ALLAIRE CORP, 424B3, 1999-09-07

ALLAIRE CORP
424B3, 1999-09-07
PREPACKAGED SOFTWARE

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<PAGE>

PROSPECTUS SUPPLEMENT DATED SEPTEMBER 7, 1999 (Registration No. 333-80759)
TO
PROSPECTUS DATED JULY 19, 1999 AND
PROSPECTUS SUPPLEMENT DATED AUGUST 16, 1999

ALLAIRE CORPORATION

On September 3, 1999 Allaire Corporation ("Allaire") filed a
registration statement with the Securities and Exchange Commission for a
proposed offering of up to 2,250,000 shares of Allaire common stock. It is
expected that Allaire will offer 1,000,000 shares of Allaire common stock and
that selling stockholders will offer 1,250,000 shares of Allaire common
stock. The underwriters will be granted the option to purchase up to an
additional 337,500 shares of Allaire common stock to cover over-allotments.
This Prospectus Supplement contains updates of the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in Allaire's prospectus dated July 19, 1999 and as
supplemented on August 16, 1999.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined
whether this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

Our revenue is derived principally from license fees for software products
and, to a lesser extent, fees for a range of services complementing these
products, primarily training, consulting and technical support. Software license
fees include sales of licenses for the then-current version of our products,
product upgrades and subscriptions. Subscriptions entitle the customer to all
new releases for a specific product during the subscription period, generally 12
months.

Revenue from sales of licenses to use our software products and product
upgrades is recognized upon delivery to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. Revenue under arrangements where multiple products or
services are sold together under one contract is allocated to each element based
on their relative fair values, with these fair values being determined using the
price charged when that element is sold separately. For agreements with
specified upgrade rights, the revenue related to such upgrade rights is deferred
until the specified upgrade is delivered. We provide most of our distributors
with rights of return. An allowance for estimated future returns is recorded at
the time revenue is recognized based on our historical experience. Revenue from
subscription sales is recognized ratably over the term of the subscription
period. Services revenue is recognized as services are rendered or ratably over
the term of the service agreement.

In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, Software Revenue Recognition, which provides guidance on the timing and
amount of revenue recognition when licensing, selling, leasing or otherwise
marketing computer software and related services. We adopted SoP 97-2 for all
transactions entered into after December 31, 1997. Subsequently, in March 1998,
the Financial Accounting Standards Board approved SoP 98-4, Deferral of the
Effective Date of a Provision of SoP 97-2, Software Revenue Recognition. SoP
98-4 provides for the one-year deferral of certain provisions of SoP 97-2
pertaining to its requirements for what constitutes vendor specific objective
evidence of the fair value of multiple elements included in an arrangement. In
December 1998, the FASB issued SoP 98-9, Modification of SoP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, which retained the
limitations of SoP 97-2 on what constitutes vendor specific objective evidence
of fair value. SoP 98-9 is effective for transactions entered into in fiscal
years beginning after March 15, 1999. Based upon our interpretation of SoP 97-2,
98-4 and 98-9, we believe that our current revenue recognition policies and
practices are consistent with the provisions of the new guidance. Adoption of
SoP 97-2 and SoP 98-4 did not have a material impact on our

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financial condition or results of operation. Adoption of SoP 98-9 is not
expected to have a material impact on our financial condition or results of
operations.

In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed, costs associated with the development of computer software are
expensed prior to the establishment of technological feasibility and capitalized
thereafter when material. No software development costs have been capitalized
because costs eligible for capitalization have not been material to our
financial condition or results of operations.

We generate our software license revenue through direct sales of licenses to
end users and through our indirect distribution channel. Direct revenue is
generated by our direct sales force and via our Web site. The indirect
distribution channel includes distributors, direct and original equipment
manufacturer resellers, system integrators and Allaire Alliance members. During
the second half of 1997, we established relationships with our primary
distribution partners in North America, Europe and Asia Pacific. Revenue
generated by the indirect distribution channel accounted for 13%, 28%, 44% and
49% of total revenue for 1996, 1997, 1998 and for the six months ended June 30,
1999, respectively. We anticipate that revenue derived from the indirect
distribution channel will continue to represent a significant percentage of
total revenue. We primarily derive our international revenue through our
indirect distribution channel. International revenue outside of North America
accounted for 17%, 19%, 13% and 11% of total revenue for 1996, 1997, 1998 and
for the six months ended June 30, 1999, respectively.

In April 1999, we completed a merger with Bright Tiger Technologies by
issuing 288,583 shares of our common stock for all of the issued and outstanding
equity securities of Bright Tiger. Bright Tiger provides software designed to
enhance the performance, availability and manageability of large-scale Internet
sites and Web applications. We had previously licensed technology from Bright
Tiger that was incorporated in certain ColdFusion products. In June 1999, we
completed a merger with Live Software by issuing 528,376 shares of our common
stock for all of the issued and outstanding equity securities of Live Software.
Live Software develops, markets and supports server-side Java development and
deployment technology. Live Software's principal product, JRun, is a leading
server-side Java development and deployment engine. We recorded merger related
costs of $2.7 million in the quarter ended June 30, 1999 primarily related to
professional fees, facility closings, severance packages and related costs
associated with these acquisitions. We accounted for these acquisitions as
poolings of interests.

We have experienced substantial net losses in each fiscal period since our
inception and, as of June 30, 1999, had an accumulated deficit of $36.7 million.
These net losses and accumulated deficit resulted primarily from the significant
costs incurred in the development of our products and in the preliminary
establishment of our infrastructure. We expect to increase our expenditures in
all areas in order to execute our business plan, particularly in research and
development and sales and marketing. The planned increase in sales and marketing
expense will primarily result from the hiring of additional sales force
personnel to focus on major account sales, and marketing programs to increase
brand awareness.

Our limited operating history and the undeveloped nature of the market for
Web development products make predicting future revenue difficult. Our expense
levels are based, in part, on our expectations regarding future revenue
increases, and to a large extent such

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expenses are fixed, particularly in the short term. There can be no assurance
that our expectations regarding future revenue are accurate. Moreover, we may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall of revenue in relation
to our expectations would likely cause significant declines in our quarterly
operating results.

We are also increasing our sales and marketing efforts focused on larger
purchases by larger customers. Such transactions are generally more complex and
may increase the length of our average sales cycle. We anticipate that an
increasing portion of our revenue could be derived from large orders, in which
case timing of receipt and fulfillment of any such orders could cause
fluctuations in our operating results, particularly on a quarterly basis.

Due to the foregoing factors, our operating results are difficult to
forecast. We believe that period-to-period comparisons of our historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, our operating results may fall below our
expectations or the expectations of securities analysts or investors in some
future quarter. In such event, the market price of our common stock would likely
be materially adversely affected.

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RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in our statement of operations.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, 1999,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Software license fees................................ 100.0% 91.6% 84.1% 87.9% 81.4%
Services............................................. 0.0 8.4 15.9 12.1 18.6
------- -------- ------- ------- -------
Total revenue...................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software license fees................................ 9.9 12.5 9.1 9.2 5.1
Services............................................. 0.0 18.6 19.0 18.0 15.1
------- -------- ------- ------- -------
Total cost of revenue.............................. 9.9 31.1 28.1 27.2 20.2
------- -------- ------- ------- -------
Gross profit........................................... 90.1 68.9 71.9 72.8 79.8
------- -------- ------- ------- -------
Operating expenses:
Research and development............................. 47.0 64.0 37.6 40.5 24.7
Sales and marketing.................................. 68.6 113.2 89.6 96.0 57.2
General and administrative........................... 61.0 43.8 23.1 24.3 14.0
Stock-based compensation............................. 0.0 0.0 1.9 2.1 0.6
Merger costs......................................... 0.0 0.0 0.0 0.0 12.4
------- -------- ------- ------- -------
Total operating expenses........................... 176.6 221.0 152.2 162.9 108.9
------- -------- ------- ------- -------
Loss from operations................................... (86.5) (152.1) (80.3) (90.1) (29.1)
------- -------- ------- ------- -------
Interest income, net................................... 0.5 4.0 0.1 1.5 3.7
------- -------- ------- ------- -------
Net loss............................................... (86.0)% (148.1)% (80.2)% (88.6)% (25.4)%
------- -------- ------- ------- -------
------- -------- ------- ------- -------
</TABLE>

SIX MONTHS ENDED JUNE 30, 1998 AND 1999

REVENUE

Total revenue increased 144% from $8.9 million for the six months ended June
30, 1998 to $21.8 million for the six months ended June 30, 1999.

SOFTWARE LICENSE FEES. Revenue from software license fees increased 126%
from $7.8 million for the six months ended June 30, 1998 to $17.7 million for
the six months ended June 30, 1999. This increase was primarily due to an
increase in the number of licenses sold to use our ColdFusion and JRun products.
Increases in product prices associated with the release of new versions of our
products during the fourth quarter of 1998 also contributed to the growth in
revenue.

SERVICES. Revenue from services increased 276% from $1.1 million for the
six months ended June 30, 1998 to $4.0 million for the six months ended June 30,
1999. The increase was primarily attributable to growth in training revenue
resulting from an increase in our installed customer base.

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COST OF REVENUE

COST OF SOFTWARE LICENSE FEES. The cost of software license fees includes
costs of product media duplication, manuals, packaging materials, licensed
technology, and fees paid to third-party vendors and agents for order
fulfillment. Cost of software license fees increased 34% from $823,000 for the
six months ended June 30, 1998 to $1.1 million for the six months ended June 30,
1999. The increase in absolute dollars was due to higher unit sales volume. The
improvement in software license fees gross margins from 89% for the six months
ended June 30, 1998 to 94% for the six months ended June 30, 1999 was primarily
attributable to economies of scale achieved with our higher sales volume.

COST OF SERVICES. Cost of services consists primarily of personnel costs.
Cost of services increased 106% from $1.6 million for the six months ended June
30, 1998 to $3.3 million for the six months ended June 30, 1999. The increase in
absolute dollars resulted primarily from the hiring of additional employees and
the use of contract trainers to support increased customer demand for training
classes and technical support. Services gross margin improved from (49)% for the
six months ended June 30, 1998 to 18% for the six months ended June 30, 1999.
The improvement in services gross margins was primarily attributable to the
substantial growth in training revenue.

Overall gross margins are primarily affected by the mix of products
licensed, sales through direct versus indirect distribution channels, software
license fees revenue versus services revenue, and international versus domestic
revenue. We typically realize higher gross margins on direct sales relative to
indirect distribution channel sales and higher gross margins on software license
fees relative to services revenue. As services revenue or revenue derived
through indirect distribution channels increases as a percentage of total
revenue, our gross margins may be adversely affected.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of employee salaries, fees for outside consultants and related costs
associated with the development of new products, the enhancement and
localization of existing products, quality assurance and testing. Research and
development expenses increased 49% from $3.6 million for the six months ended
June 30, 1998 to $5.4 million for the six months ended June 30, 1999. The
increase primarily resulted from salaries associated with newly hired
development personnel and product development consulting costs. We anticipate
that research and development expenses will continue to increase in absolute
dollars.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee salaries, commissions, and costs associated with marketing programs
such as trade shows, seminars, advertising and new product launch activities.
Sales and marketing expenses increased 46% from $8.6 million for the six months
ended June 30, 1998 to $12.5 million for the six months ended June 30, 1999. The
increase was primarily attributable to costs associated with additional direct
sales, pre-sales support and marketing personnel, and an increase in marketing
programs, including promotions and advertising. We anticipate that sales and
marketing expenses will continue to increase in absolute dollars as we continue
to expand our marketing programs and sales force to support our brand awareness,
product launches, international expansion and increased focus on major account
sales.

26
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased 41% from $2.2 million for the six
months ended June 30, 1998 to $3.0 million for the six months ended June 30,
1999. The increase was primarily attributable to salaries associated with newly
hired personnel and related costs required to manage our growth and facilities
expansion. We expect that our general and administrative expenses will increase
in absolute dollars as we continue to expand our staffing to support expanded
operations and facilities, and incur expenses relating to our responsibilities
as a public company.

STOCK-BASED COMPENSATION. The amount that the estimated fair market value
of our common stock exceeds the exercise price of stock options on the date of
grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. We recognized $186,000 for the six
months ended June 30, 1998 compared to $133,000 for the six months ended June
30, 1999. The decrease was primarily attributable to the grant of a fully vested
option with an exercise price substantially below fair market value during the
six months ended June 30, 1998.

MERGER COSTS. The merger costs of $2.7 million for the six months ended
June 30, 1999 relate to the mergers with Bright Tiger and Live Software. The
costs include professional fees, facility closings, severance packages and
related costs associated with these mergers.

INTEREST INCOME, NET. Interest income, net of interest expense, increased
from $136,000 for the six months ended June 30, 1998 to $803,000 for the six
months ended June 30, 1999. The increase was due to interest income earned from
the investment of the net cash proceeds from our initial public offering in
January 1999.

PROVISION FOR INCOME TAXES. We have incurred significant operating losses
for all periods from inception through June 30, 1999. We have recorded a
valuation allowance for the full amount of our net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.

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<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1998

REVENUE

Total revenue increased 174% from $7.8 million for 1997 to $21.4 million for
1998.

SOFTWARE LICENSE FEES. Revenue from software license fees increased 152%
from $7.1 million for 1997 to $18.0 million for 1998. The increase was primarily
due to an increase in the number of licenses sold to use our software products
including HomeSite, which we began selling in March 1997, and ColdFusion Studio,
which was released in November 1997. The growth in unit sales was also
attributable to the establishment of relationships with key domestic and
international distribution partners during the second half of 1997. To a lesser
degree, the increase in revenue from software license fees resulted from an
increase in product price associated with the release of new versions of our
products during the second half of 1997 and the fourth quarter of 1998.

SERVICES. Revenue from services increased 418% from $655,000 for 1997 to
$3.4 million for 1998. The increase was primarily attributable to growth in
training revenue resulting from an increase in our installed customer base.

COST OF REVENUE

COST OF SOFTWARE LICENSE FEES. Cost of software license fees increased 99%
from $973,000 for 1997 to $1.9 million for 1998. The increase in absolute
dollars was due to higher unit sales volume. The improvement in software license
fees gross margins from 86% for 1997 to 89% for 1998 was primarily attributable
to economies of scale achieved with higher sales volume in 1998.

COST OF SERVICES. Cost of services increased 179% from $1.5 million for
1997 to $4.1 million for 1998. The increase in absolute dollars resulted
primarily from the hiring of additional employees and the use of contract
trainers to support increased customer demand for training classes and technical
support. The improvement in services gross margins from (122)% for 1997 to (19)%
for 1998 was primarily attributable to the substantial growth in services
revenue.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses increased 61%
from $5.0 million for 1997 to $8.0 million for 1998. The increase primarily
resulted from salaries associated with newly hired development personnel and
product development consulting costs.

SALES AND MARKETING. Sales and marketing expenses increased 117% from $8.8
million for 1997 to $19.1 million for 1998. The increase was primarily
attributable to costs associated with additional direct sales, pre-sales support
and marketing personnel, and, to a lesser extent, an increase in marketing
programs, including trade shows, seminars and product launch activities.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
45% from $3.4 million for 1997 to $4.9 million for 1998. The increase was
primarily attributable to salaries associated with newly hired personnel and
related costs required to manage our growth and facilities expansion. In
addition, we incurred a charge of $400,000 in the fourth quarter of 1998 for
costs relating to exiting a facilities lease.

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STOCK-BASED COMPENSATION. The amount that the estimated fair market value
of our common stock exceeds the exercise price of stock options on the date of
grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. We recognized zero and $412,000 of
stock based compensation for 1997 and 1998, respectively.

INTEREST INCOME, NET. Interest income, net of interest expense, decreased
from $315,000 for 1997 to $13,000 for 1998. The decrease was primarily due to an
increase in interest expense attributable to our capital lease and notes payable
obligations.

YEARS ENDED DECEMBER 31, 1996 AND 1997

REVENUE

Our total revenue increased 230% from $2.4 million for 1996 to $7.8 million
for 1997.

SOFTWARE LICENSE FEES. Revenue from software license fees increased 203%
from $2.4 million for 1996 to $7.1 million for 1997. The increase was primarily
due to an increase in the number of licenses sold to use our software products
including HomeSite, which we began selling in March 1997. The growth in unit
sales was also attributable to the establishment of relationships with key
domestic and international distribution partners during the second half of 1997.
To a lesser degree, the increase in revenue from software license fees
resulted from an increase in product price associated with the release of new
versions of our products during the second half of 1997 and the introduction of
subscription sales in the fourth quarter of 1996.

SERVICES. Prior to 1997, we provided minimal technical support to our
customers and recognized no revenue from such services during 1996. During 1997,
we introduced training and fee-based technical support to our customers.

COST OF REVENUE

COST OF SOFTWARE LICENSE FEES. Cost of software license fees increased 316%
from $234,000 for 1996 to $973,000 for 1997. The increase in absolute dollars
was due to higher unit sales volume. The decrease in software license fee gross
margins from 90% for 1996 to 86% for 1997 was primarily attributable to an
increase in licensed technology costs and fees paid to third-party agents for
order fulfillment.

COST OF SERVICES. We recognized no revenue from services during 1996. The
cost of services incurred during 1997 related to the establishment of our
training organization and the hiring of additional technical support personnel.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses increased 349%
from $1.1 million for 1996 to $5.0 million for 1997. The increase primarily
resulted from salaries associated with newly hired development personnel and
product development consulting costs.

SALES AND MARKETING. Sales and marketing expenses increased 445% from $1.6
million for 1996 to $8.8 million for 1997. The increase was primarily
attributable to costs associated with additional direct sales, pre-sales support
and marketing personnel, and, to a lesser extent, an

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increase in marketing programs, including trade shows, seminars and product
launch and brand awareness activities.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
137% from $1.4 million for 1996 to $3.4 million for 1997. The increase was
primarily due to employee salaries associated with the hiring of executive and
financial personnel to help manage our growth. We also settled a wrongful
termination action with a former employee and agreed to pay the plaintiff a
one-time cash settlement of $285,000.

INTEREST INCOME, NET. Interest income, net of interest expense, increased
from $13,000 for 1996 to $315,000 for 1997. The increase was primarily
attributable to interest earned on cash received from financing activities
during 1997, partially offset by interest expense attributable to our capital
lease obligations.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth a summary of our unaudited quarterly
operating results for each of the ten quarters in the period ended June 30,
1999. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for fair statement of such information when read in conjunction with
our financial statements and notes thereto. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees............ $ 1,144 $ 1,305 $ 1,889 $ 2,795 $ 3,599 $ 4,228 $ 4,345 $ 5,794
Services......................... 94 118 144 299 493 585 1,158 1,160
-------- -------- --------- -------- -------- -------- --------- --------
Total revenue.................. 1,238 1,423 2,033 3,094 4,092 4,813 5,503 6,954
-------- -------- --------- -------- -------- -------- --------- --------
Cost of revenue:
Software license fees............ 157 186 198 432 421 402 447 667
Services......................... 146 302 396 608 699 903 1,240 1,215
-------- -------- --------- -------- -------- -------- --------- --------
Total cost of revenue.......... 303 488 594 1,040 1,120 1,305 1,687 1,882
-------- -------- --------- -------- -------- -------- --------- --------
Gross profit....................... 935 935 1,439 2,054 2,972 3,508 3,816 5,072
-------- -------- --------- -------- -------- -------- --------- --------
Operating expenses:
Research and development......... 641 1,084 1,580 1,679 1,796 1,806 2,148 2,277
Sales and marketing.............. 1,074 1,390 2,486 3,870 4,110 4,442 5,351 5,232
General and administrative....... 436 623 1,117 1,234 1,061 1,101 1,159 1,625
Stock-based compensation......... 0 0 0 0 161 25 34 192
Merger costs..................... 0 0 0 0 0 0 0 0
-------- -------- --------- -------- -------- -------- --------- --------
Total operating expenses....... 2,151 3,097 5,183 6,783 7,128 7,374 8,692 9,326
-------- -------- --------- -------- -------- -------- --------- --------
Loss from operations............... (1,216) (2,162) (3,744) (4,729) (4,156) (3,866) (4,876) (4,254)
Interest income (expense), net..... 19 76 116 104 91 45 (35) (88)
-------- -------- --------- -------- -------- -------- --------- --------
Net loss........................... $(1,197) $(2,086) $(3,628) $(4,625) $(4,065) $(3,821) $(4,911) $(4,342)
-------- -------- --------- -------- -------- -------- --------- --------
-------- -------- --------- -------- -------- -------- --------- --------
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Software license fees............ 92.4% 91.7% 92.9% 90.3% 88.0% 87.8% 79.0% 83.3%
Services......................... 7.6 8.3 7.1 9.7 12.0 12.2 21.0 16.7
-------- -------- --------- -------- -------- -------- --------- --------
Total revenue.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- --------- -------- -------- -------- --------- --------

MAR. 31, JUNE 30,
1999 1999
-------- --------
<S> <C> <C>

STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees............ $ 6,963 $10,761
Services......................... 1,734 2,314
-------- --------
Total revenue.................. 8,697 13,075
-------- --------
Cost of revenue:
Software license fees............ 456 647
Services......................... 1,506 1,794
-------- --------
Total cost of revenue.......... 1,962 2,441
-------- --------
Gross profit....................... 6,735 10,634
-------- --------
Operating expenses:
Research and development......... 2,467 2,897
Sales and marketing.............. 5,666 6,795
General and administrative....... 1,437 1,606
Stock-based compensation......... 67 66
Merger costs..................... 0 2,700
-------- --------
Total operating expenses....... 9,637 14,064
-------- --------
Loss from operations............... (2,902) (3,430)
Interest income (expense), net..... 286 517
-------- --------
Net loss........................... $(2,616) $(2,913)
-------- --------
-------- --------
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Software license fees............ 80.1% 82.3%
Services......................... 19.9 17.7
-------- --------
Total revenue.................. 100.0 100.0
-------- --------
</TABLE>

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<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of revenue:
Software license fees............ 12.7 13.1 9.7 14.0 10.3 8.3 8.1 9.6
Services......................... 11.8 21.2 19.5 19.6 17.1 18.8 22.6 17.5
-------- -------- --------- -------- -------- -------- --------- --------
Total cost of revenue.......... 24.5 34.3 29.2 33.6 27.4 27.1 30.7 27.1
-------- -------- --------- -------- -------- -------- --------- --------
Gross profit....................... 75.5 65.7 70.8 66.4 72.6 72.9 69.3 72.9
-------- -------- --------- -------- -------- -------- --------- --------
Operating expenses:
Research and development......... 51.7 76.1 77.7 54.3 43.9 37.5 39.0 32.7
Sales and marketing.............. 86.8 97.7 122.3 125.1 100.4 92.3 97.2 75.2
General and administrative....... 35.2 43.8 54.9 39.9 25.9 22.9 21.1 23.4
Stock-based compensation......... 0.0 0.0 0.0 0.0 3.9 0.5 0.6 2.8
Merger costs..................... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- -------- --------- -------- -------- -------- --------- --------
Total operating expenses....... 173.7 217.6 254.9 219.3 174.1 153.2 157.9 134.1
-------- -------- --------- -------- -------- -------- --------- --------
Loss from operations............... (98.2) (151.9) (184.1) (152.9) (101.5) (80.3) (88.6) (61.2)
Interest income (expense), net..... 1.5 5.3 5.7 3.4 2.2 0.9 (0.6) (1.3)
-------- -------- --------- -------- -------- -------- --------- --------
Net loss........................... (96.7)% (146.6)% (178.4)% (149.5)% (99.3)% (79.4)% (89.2)% (62.5)%
-------- -------- --------- -------- -------- -------- --------- --------
-------- -------- --------- -------- -------- -------- --------- --------

MAR. 31, JUNE 30,
1999 1999
-------- --------

<S> <C> <C>
Cost of revenue:
Software license fees............ 5.3 5.0
Services......................... 17.3 13.7
-------- --------
Total cost of revenue.......... 22.6 18.7
-------- --------
Gross profit....................... 77.4 81.3
-------- --------
Operating expenses:
Research and development......... 28.4 22.2
Sales and marketing.............. 65.1 52.0
General and administrative....... 16.5 12.3
Stock-based compensation......... 0.8 0.5
Merger costs..................... 0.0 20.5
-------- --------
Total operating expenses....... 110.8 107.5
-------- --------
Loss from operations............... (33.4) (26.2)
Interest income (expense), net..... 3.3 3.9
-------- --------
Net loss........................... (30.1)% (22.3)%
-------- --------
-------- --------
</TABLE>

Our total revenue has increased each consecutive quarter during the ten
fiscal quarters ending June 30, 1999, as a result of market acceptance of our
products and diversification of our sales channels, including expansion of our
direct sales force and relationships with domestic and international
distributors. Services revenue has generally increased along with increases in
our installed customer base. Cost of revenue from software license fees has
fluctuated as a percentage of revenue from software license fees primarily due
to growth in the indirect distribution channel, use of licensed technology and
economies of scale gained from increased license volume. Cost of services
revenue increased quarter to quarter in absolute dollars primarily due to
increases in personnel and related costs for customer support and training.

Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting our products, as well as
building our market presence. Research and development costs have increased as a
result of higher personnel and consulting costs associated with enhancing
existing products and developing new products. Sales and marketing expenses
increased as a result of hiring additional sales and marketing personnel and an
increase in marketing program costs. General and administrative expenses
increased throughout 1997 primarily due to the hiring of our executive and
financial staff and support personnel, increased use of outside services during
the second half of 1997 and a legal settlement. The increase during the fourth
quarter of 1998 was related to costs associated with exiting a facilities lease.
Merger costs incurred during the second quarter of 1999 were related to our two
acquisitions, each of which was recorded as a pooling of interests.

Our operating results have varied on a quarterly basis during our short
operating history and are expected to fluctuate significantly in the future. A
variety of factors, many of which are outside of our control, may affect our
quarterly operating results. These factors include:

- the evolution of the market for Web application servers and packaged
e-business applications;

- market acceptance of our products;

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- our success and timing in developing and introducing new products and
enhancements to existing products;

- market acceptance of products developed by competitors;

- changes in our pricing policies or the pricing policies of our
competitors;

- an increase in the length of our sales cycle;

- changes in customer buying patterns;

- customer order deferrals in anticipation of our new products and product
enhancements or our competitors' products and product enhancements;

- market entry by new competitors;

- development and performance of our distribution channels;

- general economic conditions; and

- economic conditions specific to Internet-related industries.

LIQUIDITY AND CAPITAL RESOURCES

In January 1999, we sold 2,875,000 shares of our common stock through an
initial public offering. Net proceeds from the offering were $52.3 million after
deducting underwriting discounts, commissions and offering expenses. Prior to
our initial public offering, we funded our operations primarily through net cash
proceeds from private placements of preferred stock. At June 30, 1999, we had
cash, cash equivalents and short-term investments of $53.5 million, up from $3.7
million at December 31, 1998.

Cash used for operating activities for 1998 was $9.2 million, primarily due
to a net loss of $17.1 million, partially offset by increases in accrued
expenses and deferred revenue. Cash used for operating activities for the six
months ended June 30, 1999 was $228,000, primarily relating to a net loss of
$5.5 million, offset by increases in accrued expenses and deferred revenue.

Cash provided by investing activities for 1998 was $1.5 million, primarily
relating to a decrease in short-term investments, partially offset by property
and equipment purchases. Cash used for investing activities for the six months
ended June 30, 1999 was $34.9 million, primarily relating to an increase in
purchases of short-term investments.

Cash provided by financing activities for 1998 was $3.8 million, primarily
due to the issuance of notes payable and promissory notes, the exercise of
common stock options and the issuance of preferred stock. Cash provided by
financing activities for the six months ended June 30, 1999 was $51.4 million,
primarily due to common stock issuances.

As of June 30, 1999, our primary commitments consisted of obligations
related to operating leases, $1.3 million of notes payable under equipment lines
and $332,000 of capital lease obligations.

In April 1999, we completed a merger with Bright Tiger by issuing 288,583
shares of our common stock for all of the issued and outstanding equity
securities of Bright Tiger. In connection with the merger, we assumed and paid
off Bright Tiger debt obligations totaling $2.6 million. In June 1999, we
completed a merger with Live Software by issuing approximately 528,376 shares of
our common stock for all of the issued and outstanding equity securities of Live
Software.

We expect to experience significant growth in our operating expenses for the
foreseeable future in order to execute our business plan, particularly research
and development and sales

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and marketing expenses. As a result, we anticipate that such operating expenses,
as well as planned capital expenditures, will constitute a material use of our
cash resources. In addition, we may utilize cash resources to fund acquisitions
or investments in complementary businesses, technologies or product lines. We
believe that the net proceeds from this offering together with our current cash,
cash equivalents and short-term investments will be sufficient to meet our
anticipated cash requirements for working capital and capital expenditures for
the foreseeable future.

RECENT DEVELOPMENTS

For the month of July 1999, our unaudited consolidated results, including
acquired businesses, reflected revenue of approximately $4.7 million and a net
loss of approximately $400,000. Financial information for July is being
disclosed to comply with pooling of interest requirements. The results for July
are not necessarily indicative of our operating results for our third fiscal
quarter of 1999 or any other future period.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. The use of software and computer systems that are not Year
2000 compliant could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with Year 2000 requirements.
Because ColdFusion and JRun do not involve data storage, the ability of a Web
application built with ColdFusion or JRun to comply with Year 2000 requirements
is largely dependent on whether the database underlying the application is Year
2000 compliant. If ColdFusion or JRun is connected to a database that is not
Year 2000 compliant, the information received by the application may be
incorrect. Although we believe that the current releases of our products are
Year 2000 compliant, there can be no assurance that Web applications developed
using our products will comply with Year 2000 requirements.

Some of our customers and potential customers have implemented policies that
prohibit or discourage changing their internal computer systems until after
January 1, 2000. Our revenue may suffer if potential customers delay the
purchase of our products until after January 1, 2000. Purchasing decisions may
be delayed as potential customers halt development of their internal computer
systems or use their information technology budgets to address Year 2000 issues.
If potential customers delay purchasing or implementing our products in
preparation for the Year 2000 problem, our business could be seriously harmed.
Year 2000 complications may disrupt the operation, viability or commercial
acceptance of the Internet, which could have a material adverse impact on our
business, operating results and financial condition.

With respect to our primary internal software systems, we have received
either written confirmations from our software vendors that the software it
installed is Year 2000 compliant or is in the process of installing available
software upgrades to achieve Year 2000 compliance. Based on the foregoing, we
currently have no reason to believe that our internal software systems will not
be Year 2000 compliant by September 30, 1999. To date, we have not incurred
significant incremental costs in order to comply with Year 2000 requirements and
do

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not believe we will incur significant incremental costs in the foreseeable
future. However, there can be no assurance that Year 2000 errors or defects will
not be discovered in our internal software systems and, if such errors or
defects are discovered, there can be no assurance that the costs of making such
systems Year 2000 compliant will not have a material adverse effect on our
business, operating results and financial condition.

We rely on third party vendors which may not be Year 2000 compliant for
certain equipment and services. In addition, many of our distributors are
dependent on commercially available operating systems, which may be impacted by
Year 2000 complications. To date, we have not conducted a Year 2000 review of
our vendors or distributors. If systems maintained by our vendors or
distributors fail to operate properly with regard to the Year 2000 and
thereafter, we could incur significant, unanticipated expenses to remedy any
problems or replace affected vendors, which could reduce our revenue from our
indirect distribution channel and could have a material adverse effect on our
business, operating results and financial condition.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We do not expect
SFAS No. 133 to have a material effect on our financial condition or results of
operations.

In February 1998, the AcSEC issued SoP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. We adopted SOP
98-1, January 1, 1999, and we do not expect our adoption of SOP 98-1 to have a
material effect on our financial condition or results of operations.

In April 1998, the AcSEC issued SoP 98-5, Reporting on the Costs of Start-Up
Activities. Start-up activities are defined broadly as those one-time activities
relating to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a new class of
customer, commencing some new operation or organizing a new entity. Under SoP
98-5, the cost of start-up activities should be expensed as incurred. SoP 98-5
is effective for our fiscal 1999 financial statements and we do not expect our
adoption of SoP 98-5 to have a material effect on our financial condition or
results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 1999, we were exposed to market risks which primarily include
changes in U.S. interest rates. We maintain a significant portion of our cash,
cash equivalents and short-term investments in financial instruments with
purchased maturities of 12 months or less. We do not hold derivative financial
instruments or equity securities in our investment portfolio. Our cash
equivalents and short-term investments consist of high quality corporate and
government debt. These financial instruments are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short duration
of these financial instruments, an immediate increase in interest rates would
not have a material effect on our financial condition or results of operations.

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<PAGE>
BUSINESS

ALLAIRE

We develop, market and support Web application servers and related software
products that enable the development and deployment of sophisticated e-business
Web sites and applications. Our products interoperate with emerging Web
application technologies as well as key enterprise information systems
technologies, and include features and tools that increase the productivity of
Web developers. With the introduction of our new Allaire Spectra product later
this year, we will provide both a Web application server and advanced content
management, commerce and personalization capabilities in a packaged e-business
application. Our products are designed to enable businesses such as
Williams-Sonoma, Kaiser Permanente and autobytel.com to build and manage
large-scale, content-rich, transaction-oriented Web sites and applications.

INDUSTRY OVERVIEW

GROWTH OF THE INTERNET

The Internet has experienced dramatic growth, both in terms of the number of
users and as a means of conducting business transactions, and is expected to
continue to grow rapidly. International Data Corporation estimates that the
number of Internet users will increase from 196 million in 1999 to 502 million
in 2003. The emergence of the Internet has enabled new online business models
and spurred the development and deployment of Web applications to facilitate
business interactions that were not practical to address with traditional
computing systems. The Internet has created a public infrastructure that enables
companies to market and sell their products and services to customers through
e-business applications. International Data Corporation estimates that the
volume of commerce over the Internet will increase from approximately $111
billion in 1999 to approximately $1.3 trillion by 2003.

As the number of companies conducting business online has increased, the
Internet has become a highly competitive business environment. A growing number
of companies are building Web applications that perform a combination of
marketing, sales and operational functions. At the same time, the Internet
promotes competition in markets and makes it easy for customers to locate and
transact business with competitive vendors. As a result, companies are seeking
to differentiate themselves from their competitors by developing increasingly
sophisticated capabilities for conducting business transactions online and
managing product marketing content. This content is increasingly delivered to
Web users in a form that is targeted to their personal interests and defined by
their past interactions with the site. The increasing use and sophistication of
Web applications has created a corresponding need for Web application servers
required to host them. It also has increased demand for packaged e-business
applications with advanced content management, commerce and personalization
capabilities.

WEB APPLICATION SERVERS

A Web application server is a software program that hosts Web applications
and enables access to these applications through Web browsers, client hardware
devices and other applications. A Web application server also enables hosted
applications to access a company's servers and other internal systems. The Web
application server is the software technology that is central to the Web as a
computing platform, much as the operating system is the software

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<PAGE>
technology that is central to the desktop computing platform. According to
Forrester Research, the market for Web application servers will triple from $692
million in 1999 to $2.1 billion in 2002. We believe that the central technology
role of Web application servers places leading Web application server vendors in
a strong position to sell related software products. This additional software
includes development tools, management products and packaged e-business
applications.

PACKAGED E-BUSINESS APPLICATIONS

Packaged e-business applications enable companies to dynamically deliver
information and transactional capabilities to a broad group of users, including
customers, vendors and employees. By offering dynamic content and the ability to
execute business transactions over the Internet, e-business applications can
provide each user with customized information while reducing the cost of each
business transaction. These capabilities differentiate e-business applications
from mainframe, desktop and client-server applications. More companies are
seeking to gain a competitive advantage by deploying applications with
sophisticated content management, commerce and personalization capabilities. An
International Data Corporation report estimates that the market for e-business
applications will grow from $1.7 billion in 1999 to $13.2 billion in 2003.

INDUSTRY CHALLENGES

Companies are deploying Web application servers and packaged e-business
applications to address a broad range of business needs. Applications range from
corporate e-business Web sites with millions of visitors per day to intranet
applications designed to share information among a small number of co-workers.
The Web's open standards and the low cost of deploying Web applications promote
the creation of a greater variety of applications than would be practical using
mainframe, desktop or client-server technologies. A Web application server must
be both highly functional and affordably priced to make this wide range of Web
application deployments economically feasible.

Successful Web application servers and Web applications must not only be
based on standards that are specific to the Web but also must be open and easily
integrated with older computer technologies. Standard Web protocols such as
HTTP, HTML and XML, form the core of Web application technology. These protocols
evolved independently, rather than from mainframe, desktop or client-server
technologies. To be successful, Web-based applications must be able to integrate
with a company's existing hardware and software systems, such as databases,
directories, messaging servers and transaction monitors. At the same time, Web
application servers should not be built around older computer platform
standards, which many large platform vendors have attempted to do by extending
mainframe, desktop or client-server technologies to the Web.

To date, few Web application server products have achieved broad market
acceptance. Broad and sustained acceptance of a product promotes market entry by
technology vendors and service providers offering complementary products and
professional services to customers. Broad customer and developer support
enhances a vendor's ability to launch new products and product versions by
improving the quality of pre-release customer testing, by enhancing the vendor's
ability to secure reference customers prior to a new product's release, and by

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helping to ensure widespread customer awareness and availability of new products
through the vendor's distribution channel.

As competition among companies conducting business online increases, those
companies are becoming increasingly focused on speeding the development and
deployment process. Cutter Information Corporation estimates that 72% of Web
application development projects have a schedule of six months or less, and 14%
have a schedule of less than a month. As a consequence, Web application servers
and packaged e-business applications must contain features, such as visual
tools, templates and wizards, which promote productive development and simplify
deployment. The graphical, content-rich and data-intensive nature of e-business
applications requires the involvement of a variety of programmers. These
programmers include enterprise systems specialists, database developers and
application programmers as well as a variety of non-traditional contributors
such as Web page designers, multi-media designers and video producers. To ensure
productive Web application development and deployment, the Web application
server must provide appropriate tools to each set of participants, while
preserving the integrity of the application and coordinating the efforts of
geographically-dispersed, multi-disciplinary teams.

THE ALLAIRE SOLUTION

We are a leading provider of Web application servers and related software
products that enable organizations to move their businesses to the Web. Our
ColdFusion, JRun and HomeSite products and related services offer companies the
following benefits:

- An enterprise class, competitively-priced Web application server, which
acts as the platform for the rapid development and deployment of scalable
e-business applications. To date, over 35,000 copies of our ColdFusion Web
application server have been licensed.

- Open, extensible application server technology based on Web standards,
such as HTML, XML and Java, that enables integration of a large number of
enterprise information systems technologies. Unlike many other vendors, we
offer Web application servers and other products that are not constrained
by a need to support or promote a particular legacy technology.

- Web-specific technology innovations designed to speed Web application
development and deployment, such as ColdFusion Markup Language, JavaServer
Pages and Web Distributed Data eXchange, and a large number of additional
product features that increase the speed of Web application development.

- A broad and growing group of developers, technology partners, direct and
indirect distributors, systems integrators and other professionals that
support and extend the use and functionality of our products through
complementary products and high-quality design, implementation, training
and support services.

The introduction of our Allaire Spectra product later this year will provide
companies with advanced content management, commerce and personalization
capabilities in a packaged e-business application deployed on our ColdFusion Web
application server.

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ALLAIRE STRATEGY

Our goal is to be the leading provider of Web application servers and
packaged e-business applications for the development and deployment of
sophisticated e-business Web sites and applications. Key elements of our
strategy to attain this goal are:

MAKE ENTERPRISE CLASS PRODUCTS THAT ARE EASY TO USE AND AFFORDABLE. We
believe that we have become a leader in the Web application server market by
providing enterprise class products that have high performance, scalability and
security, but that are much easier to use and cost significantly less than
products available from most other vendors. Because our products are easier to
use and cost less than other products, they can be adopted by a larger number of
businesses to develop and deploy a wider variety of applications. We intend to
continue to sell easy-to-use, high-quality products at affordable prices to
capture a significant portion of the Web application server market.

MAXIMIZE PRODUCT ADOPTION. We have established significant market presence
for our Web application products by making components of our technology freely
and widely available. Non-commercial versions of our ColdFusion, JRun and
HomeSite products are available for free electronic distribution and are also
distributed by original equipment manufacturers. By promoting access to our
technology, we seek to associate the Allaire brand with high-quality,
highly-productive Web application products, and to encourage users to progress
from free versions to commercial products.

LEVERAGE LEADERSHIP POSITION IN WEB APPLICATION SERVER MARKET. We intend to
continue to introduce new products, such as Allaire Spectra, that complement our
Web application server products. We believe that, as a leader in the Web
application server market, we have a competitive advantage over vendors that
have sold fewer products. We believe that the broad customer base and developer
support of our Web application servers enhance our ability to introduce
complementary products.

CONTINUE TO SUPPORT OPEN WEB STANDARDS. We architected our products to be
open by supporting development for key Web application platforms and
technologies, as well as key enterprise and client-server standards. We have
helped to introduce innovative technologies for Web application development and
deployment, such as CFML, WDDX and JavaServer Pages, that are used by large
numbers of Web developers. We intend to continue to develop innovative Web
technologies to meet changing customer requirements and to enable our customers
to preserve their investments in existing computer systems without compromising
Web application server functionality or performance.

EXPAND CHANNEL DISTRIBUTION. To maximize the effectiveness of our sales and
marketing resources, we intend to continue to expand the depth and breadth of
our channel distribution. We believe that increasing the dollar amount of the
sales opportunities handled by our indirect channel distribution will increase
the strength and motivation of our channel while allowing our direct sales force
to focus on increasingly larger sales to Fortune 1000 companies and other major
organizations.

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ENHANCE CO-SELLING RELATIONSHIPS WITH SYSTEMS INTEGRATORS. We intend to
continue to develop our relationships with systems integrators and other Web
consultants that implement e-business applications using our Web application
products. By providing significant opportunities to these firms to generate
consulting revenue, we believe that they will promote our products over those
sold by competing vendors that seek to keep implementation and consulting
services revenue for themselves. The substantial resources of systems
integrators and Web consultants help ensure the successful development and
deployment of our customers' e-business applications.

WIN ENTERPRISE STANDARDS DECISIONS. As companies invest in Web application
servers and related software products, their purchasing decisions more often
require approval of a vendor's technology as a company-wide standard. We intend
to expand the support and coverage of these accounts within our direct sales
force, and to continue to present the business advantages of adopting our
technology as a company-wide standard.

PRODUCTS

Our products enable companies and other organizations to develop and deploy
sophisticated e-business applications. The discussion and chart below describe
our products.

COLDFUSION

COLDFUSION SERVER. ColdFusion Server is an open, scalable and secure Web
application server. Web applications built with ColdFusion range from simple,
database-driven pages to large-scale, content-rich, transaction-oriented Web
sites. ColdFusion Server is available in two editions, Professional and
Enterprise, running on Windows NT. The Enterprise edition also runs on Sun
Solaris and HP-UX. ColdFusion Server has won the following awards:

- 1999 PC Magazine's Editors' Choice Award;

- 1998 Codie Award for software excellence from the Software Publishers
Association;

- "Best of Show Award" at the 1998 Fall Internet World;

- CNET's builder.com 1998 Product Award; and

- Network World Blue Ribbon Award.

COLDFUSION STUDIO. ColdFusion Studio is the integrated development
environment for ColdFusion Server. Based on HomeSite, ColdFusion Studio allows
developers to preserve development skills as well as individual projects as they
move from developing static Web pages and sites to interactive Web sites and Web
applications. ColdFusion Studio runs on Microsoft Windows NT, Windows 95 and
Windows 98.

JRUN

JRun provides companies with a system for deploying Web applications based
on Java Servlets and JavaServer Pages. Java Servlets are Web application
components written in the Java programming language, a language developed by Sun
Microsystems. JavaServer Pages is a Web application scripting language that
allows developers to create dynamic Web pages and applications that are
independent of hardware and server environments. JRun allows developers to
deploy server-side Java to leading Web servers, including Microsoft's IIS,
Netscape's Enterprise Server and Apache. Java addresses the needs of more
advanced, object-oriented system programmers. By adding Java technologies to our
product line, JRun expands the number of projects and developers that can take
advantage of our Web application platform. JRun runs on any software platform
that supports Java. JRun won the 1998

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WebTechniques' Best Java Tool award and was a finalist for the 1998 JavaWorld's
Best Servlet Tool award.

HOMESITE

HomeSite is a leading HTML design tool, which is principally used for the
creation of Web pages. HomeSite runs on Microsoft Windows NT, Windows 95 and
Windows 98. HomeSite has won a large number of industry awards as a leading HTML
design tool.

ALLAIRE SPECTRA

Allaire Spectra, which we expect to release later this year, is a packaged
e-business application for building and managing large-scale Web sites and
applications that require advanced content management, commerce and
personalization capabilities. Allaire Spectra will provide systems
administrators, Web developers and users with the necessary pre-built software
components and visual tools to deploy and manage large-scale Internet portals,
e-commerce sites and corporate-wide Web systems. Applications built with Allaire
Spectra will run on the ColdFusion application server. Allaire Spectra was
announced on July 21, 1999 and is currently in product testing. In August 1999,
the pre-release version of Allaire Spectra won the InternetWorld Australia Best
of Show award.

<TABLE>
<CAPTION>
PRODUCT
(SUGGESTED LIST PRICE) DESCRIPTION TYPICAL APPLICATIONS TARGET USERS
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>

ColdFusion Server Licensed for four Business intranets and Large enterprises
Professional ($1,295) processors and allows an extranets Large systems integrators
unlimited number of Field office extranets New Web-based businesses
concurrent users Single server applications Internet service providers
Features include open state using a relational database
repository and shared
server security
Access to any ODBC and
OLE-DB data source

ColdFusion Server Licensed for eight High-volume, Large enterprises
Enterprise ($3,495) processors and allows an business-critical commerce Large systems integrators
unlimited number of sites and applications New Web-based businesses
concurrent users Enterprise intranet Internet service providers
Includes all Professional applications
features, plus features Enterprise applications
required for large scale requiring native database
applications, including drivers or CORBA
clustering, load balancing
and automatic failover and
CORBA support
IBM DB2, Informix, Oracle
and Sybase native database
drivers

ColdFusion Studio ($395) An integrated development Business systems (human Web application developers
environment with a number resources, financial, Enterprise and
of visual tools for customer support) client-server programmers
creating Web applications Electronic commerce HTML and desktop database
Includes the award-winning (stores, developers
HomeSite HTML design tool business-to-business) Development team managers
Features include Dynamic content publishing
interactive debugging, (document management,
remote development dynamic news and
capabilities and one-step personalized information)
deployment Collaboration (discussion,
Team development support project and workflow
management)
</TABLE>

40
<PAGE>
<TABLE>
<CAPTION>
PRODUCT
(SUGGESTED LIST PRICE) DESCRIPTION TYPICAL APPLICATIONS TARGET USERS
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>

JRun Pro ($595) Supports any number of Corporate Internet, Java developers
processors and allows an intranet, and extranet Large enterprises
unlimited number of sites that utilize Java as Large systems integrators
concurrent users their primary development New Web-based businesses
Features full support for architecture
Java Servlets and Enterprise Web applications
JavaServer Pages requiring connectivity to
Licensed per processor CORBA, Enterprise Java
Beans and other distributed
environments

JRun Pro Unlimited ($1,995) Includes all Pro features, High-volume, Large enterprises
plus the ability to use any business-critical commerce Large systems integrators
number of concurrent Java sites and applications New Web-based businesses
Virtual Machines utilizing a large number of Internet service providers
Licensed per machine processors and/or Java
Virtual Machines

HomeSite (Electronic HTML page design and Web High-quality static Web site developers
Version $89; Packaged site development tool corporate Web sites Web development team
Version $99) Features an intuitive managers
graphical interface
</TABLE>

TECHNOLOGY

OPEN INTEGRATION

At the core of our Web application technology is the ColdFusion Web
application server. Our application server technology is built on an open
architecture, which can be deployed on Windows 98/NT, Sun Solaris or HP-UX. This
openness ensures that a customer can switch core operating system platforms and
maintain the same core application server technology. Our open architecture
supports native, high-performance connectivity into major enterprise databases,
such as Oracle, Sybase, SQL Server, Informix and IBM DB2. Our application server
technology supports major distributed computing standards, including DCOM,
CORBA, Java and Enterprise Java Beans. This support enables existing legacy
corporate applications infrastructure to be extended into Internet-based
systems. Additionally, all major Internet protocols and key enterprise
information systems, including messaging servers, directory servers, file
servers and other network technology, are supported.

SCALABLE, SECURE DEPLOYMENT

To successfully support high-volume sites and transaction-intensive
applications, a Web application platform requires high performance, availability
and scalability from a Web application server. Our application server technology
provides a high degree of cross-platform performance and fault-tolerance from
individual servers and multiple server clusters. ColdFusion application server
runs as a 32-bit multi-threaded system service, which permits applications to
experience an increase in processing performance as processors are added to the
server. Clusters of multiple servers significantly enhance an application's
availability and scalability. Using technology that we acquired in connection
with our merger with Bright Tiger, we have enhanced our load balancing and
failover technologies. ColdFusion automatically balances load among servers
deployed in a cluster, so that performance is

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optimized. ColdFusion permits a cluster deployment to store client state
information in a shared repository, so it will not be lost when a server fails.
If any machine in the cluster fails or is heavily loaded, ColdFusion
automatically transfers its responsibilities to one of the remaining servers.
Because ColdFusion clusters use a software-based system for load balancing and
failover there is no single point of failure.

Our application server technology also provides a set of features for
securely deploying applications. Principal among these is the ability of
ColdFusion to restrict access to specific resources needed to run an
application, including directories, files, databases and components. Therefore,
multiple applications on the same server cannot access another application's
resources. Other security features include authentication and encryption for
e-business Web applications. The application server security technology also
provides a set of tools for authenticating end users, and tracking their
interaction with a Web system. This technology forms a foundation for
personalized customer experiences and rich business intelligence. Additionally,
this security technology meets the needs of hosting and application server
provider companies, which require robust security to host multiple, outsourced
corporate Web sites and business applications on a shared infrastructure. We
license portions of this security technology from a third party.

MULTI-LANGUAGE DEVELOPMENT

Our application server technology supports multiple programming language
technologies and models. At the core of ColdFusion is the ColdFusion Markup
Language, or CFML, which provides developers with a highly-productive, tag-based
scripting model that tightly integrates with Web-based programming languages
such as HTML and XML.

As a result of our merger with Live Software, we acquired JRun, a
server-side Java programming environment. JRun provides developers with a system
for deploying Web applications based on Java Servlets and JavaServer Pages--a
standards-based model for deploying Java on Web application servers. Java
addresses the needs of more advanced, object-oriented system programmers. By
integrating Java technologies such as Java Servlets and JavaServer Pages into
our technology, we have expanded the range of projects and developers that can
use our products.

PRODUCTIVE DEVELOPMENT AND MANAGEMENT

In addition to our innovative approaches to Web-based programming languages,
we offer a wide range of visual development tools. We believe that company-wide
adoption of the Web requires rich productivity tools for system administrators,
developers, designers, and business users and managers. Our visual tools include
HomeSite, an HTML design tool, and ColdFusion Studio, our ColdFusion rapid
application development tool.

Additionally, our Allaire Spectra product will include a Web-based
productivity tool for business users and managers to assist them in managing
content, controlling business workflow and using decision support tools to
analyze their Web-based sales and marketing activities.

PACKAGED E-BUSINESS APPLICATIONS

Allaire Spectra will consist of three core components: the ContentObject
API, the core solution services and a Web-based productivity tool. The
ContentObject API is an XML-based object programming system and content
repository. It will allow companies to model their Web business technology and
data using an object-based programming model, implemented in ColdFusion, and to
store their Web information in an XML-based content

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repository. This technology will help companies build an extensible and reusable
information management solution and syndicating content and applications across
the Internet.

The six core solution services of Allaire Spectra will be:

- Content management--a system for managing content infrastructure;

- Workflow and process automation--a set of services for building custom
workflow templates and process automation;

- Role-based security--an open authentication framework to assign users and
groups to activities and processes;

- Personalization--a three-tier model that supports user profiling,
rules-based dynamic targeting and the integration of third party
personalization engines;

- Business intelligence--a model of logging, measuring and reporting user
activities; and

- Syndication--a set of XML-based capabilities for extending Web business to
Internet partners or site affiliates.

The final core technology in Allaire Spectra will be a Web-based user
interface and productivity tool, which will provide business users and managers
with a simple user interface for managing content, workflow, business rules and
decision support and analysis tools.

INTERNET MIDDLEWARE AND XML

In addition to our tools, application servers and packaged e-business
applications, we have developed a core technology aimed at supporting
business-to-business commerce and application syndication. The Web Distributed
Data eXchange, or WDDX, was developed to support the integration of business
systems across the Internet. WDDX was released in late 1998 as an open source
technology, freely available from a separate Web site, www.wddx.org. Since its
release, more than 10,000 developers have downloaded a software development kit
for using WDDX. Several major software programming languages now support WDDX,
including Perl, Java, ASP, JavaScript, PHP and Python.

WDDX provides a module for each language that will automatically serialize
or translate the native data structures into an abstract representation in XML.
This technology is designed to simplify the integration of business systems over
the Internet. We intend to foster broad adoption of the technology, and have
incorporated it directly into our own platforms, including extensive use within
Allaire Spectra for enabling business-to-business commerce applications.

RESEARCH AND DEVELOPMENT

We devote a substantial portion of our resources to developing new products
and product features, extending and improving our products and technology, and
strengthening our technological expertise. Our research and development
expenditures were $5.0 million in 1997, $8.0 million in 1998 and $5.4 million in
the six months ended June 30, 1999. We intend to continue to devote substantial
resources toward research and development. As of June 30, 1999, we had 65
employees engaged in research and development activities. We must hire
additional skilled software engineers to continue to increase our research and
development efforts. Our business, operating results and financial condition
could be adversely affected if we are not able to hire and retain the required
number of engineers.

SALES, MARKETING AND DISTRIBUTION

We market and sell our products and services to businesses using a
combination of direct and indirect distribution channels, including a corporate
sales force, domestic and

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international distribution, electronic commerce and sales through business
partners. The percentage of our total revenue generated through our indirect
distribution channel was 28% in 1997, 44% in 1998 and 49% in the six months
ended June 30, 1999. As of June 30, 1999, we had 79 sales and marketing
employees worldwide.

CORPORATE SALES FORCE. Our corporate account sales force focuses on sales
to institutional customers worldwide. Corporate account sales can be filled
either directly by our sales force or through our indirect channel partners. The
corporate account sales force is comprised of field representatives and
telesales representatives. The field representatives market and sell to
corporate, government and higher education institutional customers primarily
interested in application server products for e-business applications. The
telesales representatives qualify, develop and pursue leads generated from
inquiries on our Web site, from seminars and from downloads of our products. We
intend to add a significant number of additional field representatives over the
next 12 months.

INDIRECT DISTRIBUTION. We have a number of domestic and international
distributors and resellers that market and sell our products. As of June 30,
1999, we had 21 distributors in North America, Europe and Asia Pacific,
including Ingram Micro and Mitsubishi. In addition, as of June 30, 1999, we had
over 500 corporate and catalog resellers, original equipment manufacturers and
value-added resellers. None of our distribution partners have exclusive
distribution rights.

ELECTRONIC COMMERCE. Our Web site allows visitors to download, evaluate and
purchase our products. A number of third-party electronic commerce sites,
including Beyond.com, Intraware.com, JapanMarket.com and RealStore.com,
distribute commercial copies of our products for delivery by direct download.
Electronic distribution provides us with a low-cost, globally accessible,
24-hour sales channel.

ALLAIRE ALLIANCE. We believe that establishing a large community of active
users of our products and technology is critical to our success. To further the
development of this community, we have established the Allaire Alliance program.
Allaire Alliance members include Web developers, application vendors and systems
integrators. Allaire Alliance members also include the distributors, corporate
and catalog resellers, original equipment manufacturers and value-added
resellers referenced above. We typically enter into written agreements with
Allaire Alliance members. These agreements typically do not provide for firm
financial commitments from the member, but are intended to establish the basis
upon which the parties will work together to achieve mutually beneficial
objectives.

PRODUCT MARKETING PROGRAMS. We engage in a broad range of product marketing
activities, including sponsoring seminars for potential customers, providing
product information through our Web site and promoting special events. During
1998, we held 108 seminars in 46 cities, and during the six months ended June
30, 1999, we held 52 seminars in 33 cities. Our product marketing programs are
aimed at informing customers of the capabilities and benefits of our products
and services and stimulating demand across all market segments. Certain programs
are designed to encourage independent software developers to develop products
and applications that are compatible with our products and technology.

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BRANDING STRATEGY. We continue to develop market awareness of the "Allaire"
brand. Our branding strategy includes participating in trade shows and
conferences, promoting special events and advertising our products and services
in print and electronic media.

CUSTOMERS

Our products are marketed and distributed to a diverse group of customers,
ranging from small, independent consultants and Internet presence providers to
Fortune 1000 businesses and other large organizations. Many of our customers are
global organizations that use our products to create Web sites and Web
applications with electronic commerce, content management and personalization
capabilities for Internet, intranet and extranet use. End user customers from
which we recognized in excess of $25,000 in revenue during 1999 include the
following:

AT&T
Bank of America
Bell Atlantic
Boeing
Booz, Allen & Hamilton
Carlson Companies
Caterpillar
Cheap Tickets
GTE
Hewlett-Packard
Kaiser Permanente

Lockheed Martin
Merrill Lynch
Nortel
Toys 'R' Us
Travelers Insurance Company
UUNet Technologies
Viacom
Visa International

Revenue from customers outside North America, primarily Asia and Europe, as
a percentage of our total revenue, was 19% in 1997, 13% in 1998 and 11% in the
six months ended June 30, 1999. Sales to Ingram Micro accounted for 28% of our
total revenue in 1998 and 37% in the six months ended June 30, 1999. No single
customer accounted for 10% or more of our total revenue in 1997.

SUPPORT AND PROFESSIONAL SERVICES

We offer a broad range of support and training services to our customers. We
believe that providing a high level of customer service and technical support is
necessary to achieve rapid product implementation which, in turn, is essential
to customer satisfaction and continued license sales and revenue growth. Our
customers have a broad choice of support options depending on the level of
service desired. We maintain a technical support hotline staffed by engineers
from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday, from our
corporate office in Cambridge, Massachusetts. Internationally, distribution
partners provide telephone support to customers with technical assistance from
us. Our support staff also responds to e-mail inquiries. We track support
requests through a series of customer databases, including current status
reports and historical customer interaction logs. We use customer feedback as a
source of ideas for product improvements and enhancements.

We also provide training and consulting to assist our customers in the
development and deployment of e-business applications using our products. As of
June 30, 1999, we had 31 technical support engineers and professional service
employees.

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COMPETITION

The Web application products market is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
activities of market participants. Primary competitors in the high end of the
market include large Web and database platform companies that offer a variety of
software products, such as IBM, Oracle and Sun Microsystems. In addition, we
compete against a number of companies that offer Web application servers, such
as BEA Systems, Bluestone and SilverStream Software. These companies generally
sell their products at significantly higher prices than our products. In the
middle range of the market, where product prices are generally lower, we compete
primarily against Microsoft. Our Allaire Spectra product will experience
competition from a number of companies that have introduced or are developing
e-business applications that focus on the high-end e-business market, such as
Vignette and BroadVision.

We believe that additional competitors may enter the market with competing
products as the size and visibility of the market opportunity increases.
Increased competition could result in pricing pressures, reduced margins or the
failure of our products to achieve or maintain market acceptance, any of which
could have a material adverse effect on our business, operating results and
financial condition. Many of our current and potential competitors have longer
operating histories and substantially greater financial, technical, marketing
and other resources than we do. Therefore, they may be able to respond more
quickly to new or changing opportunities, technologies, standards or customer
requirements. Many of these competitors also have broader and more established
distribution channels that may be used to deliver competing products directly to
customers through bundling or other means. If competitors were to bundle
competing products with their products, the demand for our products might be
substantially reduced and the our ability to distribute our products
successfully would be substantially diminished.

Competitive factors in the Web application products market include:

- the quality and reliability of software;

- cost per user;

- application server scalability, availability and performance;

- productivity features for creating, editing and adapting content;

- ease of use and interactive user features; and

- compatibility with the user's existing network components and software
systems.

To expand our customer base, we must continue to innovate and improve the
performance of our products. We anticipate that consolidation will continue in
the Web application products market and related markets such as computer
software, media and communications. Consequently, competitors may be acquired
by, receive investments from or enter into other commercial relationships with,
larger, well-established and well-financed companies.

INTELLECTUAL PROPERTY

Our success and competitiveness are dependent to a significant degree on the
protection of our proprietary technology. We rely primarily on a combination of
copyrights, trademarks,

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licenses, trade secret laws and restrictions on disclosure to protect our
intellectual property and trade secrets. We also enter into confidentiality
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
attain and use our intellectual property or trade secrets without authorization.
In addition, we rely in part on "shrinkwrap" and "clickwrap" licenses that are
not signed by the end user and, therefore, may be unenforceable under the laws
of some jurisdictions. Moreover, the laws of other countries in which we market
our products may afford us little or no effective protection of our intellectual
property. There can be no assurance that the precautions taken by us will
prevent misappropriation or infringement of our technology. In addition, there
can be no assurance that others will not independently develop substantially
equivalent intellectual property. Our failure to protect our intellectual
property in a meaningful manner could have a material adverse effect on our
business, operating results and financial condition.

In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in such jurisdictions. We license some of our proprietary rights to
third parties, and there can be no assurance that such licensees will not fail
to abide by compliance and quality control guidelines with respect to such
proprietary rights or take actions that would materially adversely affect our
business, operating results and financial condition.

Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation, whether successful
or unsuccessful, could result in substantial costs and diversion of management
and technical resources, either of which could have a material adverse effect on
our business, operating results and financial condition.

We attempt to avoid infringing known proprietary rights of third parties in
our product development efforts. However, we have not conducted and do not
conduct comprehensive patent searches to determine whether the technology used
in our products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
them which are confidential when filed, with regard to similar technologies. If
we were to discover that one or more of our products violated third party
proprietary rights, there can be no assurance that we would be able to obtain
licenses to continue offering such products without substantial reengineering or
that any effort to undertake such reengineering would be successful, or that any
licenses would be available on commercially reasonable terms.

We pursue the registration of some of our trademarks and service marks in
the United States and in some other countries, although we have not secured
registration of all of our marks. We have registered United States trademarks
for "HomeSite", "Cold Fusion" and a related design for "Bright Tiger". A
significant portion of our marks contain the word "Fusion", such as ColdFusion.
We are aware of other companies that use "Fusion" in their marks alone or in
combination with other words, and we do not expect to be able to prevent third
party uses of the word "Fusion" for competing goods and services. For example,

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NetObjects markets its principal products for designing, building and updating
Web sites under the names "NetObjects Fusion" and "NetObjects Team Fusion."

We currently license technology from third parties that we incorporate into
our products. Examples include licenses for the following:

- visual editing technology from Microsoft;

- security technology from Netegrity; and

- full-text indexing and searching technology from Verity.

In light of the rapidly evolving nature of the Web platform and our strategy
to pursue industry partnerships to ensure our support of and by the emerging
platform, we will increasingly need to rely on technology that we license from
other vendors which is integrated with internally developed software and used in
our products to perform key functions.

EMPLOYEES

As of June 30, 1999, we had 222 employees, 190 of whom were based at our
headquarters in Cambridge, Massachusetts. None of our employees is subject to a
collective bargaining agreement. We believe that our employee relations are
good.

FACILITIES

Our headquarters is located in Cambridge, Massachusetts. Our lease, which
covers approximately 54,000 square feet of office space, expires in March 2003.
We also lease office space in other cities for our sales and development
personnel. We believe that these existing facilities are adequate to meet our
current foreseeable requirements or that suitable additional or substitute space
will be available on commercially reasonable terms.

LEGAL PROCEEDINGS

From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business, including
claims of alleged infringement of third party trademarks and other intellectual
property rights by us and our licensees. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. We are not aware of any legal proceedings or claims that we believe
will have, individually or in the aggregate, a material adverse effect on our
business, financial condition or results of operations.