Prepared by MERRILL CORPORATION

California (State or other jurisdiction of incorporation or organization)		94-2566313 (I.R.S. Employer Identification No.)
46832 Lakeview Blvd. Fremont, California (Address of principal executive offices)		94538-6543 (Zip Code)

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

The number of shares of the Registrant's Common Stock outstanding as of December 31, 2001 was 30,620,587.

FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's)
(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FORTEL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands except per share data)

FORTEL Inc. ("FORTEL" or the "Company") is an information technology company specializing in computer and systems optimization, data correlation and search technology. FORTEL acquires, develops and markets eBusiness performance management solutions. Product offerings include multi-platform performance analysis and automatic correlation software used to optimize performance in eBusiness infrastructure systems, and professional services for existing and new customers. FORTEL's SightLine and predecessor ViewPoint suites of software have been sold to customers in finance and banking, defense management, manufacturing, retail services and government.

The accompanying consolidated financial statements include the accounts of FORTEL Inc. and all wholly-owned domestic and foreign subsidiaries. All material intercompany balances and transactions have been eliminated. The interim statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC")and should be read in conjunction with the audited financial statements contained in the Company's annual report on Form 10-K/A for the fiscal year ended September 30, 2001. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated.

The results of operations for the period ended December 31, 2001 are not necessarily indicative of the results expected for the full year. The balance sheet as of September 30, 2001 is derived from the audited financial statements as of and for the year then ended but does not include all notes and disclosures required by accounting principles generally accepted in the United States of America.

The Company's consolidated financial statements have been prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidations of liabilities in the normal course of business. The Company has incurred significant losses from operations for at least the past five fiscal years. The Company continues to experience negative cash flows from operations and has been dependent on credit facilities to sustain its activities. These significant losses and the low level of cash available do not currently enable the Company to satisfy all or substantially all of its obligations to third-parties. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company is required to adopt

SFAS No. 144 on October 1, 2002 and does not expect the adoption of SFAS No. 144 to have a material impact on its consolidated results of operations and financial position.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No.142 effective October 1, 2002. The Company is currently assessing but has not yet determined the impact of SFAS No. 142 on the consolidated financial position and results of operations.

	December 31, 2001			September 30, 2001
Goodwill	$	2,768		$	2,768
Purchased technology		2,588			2,588
Deferred software implementation costs		351			351
Purchased software		550			550
Capitalized development projects		1,454			1,454
Other assets		328			166
Less accumulated amortization		(6,981	)		(6,762	)

	$	1,058		$	1,115

As of December 31, 2001, the Company had a $3,000 accounts receivable revolving line of credit. Borrowings are based on 80% of certain eligible receivables which are aged 90 days or less. The interest rate approximates 18% per annum calculated on the average daily balance outstanding. Additionally, there is an administrative fee of ¹/2 of one percent of each amount factored. The credit facility has no maturity; however, either party may terminate at any time. During the quarter ended December 31, 2001, the Company had borrowed approximately $1,068 and repaid approximately $426 under this credit facility. At December 31, 2001, approximately $648 was outstanding against the line.

Common stock activity for the period from October 1, 2001 through December 31, 2001 is as follows:

	Common Stock Shares	Common Stock Amount
Balance at September 30, 2001	30,387	$	79,544
Repricing of warrants	234		—
Stock-based compensation	—		21

Balance at December 31, 2001	30,621	$	79,565

In July 2000, the Company, through a private placement, issued 2,192 shares of common stock to two institutional investors, Deephaven Private Placement Trading Ltd. and Harp Investors LLC (the "Investors"), in exchange for $5,000. This private placement was pursuant to the Securities Purchase Agreement, Registration Rights Agreement and Repricing Warrants (collectively the "Agreements"). Proceeds of $4,727, net of placement agency and professional fees of $273, were received. Pursuant to the terms of the Agreements, the Investors have the right to demand additional warrants to purchase shares of common stock from the Company in the event the market price of the Company's stock falls below $2.28 per share. During the quarter ended December 31, 2001, the Company issued 234 shares of common stock in satisfaction of the repricing rights. The Company has registered 5,341 shares of common stock of which 3,693 shares had been issued as of December 31, 2001. At December 31, 2001, 1,980 fully vested and exercisable warrants are outstanding. These warrants will expire in February 2002.

Because of the redemption feature contained within the Agreements, the Company had classified the transaction as mezzanine financing and recorded the proceeds as temporary equity on the balance sheet at September 30, 2000. On November 6, 2000, the Company entered into a letter agreement with the Investors to modify the Agreements to replace the redemption feature with specified liquidated damages as a remedy for certain breaches of and defaults under the Agreements. The modification of these terms enabled the Company to reclassify the transaction from temporary equity into shareholders' equity.

The modification of the Agreements, gives the Investors the right to demand liquidating damages of up to $6,000 should certain events be breached by the Company. On July 25, 2001 the Company received demand letters from the Investors demanding liquidated damages upon various defaults under the Agreements, all dated July 18, 2000 and as subsequently amended on November 6, 2000, in the aggregate amount of $1,400 due to (1) the Company's delisting from The Nasdaq SmallCap Market effective May 16, 2001, (2) its failure to register additional securities and (3) its failure to authorize additional securities. To date, the defaults have not been remedied, nor has the demand for payment been satisfied by the Company, and as such, based on the provisions of the Agreements as subsequently amended, as of December 31, 2001, the liquidated damages, as demanded, have increased to $3,000. In addition, interest of approximately $254 has been accrued on the unpaid liquidated damages. The unpaid liquidated damages and the related accrued interest thereon are recorded in accrued liabilities. The Company does not currently have the capabilities to satisfy these demands and therefore will continue to incur interest charges at the rate of 18% per annum on the unpaid liquidated damages.

In October 2001, the Company's Board of Directors authorized the repricing of options to purchase 859 shares of common stock to $0.04 per share, which represented the market value on the date of the repricing. These options will be subject to variable plan accounting, as defined in FIN 44, and the Company will remeasure the intrinsic value of the repriced options (the excess of fair market value over the exercise price), through the earlier of the date of exercise, cancellation or expiration, at each reporting date. As of December 31, 2001, the Company has recognized a compensation expense of approximately $21 related to the repriced options, as the fair market value of the Company's common stock at December 31, 2001, was $0.13 and was above the exercise price of the repriced option.

A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows for the quarters ended December 31:

		2001			2000
Numerator—Basic and Diluted EPS
	Net loss	$	(1,840	)	$	(1,572	)

Denominator—Basic and Diluted EPS
	Weighted average common stock outstanding		30,567			29,221

Basic and Diluted loss per share		$	(.06	)	$	(.05	)

For the quarters ended December 31, 2001 and 2000, stock options to purchase 522 and 10 shares of common stock, respectively, and warrants to purchase 2,205 and 2,292 shares, respectively, of common stock were not included in the computation of diluted EPS because of the anti-dilutive effect of including these shares in the calculation for both periods.

The Company currently operates in one business segment. The table below presents net sales by geographic area for the quarters ended December 31:

	Three Months Ended December 31,
	2001		2000
U.S.	$	1,590	$	2,451
Europe		1,308		1,919
Other		153		182

Total	$	3,051	$	4,552

	December 31, 2001		September 30, 2001
Long-lived assets:
U.S.	$	1,296	$	1,389
International		201		241

Total	$	1,497	$	1,630

During the fiscal year ended September 30, 2001, certain directors and officers of the Company made loans to the Company. These loans bear interest at 18% per annum and are payable 90 days from receipt of the funds. These loans were recorded as short-term debt. At December 31, 2001, included in short-term debt is $200 in amounts owing to such directors and officers.

Comprehensive loss, as defined, includes all charges in equity (net assets) during a period from non-owner sources. There were no material differences between comprehensive loss and net loss as reported for each of the periods presented in these condensed financial statements.

On February 12, 2002, the Company received election notices from the Investors with respect to the exercise of Repricing Warrants for an aggregate of 65,062 shares of Common Stock. Harp Investors LLC notified Fortel of its exercise notice and demanded the issuance of a stock certificate for 16,673 shares of Common Stock. Deephaven Private Placement Trading, Ltd. notified Fortel of its exercise notice and demanded the issuance of a stock certificate for 48,389 shares of Common Stock. The total number of authorized shares of Common Stock is 40,000. As of December 31, 2001, 30,621 shares of Common Stock were issued and outstanding. Thus, the Company is not in a position to fully satisfy these exercise requests as the number of shares demanded exceeds the number of authorized and unissued shares of Common Stock.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates, projections, beliefs and assumptions about our industry, our company, our business and prospects. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "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 certain risks, uncertainties and other factors, some of which are beyond our control, are 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 "Risks Associated With FORTEL's Business and Future Operating Results", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. 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 report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

References in this document to "FORTEL", "we", "our" and "us" refer to FORTEL Inc., a California corporation, its predecessors, and each of its subsidiaries.

FORTEL and SightLine are trademarks of FORTEL Inc. Zitel, Datametrics and ViewPoint are registered trademarks of FORTEL Inc. VisualProfile, VisualAnalyze, VisualPoint, and the E-Business Performance Experts are trademarks of FORTEL Inc. All other service marks, trademarks and registered trademarks are the property of their respective holders.

In preparing our consolidated financial statements, our critical accounting policy is revenue recognition.

We derive our revenue from primarily two sources (i) software license, and (ii) services and support revenue which includes software license maintenance, training and consulting revenue. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

We generally license our software products on a one-year time basis or on a perpetual basis.

We apply the provisions of Statement of Position 97-2, "Software Revenue Recognition", as amended by Statement of Position 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all transactions involving the sale of software products.

We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when product is delivered to a common carrier. In instances where delivery is electronic, the product is considered delivered when the customer either takes possession by downloading the software or the access code to download the software has been provided to the customer. Payments received in advance of revenue recognition are recorded as deferred revenues.

At the time of the transaction, we assess whether the fee associated with our revenue transactions is fixed and determinable and whether or not collection is reasonably assured. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a

significant portion of a fee is due after our normal payment terms, which are 30 to 45 days from invoice date, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due.

We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.

For all sales, we use either a binding purchase order or signed license agreement as evidence of an arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction by transaction basis.

For arrangements with multiple obligations (for example, undelivered maintenance and support), we allocate revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements, which is specific to Fortel. This means that we defer revenue from the arrangement fee equivalent to the fair value of the undelivered elements. Fair values for the ongoing maintenance and support obligations are based upon separate sales of renewals to other customers or upon renewal rates quoted in the contracts. Fair value of services, such as training or consulting, is based upon separate sales by us of these services to other customers.

Our arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.

We recognize revenue for maintenance services ratably over the contract term. Our training and consulting services are billed based on hourly rates, and we generally recognize revenue as these services are performed. However, at the time of entering into a transaction, we assess whether or not any services included within the arrangement require us to perform significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests. If these services are included as part of an arrangement, we recognize the entire fee using the percentage of completion method. We estimate the percentage of completion based on our estimate of the total costs estimated to complete the project as a percentage of the costs incurred to date and the estimated costs to complete.

The Company recorded a net loss of $1,840,000 ($0.06 per share) for the fiscal 2002 first quarter, compared with a net loss of $1,572,000 ($0.05 per share) for the same quarter of the prior year. Net sales for the current quarter were $3,051,000 versus net sales of $4,552,000 for the same period a year earlier, a decrease of $1,501,000. The decrease in net sales resulted primarily from a decrease in license sales of approximately $1,076,000, a decrease in maintenance revenues of approximately $122,000, and a decrease in consulting revenue in the amount of approximately $267,000.

Gross margin for the quarter ended December 31, 2001 was 67% of net sales compared to 71% of net sales for the same quarter of the prior year. The decrease in gross margin percentage is primarily attributable to product mix, with the mix reflecting a decrease in license sales which have higher gross margins.

Research and development expenses for the quarter ended December 31, 2001 were 25% of net sales compared to 22% for the same period of the prior year. Actual spending decreased $269,000 and is primarily attributable to a decrease in headcount.

Selling, general and administrative ("SG&A") expenses for the quarter ended December 31, 2001 were 92% of net sales versus 83% for the same period a year earlier. Actual spending in SG&A decreased $969,000, primarily related to a reduction in employee headcount.

Other expense was $212,000 for the quarter ended December 31, 2001 versus $43,000 in the same quarter of the prior year. Other expense consisted primarily of interest expense for the quarters ended December 31, 2001 and 2000, respectively.

Since fiscal year 1997, in addition to the working capital provided by product sales, the Company has augmented its cash needs to finance operations primarily through the issuance of convertible subordinated notes, the private sale of common stock and proceeds from borrowings against the accounts receivable revolving line of credit.

During the quarter ended December 31, 2001, cash utilized by operating activities was $1,040,000. The utilization of cash in operating activities resulted primarily from the net loss of $1,840,000 and an increase in accounts receivable of $389,000, offset in part by an increase in deferred revenue of $71,000, a decrease in other current assets of $161,000, an increase in accounts payable and accrued liabilities of $616,000 and the add back of non-cash related charges for depreciation and amortization of $305,000.

During the current quarter, net cash utilized in investing activities was $10,000, representing purchases of capital equipment.

Net cash provided by financing activities during the current quarter was $642,000, primarily attributable to borrowings of $1,068,000 under its accounts receivable revolving line of credit, offset in part by repayments of $426,000.

The Company currently plans to increase its revenues to a level that will finance expected expenditures and result in at least neutral cash flows from operations. However, until that stage is reached, the Company will continue to use its current cash on hand, working capital, cash flow from operations and utilize the available accounts receivable revolving line of credit.

If the Company is unable to generate sufficient cash flows from operations or should management determine it to be prudent, it may attempt to raise additional debt or equity. There can be no assurance that in the event the Company requires additional financing, that such financing will be available in light of the current financial situation of the Company and the general adverse conditions of the public and private equity markets.

In the event that the Company is unable to increase revenue levels or financing is unavailable, management has developed alternative plans which will entail the reduction of expenses to levels that could be financed by revenues generated. There can be no assurance that any cost cutting exercises will be successful in completely eliminating the difference between expenditures and revenues or that such actions would not have a harmful effect on the Company's business and results of operations.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30,

2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No.142 effective October 1, 2002. The Company is currently assessing but has not yet determined the impact of SFAS No. 142 on the consolidated financial position and results of operations.

FORTEL May Seek Protection Or FORTEL's Creditors May Seek Involuntary Proceedings Against Us Under the Federal Bankruptcy Code

FORTEL may in the future elect to seek protection under Chapter 11 or Chapter 7 of the Federal Bankruptcy Code. Additionally, the Company is subject to the risk that creditors may seek to commence involuntary bankruptcy proceedings against the Company. If the Company files for Chapter 11 or Chapter 7 bankruptcy protection or if involuntary proceedings are commenced against the Company by its creditors, its creditors or other parties in interest may be permitted to propose their own plan, and the Company could be unsuccessful in having a plan of reorganization confirmed which is acceptable to the requisite number of creditors and equity holders entitled to vote on such a plan. This could lead to the Company's inability to emerge from a Chapter 11 filing. Moreover, once bankruptcy proceedings are commenced, either by the filing of a voluntary petition or if an involuntary petition is filed against FORTEL, the Company's creditors could seek FORTEL's liquidation. If a plan were consummated or if the Company were liquidated, it would almost certainly result in its creditors receiving less than 100% of the face value of their claims, and in the claims of its equity holders being cancelled in whole. Even if FORTEL does propose a plan and it is accepted, the Company is unable to predict at this time what treatment would be accorded under any such plan to Company indebtedness, licenses, transfer of goods and services and other intercompany arrangements, transactions and relationships. In addition, during any bankruptcy or similar proceeding, the Company would need court approval to take many actions out of the ordinary course, which could result in its inability to manage the normal operations of the Company and which would cause the Company to incur additional costs associated with the bankruptcy process.

FORTEL cannot assure that it will have access to sufficient funds to meet its operating needs, which will likely limit the ability to continue as a going concern. There exist uncertainties as to the Company's ability to continue as a going concern. FORTEL's independent certified public accountants have included an explanatory paragraph to this effect in their audit report on Form 10-K/A with respect to the Company's consolidated financial statements for the fiscal year ended September 30, 2001. Any significant increase in capital expenditures or other costs or any decrease in or elimination of anticipated sources of revenue could deplete the available cash. Further, should some of the Company's creditors demand immediate payment, in particular payment of liquidated damages, FORTEL would not be in a position to satisfy theses demands. FORTEL needs to find additional funding to finance its operations. If the Company does not realize significant additional revenue or raise additional debt or equity financing or is not able to renegotiate or obtain a waiver for the demand for liquidated damages, the Company will be unable to continue as a going concern. In the event the Company is the subject of bankruptcy proceedings, it may be forced to reorganize or possibly dissolve, and its stockholders may not receive any proceeds upon liquidation.

Recent Levels of Liquidity Have Been Low and Might Be Insufficient to Remain a Viable Operating Company

The Company has experienced a shortage of available cash or readily available funds to satisfy all its current obligations towards vendors and service providers. This has caused and might continue to

cause disruptions or terminations of relationships with service providers and the non-delivery of needed goods and services. The Company has taken several steps to remedy this situation such as renegotiating for accelerated cash payments instead of long term royalty payments and to arrange for payment plans with various service providers and vendors as well as numerous other cost saving measures. If the Company is unable to increase its current levels of available cash or funds available there can be no assurance that vital and material goods or services will be available to the Company and that it will remain a viable operating entity.

Significant Default Liabilities for Liquidated Damages and Liability for Issuance of Repricing Warrants to Private Investors Seriously Threaten the Company as a Going Concern

On July 18, 2000, the Company, through a private placement, issued 2,191,781 shares of common stock to two institutional investors, Deephaven Private Placement Trading Ltd. and Harp Investors LLC (the "Investors"), in exchange for $5,000,000. This private placement was pursuant to the Securities Purchase Agreement, Registration Rights Agreement and Repricing Warrants and as subsequently amended by Letter Agreement on November 6, 2000 (collectively the "Agreements"), copies of which were filed with the Company's Current Reports on Form 8-K filed on July 27, 2000 and on November 17, 2000. Proceeds of $4,726,500, net of placement agency and professional fees of $273,500, were received.

Pursuant to the terms of the Agreements, the Investors have the right to demand additional warrants to purchase shares of common stock from the Company in the event the market price of the Company's stock falls below $2.28 per share. The Company has registered 5,341,126 shares of common stock of which 3,692,135 had been issued as of December 31, 2001.

On July 25, 2001, the Company received demand letters from the Investors demanding liquidated damages upon default under the Agreements in the aggregate amount of $1,400,000 due to the Company's delisting from The Nasdaq SmallCap Market effective May 16, 2001, its failure to register and its failure to authorize additional securities. These three claims for liquidated damages have, through the passage of time, reached their contractual maximum of $3,000,000 ($1 million per incident) plus interest at a rate of 18% per annum or such lesser maximum amount that is permitted to be paid by applicable law, accruing daily until such liquidated damages, plus all interest thereon, are paid in full. To date, the events of default, as stated by the Investors, have not been remedied, nor has the demand for payment been satisfied by the Company. The Company does not currently have the capabilities to satisfy these demands and therefore will be incurring additional interest expense at the rate of 18% per annum on the unpaid liquidated damages.

The Company will have to negotiate a significant reduction or waiver of such demands or the Company will not be able to satisfy its obligations and might therefore cease to continue as a going concern.

On February 12, 2002, the Company received election notices from the Investors with respect to the exercise of Repricing Warrants for an aggregate of 65,062,164 shares of Common Stock. Harp Investors LLC notified Fortel of its exercise notice and demanded the issuance of a stock certificate for 16,672,692 shares of Common Stock. Deephaven Private Placement Trading, Ltd. notified Fortel of its exercise notice and demanded the issuance of a stock certificate for 48,389,472 shares of Common Stock. The total number of authorized shares of Common Stock is 40,000,000. As of December 31, 2001, 30,620,587 shares of Common Stock were issued and outstanding. Thus, the Company is not in a position to fully satisfy these exercise requests as the number of shares demanded exceeds the number of authorized and unissued shares of Common Stock.

Should the Company elect to seek the required shareholder approval to authorize additional shares of Common Stock sufficient to satisfy the demands made by the Investors, in full or in part, it appears questionable whether the Company will be able to obtain such shareholder approval in light of the Company's failure at the 2001 Annual Meeting to obtain shareholder approval for a proposed amendment of the 2000 Equity Incentive Plan.

In addition, Fortel might not have an effective registration statement in place to allow for the resale of all the shares requested by the Investors. Furthermore, Fortel's failure to timely file its annual report on Form 10-K might have caused the failure to provide for a continuously effective registration statement for the resale of shares held or to be received by the Investors, as required under the Registration Rights Agreement, dated July 18, 2000, which might lead to additional claims for liquidated damages.

For the first quarter of fiscal year 2002, the Company reported a net loss of $1,840,000. The Company reported total net losses of 6,759,000, $8,653,000, $13,103,000, $43,205,000 and $17,501,000 for fiscal years 2001, 2000, 1999, 1998 and 1997, respectively.

The Company has taken a number of steps to attempt to return to profitability, although there is no assurance that it will be successful. A significant portion of the cumulative losses were caused by the funding of MatriDigm, and operations of the Company's former storage systems business, which was sold in July 1998. MatriDigm filed Chapter 7 bankruptcy in October 1999 so there were no additional funding. The Company has subleased its Fremont, CA headquarters, and moved to substantially smaller and less costly premises.

The Company continues to consider options and take actions necessary to bring costs into line with anticipated revenues. There can be no assurance that the Company will be successful in this effort and remain a viable operating entity.

FORTEL has not generated net sales sufficient to produce an operating profit in recent years. The Company has relied on significant financings to support its activities. FORTEL has sustained substantial operating losses and net losses in the fiscal years 1997 through 2001. FORTEL must generate substantial additional net sales and gross margins on its products and services and must continue to successfully implement programs to manage cost and expense levels in order to remain a viable operating entity. There is no assurance that FORTEL can achieve these objectives.

Fluctuations in Quarterly Results Results and Lack of Predictability of Sales

A material portion of our revenues has been derived from large orders, as major customers deployed FORTEL's products. Increases in the dollar size of some individual license transactions would also increase the risk of fluctuation in future quarterly results. Moreover, recent adverse economic conditions in the United States, particularly those related to the technology industry, may increase the likelihood that customers will unexpectedly delay or cancel orders and result in revenue shortfalls. This risk is particularly relevant with respect to large customer orders which are more likely to be cancelled or delayed and also have a greater financial impact on FORTEL's operating results. A large number of technology companies, particularly software companies that, like FORTEL, sell e-commerce related software solutions, have recently announced that these conditions have adversely affected their financial results. Additionally, the Company's operating expenses are based in part on its expectations for future revenues and are difficult to adjust in the short term. Any revenue shortfall below FORTEL's expectations could have an immediate and significant adverse effect on the Company's results of operations.

FORTEL's quarterly operating results have in the past varied and may in the future vary significantly depending on a number of factors, including:

Due to all of the foregoing factors, FORTEL believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indicator of future performance. It is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors.

The price of FORTEL's common stock during the current quarter ranged from the low closing bid price of $0.04 to the high closing bid price of $0.20. During the fiscal year 2001, the price of the Company's common stock remained highly volatile, ranging from the low closing bid price of $0.04 to the high closing bid price of $1.03.

In December 2000 the Company was notified by NASDAQ that it no longer satisfied the minimum bid price requirement listing requirements. The Company was provided 90 calendar days, or until March 19, 2001 to regain compliance, however, the Company was unable to demonstrate compliance on or before March 19, 2001, and therefore was delisted from NASDAQ SmallCap market, effective May 16, 2001. The de-listing of the Company's common stock may materially and adversely affect the trading liquidity or the price of the Company's common stock.

Trading Restrictions and Reduced Liquidity May Adversely Affect FORTEL's Stock Price and the Ability to Trade Its Stock

Following the delisting of FORTEL's common stock from The Nasdaq SmallCap Market effective May 16, 2001, its common stock is currently traded on the OTC Bulletin Board market. FORTEL's common stock may be subject to regulation as a "penny stock." The SEC has adopted regulations which generally define "penny stock" to be any equity security that has a market price or exercise price less than $5.00 per share, subject to certain exceptions, including listing on the Nasdaq SmallCap Market. If no other exception applies, the Company's common stock may become subject to the SEC's Penny Stock Rules, Rule 15g-1 through Rule 15g-9 under the Exchange Act. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such securities and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed

control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell the Company's securities and may affect the ability of holders to sell these securities in the secondary market and the price at which such holders can sell any such securities. Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers who sell such securities except in transactions exempted from such rule. Such exempt transactions include those meeting the requirements of Rule 505 or 506 of Regulation D promulgated under the Securities Act and transactions in which the purchaser is an institutional accredited investor or an established customer of the broker-dealer. As a result, holders of FORTEL's common stock may be unable to readily sell the stock they hold or may not be able to sell it at all.

The Company's future performance depends significantly upon the continued service of its key technical and senior management personnel. The Company provides incentives such as salary, benefits and option grants (which are typically subject to vesting over four years) to attract and retain qualified employees. Recently the Company's stock price has been volatile and as such, many of the Company's employees hold options with exercise prices greater than the market price of the Company's Common Stock, and therefore may not be an incentive to retain the services of these individuals. As a result, in October 2001, the Company's Board of Directors authorized the repricing of previously granted options, reducing the original exercise prices when initially granted, to $0.04 per share, which represented the market value on the date of repricing. The loss of the services of one or more of the Company's officers or other key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success depends on its continuing ability to retain highly qualified technical and management personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical and management employees or that it can attract, assimilate and retain other highly qualified key technical and management personnel in the future.

The market for eBusiness and Internet performance management tools in which the Company's software products business competes is intensely competitive. Many of the companies with which the Company competes, such as Computer Associates International, Inc., Hewlett-Packard Company, and BMC Software, Inc. have substantially larger installed bases and greater financial resources than the Company. New companies will appear and may compete with certain of the Company's products and services. The Company believes the important considerations for software customers are ease of use, automated functionality, product reliability, quality and price, as well as complementary services offered. There can be no assurance that the Company's current competitors or new companies will not develop products comparable or superior to those developed by the Company or adapt more quickly than the Company to new technologies, evolving industry standards, new product introductions, or changing customer requirements. The Company believes that it competes favorably in each of these areas.

The markets in which the Company operates are characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and/or the emergence of new industry standards could render the Company's existing products and services obsolete and unmarketable. The Company's future success will depend upon its ability to develop and to introduce new products and services on a

timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing products or services that respond to technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products or services, or that its new products or services will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new products or services in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially and adversely affected.

The Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company has registered its FORTEL and SightLine trademarks and will continue to evaluate the registration of additional trademarks as appropriate. The Company generally enters into confidentiality agreements with its employees and with key vendors and suppliers. The Company currently holds a United States patent on one of its software technologies. There can be no assurance that this patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's ability to do business. The Company believes that the rapidly changing technology in the computer industry makes the Company's success depend more on the technical competence and creative skills of its personnel than on patents.

There has also been substantial litigation in the computer industry regarding intellectual property rights, and litigation may be necessary to protect the Company's proprietary technology. The Company has not received significant claims that it is infringing third parties' intellectual property rights, but there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, trademarks or other proprietary rights.

The Company expects that companies in its markets will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows. Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require the Company to redesign its products or require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business, operating results or financial condition. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around patents issued to the Company or other intellectual property rights of the Company.

The Company's agreements with its customers typically contain provisions intended to limit the Company's exposure to potential product liability claims. It is possible that the limitation of liability provisions contained in the Company's agreements may not be effective. Although the Company has not received any product liability claims to date, the sale and support of products by the Company and the incorporation of products from other companies may entail the risk of such claims. A successful

product liability claim against the Company could have a material adverse effect on the Company's business, operating results and financial condition.

Sales to customers outside the United States have accounted for 44%, 48% and 56% of the Company's net sales in fiscal 2001, 2000 and 1999, respectively. The Company currently has offices in and is operating in the United Kingdom, the Netherlands, Switzerland, Germany and France. International sales pose certain risks not faced by companies that limit themselves to domestic sales. Fluctuations in the value of foreign currencies relative to the U.S. dollar, for example, could make the Company's products less price competitive. International sales could be adversely affected by factors beyond the Company's control, including the imposition of government controls, export license requirements, restrictions on technology exports, changes in tariffs and taxes and general economic and political conditions. The laws of some countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company does not believe these additional risks are significant in the United Kingdom, the Netherlands, Germany, France or in Switzerland.

The Company has significant operations, including our headquarters, in the state of California and are dependent on a continuous power supply. California's current energy crisis could substantially disrupt its operations and increase our expenses. California has recently implemented, and may in the future continue to implement, rolling blackouts throughout the state. If blackouts interrupt FORTEL's power supply, the Company may be temporarily unable to continue operations at its California facilities. Any such interruption in the Company's ability to continue operations at its facilities could delay the development and delivery of its products and services and otherwise disrupt communications with FORTEL's customers or other third parties on whom it relies. Future interruptions could damage the Company's reputation and could result in lost revenue, either of which could substantially harm its business and results of operations. Furthermore, shortages in wholesale electricity supplies have caused power prices to increase. If energy prices continue to increase, FORTEL's operating expenses will likely increase which could have a negative effect on the Company's operating results.

The Company has considered the provisions of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity instruments at December 31, 2001. A review of other financial instruments and risk exposures at that date revealed the Company did not have material exposure to interest rate risk.

The Company sells it products worldwide. Consequently, the financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because a major portion of the Company's revenue is currently denominated in U.S. dollars, a strengthening of the dollar could make the Company's products less competitive in foreign markets.

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

			Page Number
PART I. Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (unaudited)— December 31, 2001 and September 30, 2001	3
		Condensed Consolidated Statements of Operations (unaudited)—Three Months Ended December 31, 2001 and 2000	4
		Condensed Consolidated Statements of Cash Flows (unaudited)—Three Months Ended December 31, 2001 and 2000	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
PART II. Other Information
	Item 1.	Legal Proceedings	21
	Item 2.	Changes in Securities	21
	Item 3.	Defaults Upon Senior Securities	21
	Item 4.	Submission of Matters to a Vote of Security Holders	21
	Item 5.	Other Information	21
	Item 6.	Exhibits and Reports on Form 8-K	21

			December 31, 2001			September 30, 2001
Assets
Current assets:
	Cash and cash equivalents		$	361		$	769
	Accounts receivable, net			2,405			2,031
	Refundable taxes			6			6
	Other current assets			449			772

		Total current assets		3,221			3,578
Fixed assets, net				439			515
Other assets, net				1,058			1,115

	Total assets		$	4,718		$	5,208

Liabilities and Shareholders' Deficit
Current liabilities:
	Accounts payable		$	4,222		$	4,084
	Accrued liabilities			5,073			4,595
	Short-term debt			848			206
	Deferred revenue			2,705			2,634

		Total current liabilities		12,848			11,519

Shareholders' deficit:
	Common stock			79,565			79,544
	Accumulated deficit			(87,695	)		(85,855	)

		Total shareholders' deficit		(8,130	)		(6,311	)

	Total liabilities and shareholders' deficit		$	4,718		$	5,208

		Three Months Ended December 31,
		2001			2000
Net product sales		$	1,171		$	2,247
Services and other			1,880			2,305

Net sales			3,051			4,552
Costs and expenses:
	Cost of products sold		181			217
	Cost of services and other		841			1,086
	Research and development expenses		748			1,017
	Selling, general & administrative expenses		2,792			3,761

	Operating loss		(1,511	)		(1,529	)
Other expense, net			212			43

	Loss before income taxes		(1,723	)		(1,572	)
Provision for income taxes			117			—

	Net loss	$	(1,840	)	$	(1,572	)

Basic and diluted net loss per share		$	(.06	)	$	(.05	)

Shares used in basic and diluted per share calculation			30,567			29,221

				Three Months Ended December 31,
				2001			2000
Cash flows provided by (used in) operating activities:
	Net loss			$	(1,840	)	$	(1,572	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization			305			460
		Provision for doubtful accounts			15			15
		Stock-based compensation			21			(3	)
		Change in operating assets and liabilities:
			Increase in accounts receivable		(389	)		(2,610	)
			Decrease in refundable taxes		—			115
			Decrease in other current assets		161			395
			Increase in accounts payable		138			693
			Increase in accrued liabilities		478			171
			Increase in deferred revenue		71			1,348

	Net cash used in operating activities				(1,040	)		(988	)

Cash flows used in investing activities:
		Acquisition of fixed assets			(10	)		(19	)

	Net cash used in investing activities				(10	)		(19	)

Cash flows provided by (used in) financing activities:
		Proceeds from borrowings		$	1,068		$	1,527
		Repayment of borrowings			(426	)		(496	)
		Issuance of common stock			—			46

	Net cash provided by financing activities				642			1,077

	Net increase (decrease) in cash and cash equivalents				(408	)		70
Cash and cash equivalents, beginning of period					769			889

Cash and cash equivalents, end of period				$	361		$	959

(a)		Exhibits
		None
(b)		Reports on Form 8-K
		None

		FORTEL INC.
Date: February 14, 2002		By:	/s/ ROMEO R. DIZON Romeo R. Dizon Acting Chief Financial Officer