneficiary, the option
holder's option rights will pass by will or by the laws of descent and
distribution.

Terms of Other Stock Awards. The board determines the purchase price of
other stock awards. However, the board may award stock bonuses in consideration
of past services without a purchase payment. Shares that we sell or award under
the incentive plan may, but need not be, restricted and subject to a repurchase
option in our favor based on with a vesting schedule that the board determines.
The board, however, may accelerate the vesting of the restricted stock.

Other Provisions. Transactions not involving our receipt of consideration,
including a merger, consolidation, reorganization, stock dividend and stock
split, may change the class and number of shares subject to the incentive plan
and to outstanding awards. In that event, the board will appropriately adjust
the incentive plan for the class and the maximum number of shares subject to
the incentive plan, to the cap on the number of shares available for incentive
stock options, and to the Section 162(m) limit. It also will adjust outstanding
awards for the class, number of shares and price per share subject to the
awards.

If a change in control happens, the surviving entity may either assume or
replace outstanding awards under the incentive plan. If this does not occur,
then generally the vesting and exercisability of the awards will accelerate,
and unexercised awards will terminate immediately before the event. A change in
control includes the following:

. a dissolution, liquidation or sale of all or substantially all of our
assets;

. a merger or consolidation in which we are not the surviving corporation;

. a reverse merger in which we are the surviving corporation but the
shares of our common stock outstanding immediately preceding the merger
are converted by virtue of the merger into other property; and

. after this initial public offering, generally the acquisition by any
person, entity or group of the beneficial ownership of our securities
representing at least 50% of the combined voting power permitted to vote
in the election of directors.

If there is a change in control, other than a merger or consolidation for
the purpose of a change in domicile, then for options held by persons then
performing services as an employee, director, or consultant to us, the vesting
of the option will be accelerated by 50%.

Stock Awards Granted. As of May 31, 2000, we had:

. 15,129,700 shares upon the exercise of options under the incentive plan
issued and outstanding;

. options to purchase 5,791,800 shares at a weighted average exercise
price of $3.10 per share outstanding; and

. 9,078,500 shares available for future grant.

As of May 31, 2000, the board had not granted any stock bonuses or
restricted stock under the incentive plan.

Plan Termination. The incentive plan will terminate in 2010 unless the board
terminates it sooner.

2000 Non-Employee Directors' Stock Option Plan

We adopted our 2000 non-employee directors' stock option plan in April 2000.
The directors' plan provides for the automatic grant to our non-employee
directors of options to purchase shares of our common stock.

Share Reserve. We have reserved a total of 300,000 shares of our common
stock for issuance under the directors' plan. On January 1 of each year for 10
years, starting on January 1, 2001, the share reserve will automatically be
increased by a number of shares equal to the greater of:

. 0.25% of our outstanding shares on a fully-diluted basis; or

. that number of shares subject to options granted under the directors'
plan during the prior 12-month period.

However, the automatic increase is subject to reduction by the board. If an
option holder does not purchase the shares subject to their option before the
option expires or terminates, the shares that are not purchased again become
available for issuance under the directors' plan.

Administration. The board administers the directors' plan. The board has the
authority to construe, interpret and amend the directors' plan but the
directors' plan specifies the essential terms of the options, including:

. the option recipients;

. the grant dates;

. the number of shares subject to the option;

. the exercisability and vesting of the option;

. the exercise price; and

. the type of consideration.

Eligibility. We automatically will issue options to our non-employee
directors under the directors' plan as follows:

. Each person who is a non-employee director on the effective date of this
offering or who is first elected or appointed after the date of the
prospectus as a non-employee director will automatically receive an
initial option for 25,000 shares. The initial option is exercisable
immediately but one third of the shares will vest one year after the
date of grant and 1/36th of the shares will vest each month thereafter
for 2 years;

. In addition, on the day after each of our annual meetings of the
stockholders, starting with the annual meeting in 2001, each non-
employee director will automatically receive an annual option for 7,500
shares. The annual option is exercisable immediately but will vest
monthly over the next year. If the non-employee director is appointed to
the board after the annual meeting, the annual option will be adjusted
based on the time actually served by the director;

. Finally, on the day after each of our annual meetings of the
stockholders, starting with the annual meeting in 2001, each non-
employee director who is serving on a board committee will automatically
receive a committee option for 5,000 shares. The committee option is
exercisable immediately but will vest monthly over the next year. If the
non-employee director is appointed to the committee after the annual
meeting, the committee option will be pro rated.

As long as the option holder continues to serve with us, whether in the
capacity of a director, an employee or a consultant, the option will continue
to vest and be exercisable during its term. When the option holder's service
terminates, we will have the right to repurchase any unvested shares at the
original exercise price, without interest.

Option Terms. Options have an exercise price equal to 100% of the fair
market value of our common stock on the grant date. The option term is 10 years
but it terminates three months after the option holder's service terminates. If
this termination is due to the option holder's disability, the post-termination
exercise period is extended to 12 months. If this termination is due to the
option holder's death or if the option holder dies within three months after
their service terminates, the post-termination exercise period is extended to
18 months following death.

The option holder may transfer the option by gift to immediate family or for
estate-planning purposes. The option holder also may designate a beneficiary to
exercise the option following the option holder's death. Alternatively, the
option exercise rights will pass by the option holder's will or by the laws of
descent and distribution.

Other Provisions. Transactions not involving our receipt of consideration,
including a merger, consolidation, reorganization, stock dividend and stock
split, may change the class and number of

shares subject to the directors' plan and to outstanding options. In that
event, the board will appropriately adjust the directors' plan for the class
and the maximum number of shares subject to the directors' plan and to the
automatic option grants. It also will adjust outstanding options for the class,
number of shares and price per share subject to the options.

If a change in control happens, the surviving entity may either assume or
replace outstanding options under the directors' plan. If this does not occur,
then generally the vesting of the options will accelerate, and unexercised
options will terminate immediately before the event. A change in control
includes the following:

. A dissolution, liquidation or sale of all or substantially all of our
assets;

. A merger or consolidation in which we are not the surviving corporation;

. A reverse merger in which we are the surviving corporation but the
shares of our common stock outstanding immediately preceding the merger
are converted by virtue of the merger into other property;

. Generally the acquisition by any person, entity or group of the
beneficial ownership of our securities representing at least 50% of the
combined voting power permitted to vote in the election of directors;
and

. If there is a change in control, other than a merger or consolidation
for the purpose of a change in domicile, then for options held by
persons then performing services as an employee or director of, or
consultant to, us, the vesting of the option will be accelerated by 50%.

Options Issued. The directors' plan will not be effective until the
effective date of this offering. We have not issued any options under the
directors' plan.

Plan Termination. The directors' plan has no set termination date.

2000 Employee Stock Purchase Plan

We adopted our 2000 employee stock purchase plan in April 2000.

Administration. The board administers the purchase plan unless it delegates
administration to a committee. The board or this committee has the authority to
construe, interpret and amend the purchase plan and determine the terms of
rights granted under the purchase plan.

Share Reserve. We reserved 4,000,000 shares of our common stock for issuance
to eligible employees with purchase rights under the purchase plan. On January
1 of each year for 10 years, starting on January 1, 2001, the share reserve
will automatically be increased by a number of shares equal to the greater of:

. 2.5% of our outstanding shares on a fully-diluted basis; or

. that number of shares issued under the purchase plan during the prior
12-month period.

However, the automatic increase is subject to reduction by the board, and no
more than 80,000,000 shares of the share reserve, as increased, may be used
under the purchase plan.

Eligibility. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which eligible employees may purchase our
common stock through payroll deductions. We implement the purchase plan by
offerings of purchase rights to eligible employees. Generally, all of our full-
time employees in the United States and in the United Kingdom who have been
employed

for at least 10 days may participate in offerings under the purchase plan.
However, no employee may participate in the purchase plan if immediately after
we grant the employee a purchase right, the employee has voting power over 5%
or more of our outstanding capital stock.

Offerings. Under the purchase plan, the board may specify offerings of up to
27 months. Unless the board determines differently, common stock is purchased
for accounts of participating employees at a price per share equal to the lower
of:

. 85% of the fair market value of a share on the first day of the
offering; or

. 85% of the fair market value of a share on the purchase date.

The first offering will begin on the effective date of this offering, and we
expect to offer shares registered on a Form S-8 registration statement. The
fair market value of the shares on the first date of this offering will be the
price per share at which our shares are first sold to the public as specified
in the final prospectus for this offering. Otherwise, fair market value
generally means the closing sales price, rounded up where necessary to the
nearest whole cent, for these shares, or the closing bid, if no sales were
reported, as quoted on the Nasdaq National Market on the last trading day
before the relevant determination date, as reported in The Wall Street Journal.

The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:

. 85% of the fair market value of a share on the day they began
participating in the purchase plan; or

. 85% of the fair market value of a share on the purchase date.

Participating employees may authorize payroll deductions of up to 15% of
their total compensation for the purchase of stock under the purchase plan.
Employees may end their participation in the offering before a purchase period
ends. Their participation ends automatically on termination of their
employment.

Other Provisions. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established
by us or by our affiliates, if any, do not permit the employee's rights to
purchase our stock to accrue at a rate which exceeds $25,000 of fair market
value of our stock for each calendar year in which the purchase rights are
outstanding.

Upon a change in control, the board may provide that the successor
corporation either will assume or replace outstanding purchase rights.
Alternatively, the board may shorten the ongoing offering period and provide
that our stock will be purchased for the participants immediately before the
change in control.

Shares Issued. The purchase plan will not be effective until the effective
date of this initial public offering of our stock. Therefore, as of the date of
this prospectus, no shares of common stock have been purchased under the
purchase plan.

Plan Termination. The purchase plan has no set termination date.

401(k) Plan

Effective February 1, 2000, we adopted a 401(k) plan to provide eligible
employees with a tax preferential savings and investment program. Employees
become eligible to participate in the 401(k)

plan on the first day they perform an hour of service for us, at which point we
classify them as participants. They may elect to reduce their current
compensation by up to the lesser of 20% of eligible compensation or the
statutorily prescribed annual limit, $10,500 in 2000, and have this reduction
contributed to the 401(k) plan. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants or by us to the 401(k) plan,
and income earned on plan contributions, are generally not taxable to the
participants until withdrawn. We have not made any contributions to the 401(k)
plan to date.

Limitation of Liability and Indemnification

Our certificate of incorporation and bylaws contain provisions permitted
under Delaware law relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except in circumstances involving wrongful acts,
including:

. for any breach of the director's duty of loyalty to us or our
stockholders;

. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. for any acts under section 174 of the Delaware General Corporation Law;
or

. for any transaction from which the director derives an improper personal
benefit.

These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, including an injunction or rescission, in
the event of a breach of the director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws. In addition, we
intend to enter into separate indemnification agreements with our directors and
executive officers that provide each of them indemnification protection in the
event the amended and restated certificate of incorporation and amended and
restated bylaws are subsequently amended. We believe that these provisions and
agreements will assist us in attracting and retaining qualified individuals to
serve as directors and officers.

Indemnification Agreements

Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:

. for any breach of the director's duty of loyalty to us or our
stockholders;

. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or

. for any transaction from which the director derived an improper personal
benefit.

Our bylaws provide that:

. we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
very limited exceptions;

. we may indemnify our employees and agents to the fullest extent
permitted by the Delaware General Corporation Law, subject to very
limited exceptions;

. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding;

. we may advance expenses, as incurred, to our employees and agents in
connection with a legal proceeding; and

. the rights conferred in the bylaws are not exclusive.

In addition to the indemnification required in our certificate of
incorporation and bylaws, we have entered into indemnity agreements with each
of our current directors and executive officers. These agreements provide for
the indemnification of our officers and directors for all expenses and
liabilities incurred in connection with any action or proceeding brought
against them by reason of the fact that they are or were our agents. We also
intend to obtain directors' and officers' insurance to cover our directors,
officers and some of our employees for liabilities, including liabilities under
securities laws. We believe that these indemnification provisions and
agreements and this insurance are necessary to attract and retain qualified
directors and officers.

The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against
directors and officers as required by these indemnification provisions. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification by us is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.

CERTAIN TRANSACTIONS

Blue Martini was established as a limited liability company in June 1998. In
January 1999, the limited liability company was merged into Blue Martini
Software, Inc., a Delaware corporation. As a result of the merger, each class B
unit of the limited liability company was converted into one share of common
stock of the corporation and each class A unit of the limited liability company
was converted into one share of series A preferred stock of the corporation.
The table below reflects the units issued by the limited liability company as
if issued by the corporation.

The following executive officers, directors, former directors or holders of
more than five percent of our voting securities purchased securities for a
purchase price in excess of $60,000 in the amounts and as of the dates set
forth below.

Shares of Preferred Stock
--------------------------------
Common Series
Stock A(1) Series B Series C
----------- --------- ------------ ---------

Directors and Executive
Officers
Monte Zweben(2)............... 22,000,000(1) 3,571,432 2,105,264 666,668
John E. Calonico, Jr. ........ 66,666 -- -- --
Thomas M. Siebel(3)........... 79,552(1) 714,284 -- --
William F. Zuendt............. 381,844(1) -- 842,104 --
Entities Affiliated with
Directors
Entities affiliated with
Matrix Partners V, L.P.(4)... -- -- 6,315,788 973,332
Other 5% Stockholders
Entities affiliated with U.S.
Venture Partners............. -- -- -- 5,666,664
Price Per Share............... $0.01-$1.50 $0.28 $0.48 $1.50
Date(s) of Purchase........... Various June 1998 January 1999 July 1999

- --------
(1) Represents shares issued upon the merger of Blue Martini LLC into Blue
Martini Software, Inc.

(2) Includes 2,892,000 shares of common stock held by the Zweben Family Limited
Partnership and 3,571,432 shares of series A preferred stock, 2,105,264
shares of series B preferred stock and 666,668 shares of series C preferred
stock held by the Zweben Family Revocable Trust.

(3) Former director.

(4) Andrew W. Verhalen, one of our directors, is a general partner of entities
associated with Matrix Partners.

Blue Martini has granted registration rights following this offering to
these and other preferred stockholders with respect to their shares of common
stock.

In October 1998, Dr. A. Michael Spence, James C. Gaither and William F.
Zuendt, three of our directors, each purchased 381,884 shares of our common
stock at a purchase price of $0.01, including 214,787 shares that were subject
to a right of repurchase as of May 31, 2000.

Cooley Godward LLP performs legal services for us. James C. Gaither, one of
our directors, is a partner of Cooley Godward LLP.

In 1999, license and service revenues from Levi Strauss & Co. accounted for
19% of our total revenues. James C. Gaither, one of our directors, is a
director of Levi Strauss & Co.

In the first quarter of 2000, we have incurred expenses of $722,000 to Young
& Rubicam, Inc. for advertising services. Edward H. Vick, one of our directors,
is chairman and chief creative officer of Young & Rubicam.

In February 2000, we granted to Edward H. Vick, one of our directors, an
option to purchase 200,000 shares of our common stock at an exercise price of
$1.50.

We have entered into an agreement with John E. Calonico, Jr., our Vice
President, Chief Financial Officer and Secretary. Under this agreement we have
agreed to pay Mr. Calonico a lump sum equal to six months of his base salary if
we terminate his employment without cause.

We intend to enter into indemnification agreements with our directors and
officers for the indemnification of and advancement of expenses to these
persons to the full extent permitted by law. We also intend to execute these
agreements with our future directors and officers.

PRINCIPAL STOCKHOLDERS

The following table presents information as to the beneficial ownership of
our common stock as of May 31, 2000 and as adjusted to reflect the sale of our
common stock in this offering by:

. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;

. each of our directors;

. each of the executive officers in our summary compensation table; and

. all of our directors and executive officers as a group.

Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable prior to August 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address for each listed
stockholder is c/o Blue Martini Software, Inc., 2600 Campus Drive, San Mateo,
CA 94403.

The percentage of common stock outstanding as of May 31, 2000 is based on
59,923,338 shares of common stock outstanding on that date, assuming that all
outstanding preferred stock has been converted into common stock.

Percent Beneficially Owned
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------ ------------------ --------------- --------------

Directors and Executive
Officers
Monte Zweben(1)............. 27,235,364 45.5% 40.4
William H. Evans(2)......... 1,527,372 2.5% 2.3
Scott D. Hanham(3).......... 1,200,000 2.0% 1.8
Jeffrey G. Johnson(4)....... 1,527,372 2.5% 2.3
James C. Gaither(5)......... 381,844 * *
A. Michael Spence(5)........ 381,844 * *
Andrew W. Verhalen(6)....... 7,289,120 12.2% 10.8
Edward H. Vick.............. -- *
William F. Zuendt(5)........ 1,223,948 2.0% 1.8
All Directors and Executive
Officers as a Group
(11 Persons)(7)............ 40,833,530 68.1% 60.6

Other Stockholders
Entities Affiliated with
Matrix Partners(6)......... 7,289,120 12.2% 10.8
Entities Affiliated with
U.S. Venture Partners(8)... 5,666,664 9.5% 8.4

- --------
* Represents beneficial ownership of less than 1%.

(1) Includes 2,892,000 shares held by the Zweben Family Limited Partnership and
6,343,364 shares held by the Zweben Family Revocable Trust.

(2) Includes 795,506 shares subject to a right of repurchase at the purchase
price for such shares.

(3) Includes 816,667 shares subject to a right of repurchase at the purchase
price for such shares. Includes 316,666 shares held by the Scott and Ann
Hanham Family Trust.

(4) Includes 795,506 shares subject to a right of repurchase at the purchase
price for such shares.

(5) Includes 214,787 shares subject to a right of repurchase at the purchase
price for such shares.

(6) Represents 6,560,208 shares held by Matrix Partners V, L.P. and 728,912
shares held by Matrix V Entrepreneurs Fund, L.P. Mr. Verhalen is a general
partner of entities associated with Matrix Partners and disclaims
beneficial ownership of the shares held by entities affiliated with Matrix
Partners except to the extent of his pecuniary interest in entities
affiliated with Matrix Partners.

(7) Includes 3,052,040 shares subject to a right of repurchase and 7,289,120
shares held by affiliates of our directors.

(8) Represents 5,184,996 shares held by U.S. Venture Partners VI, L.P., 238,000
shares held by USVP VI Affiliates Fund, L.P., 153,000 shares held by USVP
VI Entrepreneur Partners, L.P. and 90,668 shares held by 2180 Associates
Fund VI, L.P. Presidio Management Group VI, LLC is the general partner of
all of these entities.

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, our authorized capital stock will consist
of 500,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares
of preferred stock, $0.001 par value.

Common Stock

As of May 31, 2000, there were 59,923,338 shares of common stock outstanding
that were held of record by approximately 228 stockholders after giving effect
to the conversion of our preferred stock into common stock at a four-to-one
ratio. There will be 67,423,338 shares of common stock outstanding, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options, after giving effect to the sale of the shares of common
stock offered by this prospectus.

Voting rights. The holders of common stock are entitled to one vote per
share on all matters submitted to a vote of our stockholders. In addition, our
certificate of incorporation and bylaws require the approval of two-thirds,
rather than a majority, of the shares entitled to vote for certain matters. For
a description of these matters, see "Anti-Takeover Provisions."

Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive ratably any dividends out of assets legally available
therefor as our board of directors may from time to time determine. Upon
liquidation, dissolution or winding up of Blue Martini, holders of our common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable.

Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets legally
available at the times and in the amounts as our board of directors may
determine.

No preemptive or similar rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.

Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of Blue Martini, the holders of our common stock are entitled to
share ratably among themselves in all assets remaining after payment of all
liabilities and the liquidation preferences of any outstanding preferred stock.
Each outstanding share of our common stock is, and all shares of our common
stock to be outstanding upon completion of this offering will be, fully paid
and nonassessable.

Preferred Stock

Upon the closing of this offering, each outstanding share of our preferred
stock will be converted into four shares of our common stock. See Note 9 of
notes to financial statements for a description of our preferred stock.

Following the offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series,
and to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations or restrictions. The
board of directors can

also increase or decrease the number of shares of any series, but not below the
number of shares of such series then outstanding, without any further vote or
action by the stockholders. The board may authorize the issuance of preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of the common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, have the
effect of delaying, deferring or preventing a change in control of Blue Martini
and may adversely affect the market price of the our common stock and the
voting and other rights of the holders of our common stock. We have no current
plan to issue any shares of preferred stock.

Warrants

As of May 31, 2000, after giving effect to the conversion of all outstanding
preferred stock into common stock, warrants to purchase a total of 2,445,000
shares of our common stock were outstanding at a weighted average exercise
price of $4.94 per share. Each warrant contains provisions for the adjustment
of the exercise price and the number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations.

Registration Rights

As a result of an investors' rights agreement dated January 13, 1999 as
amended July 20, 1999, among us and some of our stockholders, the holders of
23,297,264 shares of our common stock will be entitled to rights with respect
to the registration of these shares under the Securities Act, as described
below.

Demand Registration Rights. At any time after six months following this
offering, the holders of at least 50% of the shares having registration rights
can request that we register all or a portion of their shares, so long as such
registration covers at least 40% of their shares and the total offering price
of the shares to the public is at least $10 million. We will only be required
to file two registration statements in response to these demand registration
rights. We may postpone the filing of a registration statement for up to 120
days twice in a 12 month period if we determine that the filing would be
seriously detrimental to us and our stockholders.

Piggyback Registration Rights. If we register any securities for public
sale, the stockholders with registration rights will have the right to include
their shares in the registration statement. The managing underwriter of any
underwritten offering will have the right to limit the number of shares
registered by these holders to be included in the registration statement due to
marketing reasons.

Form S-3 Registration Rights. The holders of the shares having registration
rights can request that we register their shares if we are eligible to file a
registration statement on Form S-3 and if the total price of the shares offered
to the public is at least $3 million. We will only be required to file two
registration statements in response to these S-3 registration rights. We may
postpone the filing of a registration statement for up to 90 days once in a 12
month period if we determine that the filing would be seriously detrimental to
us and our stockholders.

We will pay all expenses incurred in connection with the registrations
described above, except for underwriters' and brokers' discounts and
commissions, which will be paid by the selling stockholders.

The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
under Rule 144 of the Securities Act. In any event, the registration rights
described above will expire three years after this offering is completed.

Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.

Anti-Takeover Provisions

The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or discouraging another
person from acquiring control of our company.

Delaware Law

We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of more than 10% of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an "interested stockholder" unless:

. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;

. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or

. on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.

A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.

Charter and Bylaw Provisions

Our certificate of incorporation and bylaws provide that:

. following the completion of this offering, no action shall be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and that stockholders may not act
by written consent;

. following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
shall be required to adopt, amend or repeal our bylaws or amend or
repeal the provisions of our certificate of incorporation regarding the
election and removal of directors and ability of stockholders to take
action;

. stockholders may not call special meetings of the stockholders without
advance notice and approval of the stockholders holding at least a
majority of the outstanding shares of stock;

. stockholders may not fill vacancies on the board;

. following the completion of this offering, our board of directors will
be divided into three classes, each serving staggered three-year terms,
which means that only one class of directors will be elected at each
annual meeting of stockholders, with the other classes

continuing for the remainder of their respective terms, and directors
may only be removed for cause by the holders of a majority of the shares
entitled to vote at an election of directors; and

. we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.

These provisions of our certificate of incorporation and bylaws may have
the effect of delaying, deferring or discouraging another person from
acquiring control of our company.

Transfer Agent

The transfer agent and registrar for our common stock is Computershare
Investor Services, LLC.

Listing

Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "BLUE."

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of our common stock for sale
will have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.

Upon the completion of this offering, we will have 67,423,338 shares of our
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options. Of the outstanding
shares, all of the shares sold in this offering will be freely tradable, except
that any shares held by directors, officers or owners of ten percent or more of
our stock, may only be sold in compliance with the limitations described below.
The remaining 59,923,338 shares of our common stock will be deemed "restricted
securities" as defined under Rule 144. Restricted shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. Subject to the lock-up agreements
described below, the provisions of Rules 144, 144(k) and 701 and a right of
repurchase in favor of Blue Martini applicable to some of our common stock,
additional shares will be available for sale in the public market as follows:

. no shares will be eligible for sale within 90 days from the date of this
prospectus; up to 6,744,121 shares will be eligible for sale 90 days
from the date of this prospectus in the event that the locked-up shares
are released early, as described below;

. an additional 1,769,732 shares will be eligible for sale 120 days from
the date of this prospectus in the event that the locked-up shares are
released early, as described below;

. 46,075,619 shares will be eligible for sale upon the expiration of the
180-day lock-up period; and

. 5,333,866 shares will be eligible for sale at various times after the
180-day lock-up period.

Lock-Up Agreements

A total of 227 of our stockholders have entered into lock-up agreements in
connection with this offering accounting for 59,081,234 shares of our common
stock outstanding. These lock-up agreements provide that these persons will not
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Goldman, Sachs & Co. or as
described below. Goldman, Sachs & Co. has advised us that it has no present
intention to release any of the shares subject to the lock-up agreements prior
to the expiration of the lock-up periods described below. These lock-up
agreements do not restrict the transfer of shares of our common stock purchased
under the directed share program in connection with this offering or in the
open market following the date of this prospectus.

If our stock price is greater than twice the initial public offering price
per share for the time periods set forth below, then a percentage of the
securities subject to lock-up agreements will be released from the transfer
restrictions of the lock-up agreements at the time set forth below.

Time Period Amount Released Time Released
- ----------------------------------------------------------------------------------

20 of the 40 consecutive 15% of the securities The 90th day after the
trading days ending on subject to lock-up date of this prospectus.
the last trading day agreements as of the date of
preceding the 90th day this prospectus.
after the date of this
prospectus.
- ----------------------------------------------------------------------------------
20 of the 40 consecutive An additional 20% of the The 120th day after the
trading days ending on securities subject to lock- date of this prospectus.
the last trading day up agreements as of the date
preceding the 120th day of this prospectus.
after the date of this
prospectus.

However, if the securities to be released above would be released during one
of the Company's blackout periods, then if our stock price is greater than
twice the initial public offering price per share for the time periods set
forth below, a percentage of the securities subject to the lock-up agreements
will be released from the transfer restrictions of the lock-up agreements at
the time set forth below.

Scheduled Release Time Period Amount Released Actual Release
- ----------------------------------------------------------------------------------------

The 90th day after the 20 of the 40 15% of the The 20th day after
date of this prospectus consecutive trading securities subject the end of the
is during a blackout days ending on the to lock-up blackout period.
period. 20th day after the agreements as of the
end of the blackout date of this
period. prospectus.
- ----------------------------------------------------------------------------------------
The 120th day after the 20 of the 40 An additional 20% of The first day after
date of this prospectus consecutive trading the securities the end of the
is during a blackout days ending on the subject to lock-up blackout period.
period. first day after the agreements as of the
end of the blackout date of this
period. prospectus.

Blue Martini's blackout period begins on the last four weeks of each
calendar quarter and ends three trading days after it announces its quarterly
results. During the blackout period, we do not allow our directors, officers
and key employees to trade our stock.

Rule 144

In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate of
Blue Martini, who has beneficially owned shares for at least one year is
entitled to sell within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
one percent of the then-outstanding shares of our common stock, which will be
approximately 674,423 shares immediately after this offering, or the average
weekly trading volume in our common stock during the four calendar weeks
preceding the date on which notice of the sale is filed. In addition, a person
who is not deemed to have been an affiliate at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell these shares under Rule 144(k)
without regard to the requirements described above. To the extent

that shares were acquired from one of our affiliates, a person's holding period
for the purpose of effecting a sale under Rule 144 would commence on the date
of transfer from the affiliate.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors, other than affiliates, who purchases
or receives shares from us in connection with a compensatory stock purchase
plan or option plan or other written agreement will be eligible to resell their
shares beginning 90 days after the date of this prospectus, subject only to the
manner of sale provisions of Rule 144. Affiliates who purchase or receive
shares from us in connection with a compensatory stock purchase plan or option
plan or other written agreement will be eligible to sell their shares beginning
90 days after the date of this prospectus under Rule 701 without compliance
with the Rule 144 holding period requirements.

Registration Rights

On the date 180 days after the date of this prospectus, the holders of
23,297,264 shares or their transferees, will be entitled to rights with respect
to the registration of their shares under the Securities Act. Registration of
their shares under the Securities Act would result in the shares becoming
freely tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of this
registration.

Stock Options

We intend to file a registration statement under the Securities Act covering
the 30,300,000 shares reserved for issuance under our stock option plans and
4,000,000 shares reserved for issuance under our employee stock purchase plan.
The registration statement is expected to be filed and become effective as soon
as practicable after the closing of this offering. Accordingly, shares
registered under the registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale at various times as
permitted under the lock-up provisions discussed above.

UNDERWRITING

Blue Martini and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co., Dain
Rauscher Incorporated, Thomas Weisel Partners LLC and U.S. Bancorp Piper
Jaffray Inc. are the representatives of the underwriters:

Underwriters Number of Shares
------------ ----------------

Goldman, Sachs & Co. .......................................
Dain Rauscher Incorporated..................................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total..................................................... 7,500,000
=========

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,125,000 shares from Blue Martini to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Blue Martini. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.

Paid by Blue Martini
-------------------------
No Exercise Full Exercise
----------- -------------

Per share.......................................... $ $
Total.............................................. $ $

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price.
Any of these securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $
per share from the initial public offering price. If all the shares are not
sold at the initial public offering price, the representatives may change the
offering price and the other selling terms.

Blue Martini has agreed with the underwriters not to dispose of or hedge any
of its common stock or securities convertible into or exchangeable for shares
of common stock during the period from the date of this prospectus continuing
through the 180 days after the date of this prospectus, except with the prior
written consent of the representatives. This restriction does not apply to any
existing employee benefits plans or securities issues in connection with
acquisition transactions, provided that the recipients of such securities agree
to be bound by the lock-up provisions applicable to other stockholders.

Blue Martini's directors, officers and substantially all of its stockholders
have agreed with the underwriters not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This restriction shall terminate
as to 15% of the locked-up shares after 90 days and an additional 20% of the
locked-up shares after 120 days after the date of this prospectus, subject to
delays as a result of the timing of Blue Martini's earnings releases and
compliance with insider trading policies, in the event that the reported last
sale price of Blue Martini's common stock on the Nasdaq National Market is at
least twice the initial public offering price for predetermined periods ending
on these dates. See "Shares Eligible for Future Sale" for a discussion of
transfer restrictions.

At the request of Blue Martini, the underwriters have reserved for sale, at
the initial public offering price, up to 400,000 shares of common stock for
certain parties having an existing commercial relationship with Blue Martini.
There can be no assurance that any of the reserved shares will be so purchased.
The number of shares available for sale to the general public in the offering
will be reduced by the number of reserved shares sold. Any reserved shares not
so purchased will be offered to the general public on the same basis as the
other shares offered hereby.

Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
negotiated among Blue Martini and the representatives of the underwriters.
Among the factors to be considered in determining the initial public offering
price of the shares, in addition to prevailing market conditions, will be Blue
Martini's historical performance, estimates of Blue Martini's business
potential and earning prospects, an assessment of Blue Martini's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.

Blue Martini's common stock has been approved for quotation on the Nasdaq
National Market under the symbol "BLUE."

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Shorts sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from Blue Martini in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. "Naked" short sales are any sales in excess of such option. The
underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of Blue
Martini's stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock.
As a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
166 filed public offerings of equity securities, of which 122 have been
completed, and has acted as a syndicate member in an additional 95 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with Blue Martini or any of its officers, directors or
other controlling persons, except with respect to its contractual relationship
with Blue Martini contained in the underwriting agreement entered into in
connection with this offering.

A prospectus in electronic format may be made available on the web sites
maintained by one or more underwriters. The underwriters may agree to allocate
a number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the lead managers to
underwriters that may make Internet distributions on the same basis as other
allocations.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

Blue Martini estimates that its share of the total expenses at the offering,
excluding underwriting discounts and commissions, will be approximately $1.9
million.

Blue Martini has agreed to indemnify the several underwriters against
liabilities, including liabilities under the Securities Act of 1933.

LEGAL MATTERS

Cooley Godward LLP, Palo Alto, California will pass upon the validity of the
shares of common stock offered by this prospectus. As of the date of this
prospectus, partners and associates of Cooley Godward LLP beneficially own an
aggregate of 178,568 shares of common stock through an investment partnership
and James C. Gaither, a director of Blue Martini and a partner of Cooley
Godward, owns an aggregate of 381,844 shares of common stock. Shearman &
Sterling, Menlo Park, California will pass upon the validity of the shares of
common stock offered by this prospectus for the underwriters.

EXPERTS

The balance sheets of Blue Martini Software, Inc. as of December 31, 1998
and 1999, and the related statements of operations, stockholders' equity and
cash flows for the period from June 5, 1998 (Inception) to December 31, 1998
and for the year ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. If a contract or document has been filed
as an exhibit to the registration statement, we refer you to the copy of the
contract or document that has been filed. Each statement in this prospectus
relating to a contract or document filed as an exhibit is qualified in all
respects by the filed exhibit. The registration statement, including exhibits
and schedules, may be inspected without charge at the principal office of the
Securities and Exchange Commission in Washington, D.C., and copies of all or
any part of it may be obtained from that office after payment of fees
prescribed by the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report................................................ F-2

Balance Sheets.............................................................. F-3

Statements of Operations.................................................... F-4

Statements of Stockholders' Equity.......................................... F-5

Statements of Cash Flows.................................................... F-6

Notes to Financial Statements............................................... F-7

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Blue Martini Software, Inc.:

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

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

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

/s/ KPMG LLP

Mountain View, California
February 29, 2000, except as to
Note 12, which is as of April
24, 2000

F-2

BLUE MARTINI SOFTWARE, INC.

Balance Sheets

(In thousands, except per share data)

Pro Forma
Stockholders'
December 31, Equity
----------------- March 31, March 31,
1998 1999 2000 2000
Assets ------- -------- --------- -------------
(Unaudited)

Current assets:
Cash and cash equivalents.......... $ 261 $ 10,362 $ 11,886
Short-term investments............. -- 2,562 1,746
Accounts receivable, net of
allowance for doubtful accounts of
$-, $225 and $459 as of
December 31, 1998 and 1999 and
March 31, 2000, respectively...... 130 3,649 6,527
Prepaid expenses and other current
assets............................ 48 656 1,513
------- -------- --------
Total current assets.............. 439 17,229 21,672
Property and equipment, net......... 136 2,761 5,152
Other assets, including restricted
cash of $182 at December 31, 1999
and March 31, 2000................. 167 370 964
------- -------- --------
Total assets...................... $ 742 $ 20,360 $ 27,788
======= ======== ========

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable................... $ 170 $ 1,874 $ 1,994
Accrued employee compensation...... 19 2,578 4,379
Other current liabilities.......... 51 1,074 4,717
Deferred revenues.................. 130 3,577 9,059
Current portion of long-term
obligations....................... 16 418 500
------- -------- --------
Total current liabilities......... 386 9,521 20,649
Long-term obligations, less current
portion............................ 39 544 602
------- -------- --------
Total liabilities................. 425 10,065 21,251
------- -------- --------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001
par value; actual--7,200 shares
authorized; 1,116 shares issued
and outstanding as of December 31,
1998 and 5,824 shares issued and
outstanding as of December 31,
1999 and March 31, 2000; aggregate
liquidation preference of $18,712
as of December 31, 1999 and March
31, 2000; pro forma--5,000 shares
authorized; no shares issued and
outstanding....................... 1 6 6 $ --
Common stock, $0.001 par value;
actual--46,000 shares authorized;
30,253, 31,411 and 35,361 shares
issued and outstanding as of
December 31, 1998 and 1999 and
March 31, 2000, respectively; pro
forma--500,000 shares authorized;
58,657 shares issued and
outstanding....................... 30 31 35 59
Additional paid-in-capital......... 3,563 31,640 69,361 69,343
Deferred stock compensation........ (1,695) (8,926) (38,842) (38,842)
Accumulated deficit................ (1,582) (12,456) (24,023) (24,023)
------- -------- -------- -------
Total stockholders' equity........ 317 10,295 6,537 $ 6,537
------- -------- -------- =======
Total liabilities and
stockholders' equity............. $ 742 $ 20,360 $ 27,788
======= ======== ========

See accompanying notes to financial statements.

F-3

BLUE MARTINI SOFTWARE, INC.

Statements of Operations

(In thousands, except per share data)

June 5, 1998
(Inception) Three Months
to Year Ended Ended March 31,
December 31, December 31, -----------------
1998 1999 1999 2000
------------ ------------ ------- --------
(Unaudited)

Revenues:
License......................... $ -- $ 7,205 $ 25 $ 6,070
Service......................... -- 4,027 216 4,611
------- -------- ------- --------
Total revenues............... -- 11,232 241 10,681
------- -------- ------- --------
Cost of revenues:
License......................... -- 719 3 561
Service......................... -- 5,480 117 6,237
------- -------- ------- --------
Total cost of revenues....... -- 6,199 120 6,798
------- -------- ------- --------
Gross profit................. -- 5,033 121 3,883
------- -------- ------- --------
Operating expenses:
Sales and marketing............. 725 7,736 524 8,580
Research and development........ 562 7,076 994 4,402
General and administrative...... 310 1,348 247 2,528
------- -------- ------- --------
Total operating expenses..... 1,597 16,160 1,765 15,510
------- -------- ------- --------
Loss from operations......... (1,597) (11,127) (1,644) (11,627)
Interest and other, net.......... 15 253 31 60
------- -------- ------- --------
Net loss..................... $(1,582) $(10,874) $(1,613) $(11,567)
======= ======== ======= ========
Basic and diluted net loss per
common share.................... $ (0.07) $ (0.47) $ (0.07) $ (0.46)
======= ======== ======= ========
Shares used in computing basic
and diluted net loss per common
share........................... 22,000 22,964 22,000 25,108
======= ======== ======= ========

See accompanying notes to financial statements.

F-4

BLUE MARTINI SOFTWARE, INC.

Statements of Stockholders' Equity

June 5, 1998 (Inception) to March 31, 2000

(In thousands)

Convertible
Preferred Stock Common Stock Additional Deferred Total
----------------- -------------- Paid-In Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
-------- ------- ------ ------ ---------- ------------ ----------- -------------

Issuance of common
stock.................. -- $ -- 22,000 $ 22 $ 48 $ -- $ -- $ 70
Issuance of common stock
for employee stock
options................ -- -- 8,253 8 43 -- -- 51
Issuance of series A
convertible preferred
stock.................. 1,116 1 -- -- 1,249 -- -- 1,250
Deferred compensation
relating to stock
option grants.......... -- -- -- -- 2,223 (2,223) -- --
Amortization of stock
compensation........... -- -- -- -- -- 528 -- 528
Net loss................ -- -- -- -- -- -- (1,582) (1,582)
-------- ------- ------ ---- ------- -------- -------- -------
Balances, December 31,
1998................... 1,116 1 30,253 30 3,563 (1,695) (1,582) 317
Issuance of common
stock.................. -- -- 24 -- 6 -- -- 6
Issuance of common stock
for employee stock
options................ -- -- 1,676 2 203 -- -- 205
Repurchase of common
stock.................. -- -- (542) (1) (6) -- -- (7)
Issuance of series B
convertible preferred
stock.................. 2,631 3 -- -- 4,997 -- -- 5,000
Issuance of series C
convertible preferred
stock.................. 2,077 2 -- -- 12,448 -- -- 12,450
Deferred compensation
relating to stock
option grants.......... -- -- -- -- 10,382 (10,382) -- --
Amortization of stock
compensation........... -- -- -- -- -- 3,151 -- 3,151
Non-employee stock
compensation........... -- -- -- -- 47 -- -- 47
Net loss................ -- -- -- -- -- -- (10,874) (10,874)
-------- ------- ------ ---- ------- -------- -------- -------
Balances, December 31,
1999................... 5,824 6 31,411 31 31,640 (8,926) (12,456) 10,295
Issuance of common stock
(unaudited)............ -- -- 66 -- 100 -- -- 100
Issuance of common stock
for employee stock
options (unaudited).... -- -- 3,884 4 1,768 -- -- 1,772
Warrant issued
(unaudited)............ -- -- -- -- 176 -- -- 176
Deferred compensation
relating to stock
option grants
(unaudited)............ -- -- -- -- 34,261 (34,261) -- --
Amortization of stock
compensation
(unaudited)............ -- -- -- -- -- 4,345 -- 4,345
Non-employee stock
compensation
(unaudited)............ -- -- -- -- 1,416 -- -- 1,416
Net loss (unaudited).... -- -- -- -- -- -- (11,567) (11,567)
-------- ------- ------ ---- ------- -------- -------- -------
Balances, March 31, 2000
(unaudited)............ 5,824 $ 6 35,361 $ 35 $69,361 $(38,842) $(24,023) $ 6,537
======== ======= ====== ==== ======= ======== ======== =======

See accompanying notes to financial statements.

F-5

BLUE MARTINI SOFTWARE, INC.

Statements of Cash Flows

(In thousands)

June 5, 1998
(Inception) Three Months
to Year Ended Ended March 31,
December 31, December 31, -----------------
1998 1999 1999 2000
------------ ------------ ------- --------
(Unaudited)

Cash flows from operating
activities:
Net loss......................... $(1,582) $(10,874) $(1,613) $(11,567)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.. 8 788 35 623
Stock compensation............. 528 3,198 365 5,761
Provision for doubtful
accounts...................... -- 225 -- 234
Changes in operating assets and
liabilities:
Accounts receivable........... (130) (3,744) (802) (3,112)
Prepaid expenses and other
current assets............... (48) (608) (549) (857)
Accounts payable, accrued
employee compensation and
other current liabilities.... 240 5,286 701 5,564
Deferred revenues............. 130 3,447 745 5,482
------- -------- ------- --------
Net cash provided by (used
in) operating activities... (854) (2,282) (1,118) 2,128
------- -------- ------- --------
Cash flows from investing
activities:
Purchases of property and
equipment....................... (82) (3,108) (300) (2,704)
Purchases of available-for-sale
short-term investments.......... -- (2,562) -- --
Sales and maturities of
available-for-sale short-term
investments..................... -- -- -- 816
Other assets..................... (167) (203) -- (462)
------- -------- ------- --------
Net cash used for investing
activities................. (249) (5,873) (300) (2,350)
------- -------- ------- --------
Cash flows from financing
activities:
Net proceeds from issuance of
convertible preferred stock..... 1,250 17,450 5,000 --
Net proceeds from issuance of
common stock.................... 121 211 1 1,872
Repurchases of common stock...... -- (7) (3) --
Proceeds from bank borrowings.... -- 750 -- --
Repayment of debt and capital
lease obligations............... (7) (148) (29) (126)
------- -------- ------- --------
Net cash provided by
financing activities....... 1,364 18,256 4,969 1,746
------- -------- ------- --------
Net increase in cash and cash
equivalents...................... 261 10,101 3,551 1,524
Cash and cash equivalents at
beginning of period.............. -- 261 261 10,362
------- -------- ------- --------
Cash and cash equivalents at end
of period........................ $ 261 $ 10,362 $ 3,812 $ 11,886
======= ======== ======= ========
Supplemental disclosures of
noncash investing and financing
activities:
Property and equipment acquired
under capital lease
obligations.................... $ 62 $ 305 $ 302 $ 266
======= ======== ======= ========
Deferred stock compensation..... $ 2,223 $ 10,382 $ 278 $ 34,261
======= ======== ======= ========
Warrant issued in connection
with lease financing........... $ -- $ -- $ -- $ 176
======= ======== ======= ========

See accompanying notes to financial statements.

F-6

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements

December 31, 1998 and 1999 and March 31, 2000
(information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)

1. The Company

Blue Martini Software, Inc. (the "Company") develops, markets and supports
integrated software applications that allow companies to extend their brands
across their traditional and Internet-based sales and marketing and
merchandising efforts. The Company's customers include manufacturers, retailers
and other entities that do business on the Internet.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited balance sheet as of March 31, 2000, the
statements of operations and cash flows for the three months ended March 31,
1999 and 2000 and the statement of stockholders' equity for the three months
ended March 31, 2000 are unaudited. The unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles.
In the opinion of the Company's management, the unaudited interim financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the Company's results of
operations and its cash flows for the three months ended March 31, 1999 and
2000. The results for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for the year ending December 31, 2000.

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

F-7

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

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.

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 include amounts billed to customers for which revenues
have not been recognized, which generally result from the following: deferred
technical support; professional services not yet rendered; amounts billed to
customers with extended payments terms which are not yet due; and amounts
deferred relating to arrangements where the Company is required to deliver
either specified upgrades or unspecified additional products.

Cash and Cash Equivalents

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 are recorded at cost, which approximates
fair value.

Short-term Investments

Short-term investments, consisting principally of commercial paper and
corporate term notes, are stated at fair value. Short-term investments maturing
within one year that are not restricted are classified as current assets.

The Company determines the appropriate classification of its short-term
investments at the time of purchase and re-evaluates such classification as of
each balance sheet date. The Company has classified all of its short-term
investments as available-for-sale and carries such securities at fair

F-8

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

value, with unrealized gains and losses calculated using the specific
identification method, net of tax, reported as a component of accumulated other
comprehensive income.

Restricted Cash

At December 31, 1999 and March 31, 2000, the Company had $182,000 invested
in a certificate of deposit as security for a letter of credit issued to a
lessor in connection with a facility lease agreement. This letter of credit
expires in August 2004. Accordingly, this restricted cash amount has been
classified as a non-current asset.

Concentration of Credit Risk

The Company places its cash, cash equivalents and short-term 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 11.

The Company had no write-offs of accounts receivable and, based on its
ongoing evaluation of collectibility, had allowances for doubtful accounts
receivable of $225,000 and $459,000 at December 31, 1999 and March 31, 2000,
respectively.

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.

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

F-9

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

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.

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 on the release of a beta
version of the software. To date, technological feasibility on software
releases has coincided with the general availability of such software because
no beta versions are developed. Accordingly, no software development costs have
been capitalized.

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 and Statement of Financial
Accounting Standard ("SFAS") Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans, 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 9.

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 of which the counter-party's performance is complete.

Comprehensive Income (Loss)

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

F-10

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

from net income. Through March 31, 2000, the Company has not had any
significant transactions that are required to be reported in comprehensive
income (loss).

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):

June 5, 1998 Three Months
(Inception) Ended March
to Year Ended 31,
December 31, December 31, -------------
1998 1999 1999 2000
------------ ------------ ------ ------

Shares issuable under stock options... -- 4,248 448 5,308
Shares of restricted stock subject to
repurchase........................... 8,252 6,981 7,941 9,937
Shares issuable pursuant to warrants.. -- -- -- 45
Shares of convertible preferred stock
on an "as-if-converted" basis........ 4,464 23,297 14,991 23,297

The weighted average exercise price of stock options was $0.21 for the year
ended December 31, 1999 and $0.08 and $1.25 for the three months ended March
31, 1999 and 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 $0.01 and $0.20 for the three months ended March 31, 1999 and
2000. The exercise price of warrants was $1.50 for the three months ended March
31, 2000.

Pro forma basic and diluted net loss per common share is presented for the
year ended December 31, 1999 and the three months ended March 31, 2000 to
reflect per share data assuming the conversion of all outstanding shares of
convertible preferred stock into common stock on a four-for-one basis, as if
the conversion had taken place at the beginning of 1999, or at the date of
issuance, if later. The following data is unaudited (in thousands, except per
share data):

Year Ended Three Months
December 31, Ended March 31,
1999 2000
------------ ---------------

Net loss used in computing pro forma basic and
diluted net loss per common share................. $(10,874) $(11,567)
======== ========
Shares used in computing pro forma basic and
diluted net loss per common share:................
Shares used in net loss per common share
calculation..................................... 22,964 25,108
Weighted average shares of convertible preferred
stock and warrant assuming conversion........... 18,384 23,344
-------- --------
41,348 48,452
======== ========
Pro forma basic and diluted net loss per common
share............................................. $ (0.26) $ (0.24)
======== ========

F-11

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. In July 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, will be
effective for fiscal years beginning after June 15, 2000. Because the Company
does not currently hold any derivative instrument and does not currently engage
in hedging activities, the Company expects that the adoption of SFAS No. 133
will not have a material impact on its financial position or operating results.

In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 101A, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The SEC has recently indicated that it intends to issue
further guidance with respect to adoptions of specific views addressed by SAB
No. 101. Until such time as this additional guidance is issued, the Company is
unable to assess the impact, if any, it may have on its financial position or
results of operations.

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 is effective July 1, 2000. We do
not expect the adoption of Interpretation No. 44 to have a material effect on
our financial position or results of operations.

3. Short-term Investments

All of the Company's investments consist of commercial paper and corporate
term notes, and are due within one year. Investments totaling $7,068,000 and
$7,964,000 as of December 31, 1999 and March 31, 2000 are included in cash and
cash equivalents. Realized and unrealized gains and losses for available-for-
sale securities were immaterial for all periods presented.

4. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

December 31
------------- March 31,
1998 1999 2000
------ ------ ---------

Accounts receivable.................................. $ 130 $3,013 $4,736
Unbilled receivables................................. -- 861 2,250
------ ------ ------
130 3,874 6,986
Allowance for doubtful accounts...................... -- 225 459
------ ------ ------
$ 130 $3,649 $6,527
====== ====== ======

F-12

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

5. Property and Equipment

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

December 31,
------------- March 31,
1998 1999 2000
------ ------ ---------

Computer equipment.................................. $ 99 $2,996 $5,518
Furniture and office equipment...................... 45 344 730
Leasehold improvements.............................. -- 217 279
------ ------ ------
144 3,557 6,527
Less accumulated depreciation and amortization...... 8 796 1,375
------ ------ ------
$ 136 $2,761 $5,152
====== ====== ======

Equipment held under capital leases totaled $62,000, $367,000 and $633,000
as of December 31, 1998 and 1999 and March 31, 2000, respectively. Accumulated
amortization for equipment under capital leases totaled $2,000, $107,000 and
$137,000 as of December 31, 1998 and 1999, and March 31, 2000, respectively.

6. Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

December 31,
------------- March 31,
1998 1999 2000
------ ------ ---------

Customer deposits.................................... $ -- $ -- $1,800
Accrued marketing expenses........................... -- -- 850
Accrued rent expense................................. 31 31 121
Other accrued expenses............................... 20 1,043 1,946
------ ------ ------
$ 51 $1,074 $4,717
====== ====== ======

At March 31, 2000, accrued marketing expenses included $376,000 of accrued
advertising expenses. The Company expenses advertising costs as incurred.
Advertising costs expensed from June 5, 1998 (Inception) through December 31,
1998, the year ended December 31, 1999 and for the three months ended March 31,
1999 and 2000 were $8,000, $409,000 and $722,000, respectively. All advertising
expense for the three months ended March 31, 2000 were for services provided by
a company whose chairman and chief creative officer is also a member of the
Company's board of directors.

7. Borrowings

The Company had $700,000 and $625,000 outstanding under a loan agreement
with a bank as of December 31, 1999 and March 31, 2000. The loan agreement
provides for borrowings of up to $750,000 and is collateralized by certain
assets of the Company, including property and equipment and accounts
receivables. Under the terms of the loan agreement, certain transactions,
including payment of dividends, are prohibited without the bank's consent. The
loan bears interest at the bank's prime rate (8.50% as of December 31, 1999 and
8.75% as of March 31, 2000), plus 0.50% per annum. The Company is required to
make monthly payments of $25,000, plus interest, through April 2002.

F-13

BLUE MARTINI SOFTWARE, INC.

Notes To Financial Statements--(continued)

In January 2000, the Company signed an agreement with a leasing company for
an equipment lease line of credit of $1,500,000. Amounts borrowed under this
agreement bear interest at 8% and are collateralized by the leased assets. No
borrowings are outstanding under this facility. In connection with this
agreement, the Company issued a warrant to the leasing company for 11,250
shares of series C convertible preferred stock at an exercise price of $6.00
per share (see Note 9).

8. Commitments and Contingencies

The Company leases certain facilities, including its corporate headquarters,
under operating leases. Rent expense for the period from inception through
December 31, 1998, the year ended December 31, 1999 and for the three months
ended March 31, 1999 and 2000, was $72,000, $434,000, $61,000 and $411,000,
respectively.

Future minimum lease payments as of December 31, 1999 were as follows (in
thousands):

Year Ending Capital Operating
December 31, Leases Leases
------------ ------- ---------

2000..................................................... $160 $1,036
2001..................................................... 139 1,144
2002..................................................... 24 1,177
2003..................................................... -- 1,208
2004..................................................... -- 1,238
Thereafter............................................... -- 119
---- ------
Total.................................................... 323 $5,922
======
Less amount representing interest........................ 61
----
Present value of capital lease obligations............... 262
Less current portion..................................... 118
----
Long-term portion........................................ $144
====

On March 1, 2000 the Company entered into a facility lease agreement in
order to conduct employee, partner and customer training classes. The initial
term of the lease is three years with a renewal option for one additional
twelve month period. Total rent expense related to this operating lease was
$120,750, for the three month period ended March 31, 2000. Future minimum lease
payments are $988,000, $1,317,000, $1,317,000 and $329,000 for the years ended
December 31, 2000, 2001, 2002 and 2003, respectively.

The Company obtained a letter of credit from a financial institution
totaling $182,000 in lieu of a security deposit for leased office space. No
amounts have been drawn against the letter of credit. The letter is secured by
a $182,000 certificate of deposit, which is included in non-current assets as
of December 31, 1999 and March 31, 2000.

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 March 2004, the Company pays royalties at
various rates and amounts, generally based on unit sales or revenues. Royalty
expense was $761,000 for the year ended December 31, 1999 and $597,000 for the
three months ended March 31, 2000. Such costs are included as a component of
cost of revenues.

F-14

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

9. 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.

Common Stock Split

In February 2000, the Company's board of directors approved a two-for-one
stock split of the Company's common stock. All common shares and per common
share information presented in these financial statements has been adjusted to
reflect this common stock split.

Convertible Preferred Stock

Convertible preferred stock outstanding as of December 31, 1999 is as
follows (in thousands):

Shares
---------------------- Liquidation Carrying
Authorized Outstanding Preference Value
---------- ----------- ----------- --------

Series:
A............................. 2,000 1,116 $ 1,250 $ 1,250
B............................. 3,000 2,631 5,000 5,000
C............................. 2,200 2,077 12,462 12,462
----- ----- ------- -------
7,200 5,824 $18,712 $18,712
===== ===== ======= =======

The rights, preferences and privileges of the holders of series A, B and C
convertible preferred stock are as follows:

Dividends

The holders of Series A, B and C convertible preferred stock are entitled
to receive dividends of $0.09, $0.15 and $0.48 per share, per annum,
respectively (subject to appropriate adjustment, as defined). Such dividends,
which are in preference to any common stock dividends, are payable whenever
funds are legally available and when declared by the board of directors. The
right of the holders of the convertible preferred stock to receive dividends
is not cumulative. As of December 31, 1999 and March 31, 2000, no dividends
have been declared.

Liquidation

In the event of any liquidation, dissolution or winding-up of the Company,
a merger with a change in voting control and an asset sale, the holders of
convertible preferred stock are entitled to receive a liquidation preference
of $1.12, $1.90 and $6.00 for each outstanding share of series A, B

F-15

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

and C convertible preferred stock, respectively, plus any declared and unpaid
dividends. If the funds available for distribution are insufficient to cover
the liquidation preference, then the entire assets and funds of the Company
legally available for distribution are to be distributed ratably among the
holders of convertible preferred stock.

Voting Rights

The holders of series A, B and C convertible preferred stock have voting
rights equal to the number of shares of common stock into which the shares of
series A, B and C convertible preferred stock are then convertible.

Holders of series A, B and C convertible preferred stock are also entitled
to vote together as a separate class to approve or reject certain transactions,
including mergers and certain changes in equity.

Conversion

Each share of convertible preferred stock, at the option of the holder, is
convertible into four shares of common stock, subject to adjustments in
accordance with anti-dilution provisions. Conversion is automatic immediately
upon the closing of a firm commitment underwritten public offering in which the
gross proceeds raised exceed $25 million.

Warrant

In January 2000, the Company granted a fully exercisable warrant to purchase
11,250 shares of series C convertible preferred stock at an exercise price of
$6.00 per share in connection with an equipment lease agreement (see Note 7).
Such warrants were outstanding as of March 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 $18.75 as the fair value of the
underlying convertible preferred 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 will be amortized
ratably over the term of the equipment lease agreement.

Stock Plans

1998 Equity Incentive Plan

The Company is authorized to issue up to 20,520,000 shares of common stock
in connection with its 1998 Equity Incentive Plan (the Incentive Plan) to
directors, employees and consultants. The Incentive Plan provides for the
issuance of stock purchase rights, incentive stock options or nonstatutory
stock options.

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. Through March 31, 2000, the Company has issued 13,813,000 shares
under restricted stock purchase agreements, of which 3,334,000 shares are no
longer subject to repurchase rights, 542,000 shares have been repurchased and
9,937,000 shares are subject to repurchase at a weighted average price of $0.20
per share.

F-16

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

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.

Activity under the Incentive Plan is as follows (in thousands, except per
share amounts):

June 5, 1998
(Inception) to Year Ended Three Months Ended
December 31, 1998 December 31, 1999 March 31, 2000
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------

Outstanding, beginning
of period/year......... -- $ -- -- $ -- 4,248 $0.21
Granted................. 8,253 0.01 6,316 0.19 4,984 1.50
Exercised............... (8,253) (0.01) (1,676) 0.13 (3,884) 0.45
Canceled................ -- -- (392) 0.16 (40) 0.25
------ ------ ------
Outstanding, end of
period/year............ -- -- 4,248 0.21 5,308 1.25
====== ====== ======
Exercisable, end of
period/year............ -- -- 10 0.13 52 0.15
====== ====== ======
Weighted average fair
value of options
granted with exercise
prices equal to fair
value at date of
grant.................. -- -- -- -- -- --
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 4,984 7.11

F-17

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

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

Options
Options Outstanding Exercisable
--------------------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise of Life Exercise of Exercise
Prices Options (Years) Price Options Price
-------- ------- ----------- -------- ------- --------

$0.13 386 9.29 $0.13 44 $0.13
0.25 650 9.50 0.25 8 0.25
1.50 4,272 9.92 1.50 -- --
----- ---
5,308 1.25 52 0.15
===== ===

Stock Compensation

During the period from inception through December 31, 1998, the year ended
December 31, 1999, and during the three months ended March 31, 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 and
$10,382,000 and $34,261,000 for the period from inception through December 31,
1998, the year ended December 31, 1999 and the three months ended March 31,
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 year ended December 31, 1999 and the three months ended March 31,
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 $1,416,000, 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%.

Three
June 5, 1998 Months
(Inception) Ended
to Year Ended March 31,
December 31, December 31, -----------
1998 1999 1999 2000
------------ ------------ ---- ------

Cost of revenues.................... $ -- $ 436 $ 11 $1,103
Sales and marketing................. 332 1,398 172 1,392
Research and development............ 91 1,088 106 2,167
General and administrative.......... 105 276 76 1,099
---- ------ ---- ------
$528 $3,198 $365 $5,761
==== ====== ==== ======

F-18

BLUE MARTINI SOFTWARE, INC.

Notes to 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, the year
ended December 31, 1999 and the three months ended March 31, 2000, the
Company's net loss would have been as follows (in thousands, except per share
amounts):

June 5, 1998
(Inception) Three Months
to Year Ended Ended March 31,
December 31, December 31, -----------------
1998 1999 1999 2000
------------ ------------ ------- --------

Net loss:
As reported.................... $(1,582) $(10,874) $(1,613) $(11,567)
Pro forma...................... $(1,584) $(10,918) $(1,615) $(11,679)
Basic and diluted net loss per
common share:
As reported.................... $ (0.07) $ (0.47) $ (0.07) $ (0.46)
Pro forma...................... $ (0.07) $ (0.48) $ (0.07) $ (0.47)

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
years ended December 31 1998 and 1999 and for the three months ended March 31,
2000; and risk-free interest rate of 4.9%, 5.7% and 6.6% for the period from
June 5, 1998 through December 31, 1998, the year ended December 31, 1999 and
the three months ended March 31, 2000, respectively.

Because the determination of the fair value of all options granted after the
Company becomes a public entity will include an expected volatility factor in
addition to the factors noted above, and because additional option grants are
expected to be made and options vest over several years, the above pro forma
disclosures are not representative of the pro forma effects on reported net
income or loss for future years.

10. 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):

Period from
Year Ended Jaunary 12, 1999 Three Months
December 31, to Ended
1999 March 31, 1999 March 31, 2000
------------ ---------------- --------------

Federal tax at statutory rate.... $(3,697) $(548) $(3,933)
Net operating losses not
benefitted...................... 2,485 415 2,431
Deferred compensation............ 1,071 124 1,477
Other............................ 141 9 25
------- ----- -------
$ -- $ -- $ --
======= ===== =======

F-19

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

The individual components of the Company's deferred tax assets as of January
12, 1999 and December 31, 1999 are as follows (in thousands):

January 12, December 31,
1999 1999
----------- ------------

Deferred tax assets:
Accruals and reserves................................. $ 7 $ 1,353
Net operating loss carryforwards...................... -- 1,693
Credit carryforwards.................................. -- 579
Other................................................. 45 89
---- -------
Total deferred tax assets........................... 52 3,714
Less valuation allowance.............................. (52) (3,714)
---- -------
Net deferred tax assets............................ $ -- $ --
==== =======

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 period ended December 31, 1999 was an increase of
$3,662,000.

The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $4,287,000 and $2,172,000, 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.

As of December 31, 1999 the Company had research and other credit
carryforwards for federal and California income tax purposes of approximately
$374,000 and $205,000, respectively available to reduce future income taxes.
These credits expire in 2019.

The federal net operating loss carryforwards expire in 2019. The California
net operating loss carryforwards expire in 2004.

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.

11. 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.

F-20

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

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 statements of operations and the Company had no significant
foreign operations through December 31, 1999. For the three months ended March
31, 2000, revenues from a customer in the United Kingdom were $1,299,000 and
revenues from a customer in the Netherlands were $738,000. On this basis, the
Company is organized and operates in a single segment: the design, development
and marketing of software solutions.

Disaggregated product information is as follows (in thousands):

Three Months
Ended March 31,
December 31, ---------------
1999 1999 2000
------------ ------- -------

Revenues:
License.......................................... $ 7,205 $ 25 $ 6,070
Service:
Consulting..................................... 3,664 216 4,083
Maintenance.................................... 363 -- 528
------- ------- -------
$11,232 $ 241 $10,681
======= ======= =======

Significant customer information is as follows:

Percent of Total Revenues
----------------------------
Three Months
Ended Percent of Net
March 31, Accounts Receivable
Year Ended --------------- ----------------------
December 31, December 31, March 31,
1999 1999 2000 1999 2000
------------ ------ ------ ------------ ---------

Customer:
A......................... 19% 100%
B......................... 19%
C......................... 10%
D......................... 12% 11%
E......................... 30%
F......................... 12%
G......................... 10%
H......................... 16%
I......................... 10%

One of the Company's directors sits on the board of directors of customer A
above.

12. Subsequent Events

Issuance of Warrant

On April 17, 2000, the Company issued a warrant to purchase 600,000 shares
of series C convertible preferred stock at $20.00 per share to a third party in
connection with a marketing arrangement. The warrant is exercisable at the end
of eight years. The fair value of the warrant will be capitalized and amortized
to sales and marketing expense over the four year term of the underlying
marketing agreement.

F-21

BLUE MARTINI SOFTWARE, INC.

Notes to Financial Statements--(continued)

Stock Split and Amendment to Certificate of Incorporation

On April 24, 2000, the Company's board of directors authorized a two-for-one
common stock split in addition to the two-for-one common stock split described
in Note 9. All common share and per share information presented in these
financial statements have been retroactively adjusted to reflect this second
stock split.

On April 24, 2000, the Company's board of directors approved an increase to
the number of common shares authorized to 500,000,000 and to establish an
undesignated class of preferred stock with 5,000,000 authorized shares.

Amended and Restated Equity Incentive Plan

On April 24, 2000, the Company's board of directors approved the 2000 Equity
Incentive Plan, an amendment and restatement of the 1998 Equity Incentive Plan,
and increased the number of shares reserved by 9,480,000 shares of common
stock. All options available for grant under the 1998 Plan will be transferred
to the 2000 Plan on its effective date and will continue to have substantially
the same terms. The share reserve will increase automatically to the greater of
5% of the outstanding shares or the number of shares issued under the plan
during the prior 12 months.

2000 Non-employee Directors' Stock Option Plan

On April 24, 2000, the Company's board of directors approved the 2000 Non-
employee Directors' Stock Option Plan under which 300,000 common shares have
been reserved for issuance. The Plan provides for non-employee director option
grants for 25,000 common shares upon the closing of the IPO or the date of
first election if later, option grants of 7,500 common shares annually and
annual option grants of 5,000 shares for committee members. The share reserve
will increase automatically to the greater of 0.25% of the outstanding shares
or the number of shares issued under the plan during the prior 12 months.

2000 Employee Stock Purchase Plan

On April 24, 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. 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. The share reserve will increase automatically to the
greater of 2.5% of outstanding shares or the number of shares issued under this
plan during the prior 12 months.

Initial Public Offering and Unaudited Pro Forma Balance Sheet Information

On April 24, 2000, the Company's board of directors authorized the filing of
a registration statement with the Securities and Exchange Commission that would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering. If the offering is consummated under
the terms presently anticipated, all the then outstanding shares of the
Company's convertible preferred stock will automatically convert into shares of
common stock on a four-for-one basis upon the closing of the proposed initial
public offering. The unaudited pro forma stockholders' equity information
presented in the historical balance sheet reflects the conversion of all of the
convertible preferred stock as if it had occurred on March 31, 2000.

F-22

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

No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this Prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

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

TABLE OF CONTENTS

Page
----

Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
Management............................................................... 48
Certain Transactions..................................................... 62
Principal Stockholders................................................... 64
Description of Capital Stock............................................. 66
Shares Eligible for Future Sale.......................................... 70
Underwriting............................................................. 73
Legal Matters............................................................ 76
Experts.................................................................. 76
Where You Can Find More Information...................................... 76
Index to Financial Statements............................................ F-1

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

Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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

7,500,000 Shares

Blue Martini Software, Inc.

Common Stock

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

[LOGO OF BLUE MARTINI SOFTWARE]

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

Goldman, Sachs & Co.

Dain Rauscher Wessels

Thomas Weisel Partners LLC

U.S. Bancorp Piper Jaffray

Representatives of the Underwriters

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market application fee.

Amount to
be Paid
----------

SEC Registration Fee............................................. $ 29,600
NASD Filing Fee.................................................. 11,700
Nasdaq National Market Listing Application Fee................... 95,000
Blue Sky Qualification Fees and Expenses......................... 5,000
Printing and Engraving Expenses.................................. 300,000
Legal Fees and Expenses.......................................... 800,000
Accounting Fees and Expenses..................................... 500,000
Transfer Agent and Registrar Fees................................ 25,000
Miscellaneous.................................................... 133,700
----------
Total.......................................................... $1,900,000
==========

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").

The Registrant's Restated Certificate of Incorporation and Bylaws include
provisions to (i) eliminate the personal liability of its directors and
officers for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Under Section 145 of the Delaware Law, a corporation generally
has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Registrant or its stockholders, for
improper transactions between the director and the Registrant and for improper

II-1

distributions to stockholders and loans to directors and officers. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities law or state or federal environmental laws.

The Registrant intends to enter into indemnity agreements with each of its
directors and officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or an officer of the
Registrant or any of its affiliated enterprises, provided that such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.

At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.

The Registrant has an insurance policy covering the officers and directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Information presented in this section is on an as converted basis, and as if
issued by the Registrant. Since the Registrant's inception in June 1998, the
Company has issued and sold the following unregistered securities:

(1) From June 1998 to January 12, 1999 the Company issued an aggregate of
30,252,500 shares of its common stock at a weighted average exercise price of
$0.01 per share to employees, consultants and directors under its 1998 Equity
Incentive Plan. These sales were made in reliance on Rule 701 and Section 4(2).

(2) From July 1998 through November 1998, the Company issued 4,464,284
shares of its series A preferred stock at a purchase price of $0.28 per share
to Monte Zweben, Thomas M. Siebel and GC&H Investments for an aggregate
purchase price of $1,250,000. These sales were made in reliance on Rule 506 of
Regulation D and Section 4(2).

(3) In January 1999, the Company issued 30,252,500 shares of its common
stock to Monte Zweben, James C. Gaither, Thomas M. Siebel, A. Michael Spence,
William F. Zuendt, William H. Evans, Scott D. Hanham, Jeffrey G. Johnson and 17
employees, consultants and directors for an aggregate purchase price of
$120,935 and 4,464,284 shares of its series A preferred stock to Monte Zweben,
Thomas M. Siebel and GC&H Investments for an aggregate purchase price of
$1,250,000. These issuances were made in reliance on Section 4(2).

(4) In January 1999, the Company issued 10,526,316 shares of its series B
preferred stock at a purchase price of $0.475 per share for an aggregate
purchase price of $5,000,000 to Matrix Partners V, Matrix V Entrepreneurs Fund,
the Zweben Family Revocable Trust, the Zuendt Family Trust, Marc Benioff,
Daniel Doles and Peter Friedland. These sales were made in reliance on Rule 506
of Regulation D and Section 4(2).

(5) In July 1999, the Company issued 8,306,664 shares of its series C
preferred stock at a purchase price of $1.50 per shares for an aggregate
purchase price of $12,459,996 to ACII Technology (ACT II) B.V., Matrix Partners
V, Matrix V Entrepreneurs Fund, U.S. Venture Partners VI, USVP VI Affiliates
Fund, USVP VI Entrepreneur Partners and the Zweben Family Revocable Trust.
These sales were made in reliance on Rule 506 of Regulation D and Section 4(2).

II-2

(6) In December 1999, the Company issued a warrant to purchase 45,000 shares
of its series C preferred stock at an exercise price of $1.50 per share to
Comdisco, Inc. This sale was made in reliance on Rule 506 of Regulation D and
Section 4(2).

(7) From January 13, 1999 through May 31, 2000, the Company granted options
to purchase 13,222,200 shares of common stock at a weighted average exercise
price of $1.67 per share to employees, consultants and directors under its 1998
Equity Incentive Plan and issued an aggregate of 6,911,200 shares of its common
stock at a weighted average exercise price of $0.51 per share to employees,
consultants and directors as a result of exercises of options granted under the
1998 Equity Incentive Plan. These sales were made in reliance on Rule 701 and
Section 4(2).

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a) Exhibits

Exhibit
Number Description of Document
------- -----------------------

1.1 Form of Underwriting Agreement.

3.1** Third Amended and Restated Certificate of Incorporation of the
Registrant.

3.2** Form of Fourth Amended and Restated Certificate of Incorporation of
the Registrant to be filed immediately following the closing of the
offering made hereby.

3.3** Bylaws of the Registrant.

3.4 Bylaws of the Registrant to be filed on the closing of the offering
made hereby.

4.1 Specimen Stock Certificate.

4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4 hereof.

5.1 Opinion of Cooley Godward LLP.

10.1** 2000 Equity Incentive Plan.

10.2** 2000 Employee Stock Purchase Plan.

10.3** 2000 Non-Employee Directors' Stock Option Plan.

10.4** Commercial Office Lease Agreement by and between Peninsula Office
Park Associates, L.P. and Blue Martini, LLC, as Amended.

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

10.6** Form of Class A Units Agreement by and between the Registrant and
certain investors of the Registrant.

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

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

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

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

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

10.12+** License and Marketing Agreement by and between the Registrant and
Neuron Data, Inc., now Blaze Software, Inc., dated March 31, 1999.

II-3

Exhibit
Number Description of Document
------- -----------------------

10.13+** ISV Software and License Agreement between the Registrant and BEA
Systems, Inc. dated January 29, 1999.

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

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

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

23.1 Consent of KPMG LLP, and Report on Schedule.

23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.

24.1** Power of Attorney. See Signature Page.

27.1 Financial Data Schedule.

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

* To be filed by amendment.

** Previously Filed

(b) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts

Additions
charged Balance
Balance at to costs at end
beginning and Deductions of
Description of period expenses write-offs period
----------- ---------- --------- ---------- --------

Period from June 5, 1998 (inception)
through December 31, 1998
Allowance for doubtful accounts.... $ -- $ -- $ -- $ --
Allowance for sales returns........ -- -- -- --
Year ended December 31, 1999
Allowance for doubtful accounts.... $ -- $225,000 $ -- $225,000
Allowance for sales returns........ -- 147,000 -- 147,000

Other financial statement schedules are omitted as the information called
for is not required or is shown either in the financial statements of the notes
thereto.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of

II-4

the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the city of San Mateo, County of San Mateo, State of California, on June 28,
2000.

/s/ John E. Calonico, Jr.

By: _________________________________

John E. Calonico, Jr.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

* Chairman and President, June 28, 2000
____________________________________ Chief Executive Officer
Monte Zweben (Principal Executive
Officer)

/s/ John E. Calonico, Jr. Vice President, Chief June 28, 2000
____________________________________ Financial Officer and
John E. Calonico, Jr. Secretary (Principal
Financial and Accounting
Officer)

* Director June 28, 2000
____________________________________
James C. Gaither

* Director June 28, 2000
____________________________________
A. Michael Spence

* Director June 28, 2000
____________________________________
Andrew W. Verhalen

* Director June 28, 2000
____________________________________
Edward H. Vick

* Director June 28, 2000
____________________________________
William F. Zuendt

/s/ John E. Calonico, Jr.
*By: _____________________________________
John E. Calonico, Jr.
Attorney-in-Fact

II-6

EXHIBIT INDEX