ROGUE WAVE SOFTWARE INC /OR/, 424B4, 1996-11-22

ROGUE WAVE SOFTWARE INC /OR/
424B4, 1996-11-22
PREPACKAGED SOFTWARE

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FILED PURSUANT TO RULE 424(b)(4)

REGISTRATION NO. 333-13517
PROSPECTUS

2,450,000 SHARES

[LOGO]

COMMON STOCK

Of the 2,450,000 shares of Common Stock offered hereby, 2,363,890 shares are
being sold by the Company and 86,110 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol RWAV.

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

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $12.00 $0.84 $11.16 $11.16
Total (3)............... $29,400,000 $2,058,000 $26,381,012 $960,988
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $850,000.

(3) The Company and certain stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to 367,500 additional shares of
Common Stock solely to cover over-allotments, if any. If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholders will be $33,810,000,
$2,366,700, $26,422,862 and $5,020,438, respectively. See "Underwriting."

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

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about November 27, 1996 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST WESSELS, ARNOLD & HENDERSON

November 21, 1996

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Rogue Wave's object-oriented
software parts work behind the
scenes in a diverse set of
industries such as
telecommunications, finance and
aerospace.

[A graphic showing a sample screen from one of the Company's products with a
reflection of a person on the screen. Below the sample screen are two columns,
one listing several of the Company's C++ products and the other listing the
Company's Java products]

The Software Parts Company-TM- [Company Logo]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.

THE COMPANY

Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's C++ and Java-based products are used to develop
robust, scalable software applications for a wide variety of environments,
including client-server, intranet and Internet environments. These products
enable customers to construct software applications more quickly, with higher
quality and across multiple platforms, and reduce the complexity associated with
the software development process. The Company's software parts provide the
functionality to perform fundamental operations such as network and database
connectivity, thereby allowing programmers to focus on the core functionality of
the software under development. Rogue Wave offers a broad suite of software
parts and related tools for C++, and has recently introduced and continues to
develop software parts and related tools for Java. The Company believes it was
the first to deliver a commercially available Java interface builder.

Software is increasingly the most critical component of today's information
systems. Businesses typically rely on such information systems as a strategic
resource and as a way of differentiating themselves from their competitors.
However, software development technologies and methods have not kept pace with
the increasing reliance on software systems. In fact, the intricacies of modern
software systems have tended to make the software development process longer,
more complicated and increasingly error prone. To address these difficulties in
developing and maintaining complex software systems, organizations are
increasingly adopting object-oriented technologies and development
methodologies. For object-oriented software development, C++ has emerged as the
industry standard programming language. Java, another object-oriented
programming language that is similar to C++, has been recently popularized
through the growth of the Internet and intranet environments. Java offers
additional benefits in the areas of platform independence and distributed
computing.

While objects are easy to use once built, developing robust, well-designed
objects can be extremely difficult and time consuming. Organizations are seeking
to improve quality and time-to-market by purchasing pre-written objects or
"parts" from independent vendors to handle fundamental operations ranging from
simple functions such as date handling to more complex functions such as network
communications. The Company believes that the use of third-party software parts
will enable organizations to develop robust software applications more rapidly,
at lower cost and with more functionality than applications using only
internally developed objects.

The Company's objective is to be the leading provider of high quality,
reusable software parts and related tools for the development of object-oriented
software applications. The Company's products have the features and
functionality necessary to provide customers with the benefits of increased
software flexibility and quality, accelerated development times and reduced
maintenance costs. The Company follows a cross-platform strategy allowing most
objects to be used on the most popular operating systems, such as Windows and
UNIX. The Company's strategy is to leverage its installed base of Tools.h++
customers by offering additional object-oriented software parts and related
tools. The Company also intends to extend its technological leadership, promote
the enterprise-wide adoption of Rogue Wave products and expand its worldwide
distribution.

To date, Rogue Wave has sold over 50,000 end-user licenses. Rogue Wave
markets its software primarily through its direct sales organization, and to a
lesser extent through outside sales representatives and indirect channel
partners. The Company bundles its Tools.h++ and/or Standard C++ Library products
with popular compilers offered by leading vendors, including Fujitsu,
Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon Graphics and Sun
Microsystems. The Company's products are used by programmers to develop software
applications for organizations in a wide variety of industries. The Company's
customers include FedEx, Ford, Hewlett-Packard, IBM, MCI, Motorola, Netscape,
Sony and Sun Microsystems.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company..................... 2,363,890 shares
Common Stock offered by the Selling Stockholders........ 86,110 shares
Common Stock to be outstanding after the offering....... 7,562,198 shares (1)
Use of proceeds......................................... Working capital and other corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol........................... RWAV
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue.......................................................... $ 3,212 $ 7,209 $ 11,937 $ 18,845
Income (loss) from operations.......................................... 180 644 195 (80)
Net income............................................................. 175 568 79 35
Net income per common share (2)........................................ $ 0.04 $ 0.14 $ 0.02 $ 0.01
Shares used in per share calculation (2)............................... 3,914 4,154 5,009 6,045
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------
ACTUAL PRO FORMA (3) AS ADJUSTED(3)
--------- ------------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 1,714 $ 1,714 $ 27,245
Total assets.......................................................... 10,194 10,194 35,725
Long-term obligations, less current portion........................... 322 322 322
Mandatorily redeemable preferred stock................................ 4,664 -- --
Total stockholders' equity............................................ 668 5,332 30,863
</TABLE>

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(1) Excludes 1,450,726 shares of the Company's Common Stock issuable upon
exercise of stock options outstanding as of September 30, 1996 at a weighted
average exercise price of $2.38 per share. See "Management--Equity Incentive
Plans."

(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the calculation of the number of shares used in the calculation of net
income per common share.

(3) Pro forma to reflect the conversion of the mandatorily redeemable preferred
stock and as adjusted to reflect the sale of the 2,363,890 shares of Common
Stock offered by the Company hereby at the initial public offering price of
$12.00 per share. See "Capitalization."

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

EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES (i) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) THE
CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON
STOCK, WHICH WILL OCCUR UPON THE CLOSING OF THE OFFERING. SEE "DESCRIPTION OF
CAPITAL STOCK" AND "UNDERWRITING."

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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.

LIMITED OPERATING HISTORY; DECLINE IN NET INCOME. The Company was founded
in September 1989 and first shipped products in November 1989. Although the
Company's revenue has increased in each of the last six quarters and the Company
had net income in several of those quarters, the Company incurred net losses in
the quarters ended June 30, 1995, September 30, 1995 and June 30, 1996. In
fiscal 1995 and fiscal 1996, the Company experienced significant declines in net
income. The declines were primarily the result of two factors, the combination
of its financial results with those of Inmark Development Corporation
("Inmark"), with which the Company merged in October 1995 (the "Inmark Merger"),
as well as the significant commitment of resources to the Company's product
development, sales and marketing and technical support organizations. The Inmark
Merger had a significant adverse impact on the Company's net income because,
prior to the time of the Inmark Merger, Inmark was engaged in a new product
development effort that resulted in substantial operating losses. The increase
in resources devoted to the Company's product development, sales and marketing
and technical support organization were part of the Company's strategy to expand
market share. The strategy represented a shift away from the Company's earlier
focus on achieving profitability and the short term result was the decrease in
net income. The Company expects to continue to devote substantial resources in
these areas and as a result will need to recognize significant quarterly revenue
to achieve and maintain profitability. The Company's limited operating history
makes the prediction of future operating results difficult or impossible.
Although the Company has experienced significant revenue growth in recent years,
there can be no assurance that the Company will sustain such growth, if any, or
that the Company will remain profitable on a quarterly basis or at all. See
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS. Prior growth rates in the Company's revenue and net income should not
be considered indicative of future operating results. Future operating results
will depend upon many factors, including the demand for the Company's products,
the level of product and price competition, the length of the Company's sales
cycle, the size and timing of individual license transactions, the delay or
deferral of customer implementations, the budget cycles of the Company's
customers, the Company's success in expanding its direct sales force and
indirect distribution channels, the timing of new product introductions and
product enhancements, the mix of products and services sold, levels of
international sales, activities of and acquisitions by competitors, the timing
of new hires, changes in foreign currency exchange rates, and the ability of the
Company to develop and market new products and control costs. A significant
portion of the Company's revenue has been, and the Company believes will
continue to be, derived from relatively large orders, and the timing of such
orders has caused and may continue to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. The Company
generally ships orders as received and as a result typically has little or no
backlog. Quarterly revenue and operating results therefore depend on the volume
and timing of orders received during the quarter, which are difficult to
forecast. In addition, the Company has historically earned a substantial portion
of its revenue in the last days of each quarter. To the extent this trend
continues, the failure to achieve such revenue during the last days of any given
quarter will have a material adverse effect on the Company's business, financial
condition and results of operations.

Service and maintenance revenue tend to fluctuate as consulting contracts,
which may extend over several months, are undertaken, renewed, completed or
terminated. License fee revenue is difficult to forecast due to the fact that
the Company's sales cycle, from initial evaluation to purchase, varies
substantially from customer to customer. As a result of these and other factors,
revenue for any quarter is subject to significant variation, and the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful

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and should not be relied upon as indications of future performance. Because the
Company's operating expenses are based on anticipated revenue trends and because
a high percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of transactions could cause
significant variations in operating results from quarter to quarter and could
result in significant losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenue, the Company's operating results
would be materially and adversely affected. Due to all of the foregoing factors,
it is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially and adversely
affected. Fluctuations in operating results may also result in volatility in the
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business-- Sales,
Marketing and Customer Support."

DEPENDENCE ON EMERGING MARKET FOR C++ AND JAVA. The number of software
developers using the C++ programming language is relatively small compared to
the number of developers using more traditional software development technology.
The Company's product lines are designed for use in object-oriented software
application development, specifically the C++ programming language, and
substantially all of the Company's revenue has been attributable to sales of
products and related maintenance and consulting services related to C++
programming and development. The Company believes that while the market for
object-oriented technology in general, and C++ tools and programming
applications in particular, is growing, the Company's growth depends upon
broader market acceptance of object-oriented technology and the C++ programming
language. Even if broader market acceptance is achieved, the object-oriented
market may continue to be characterized by multiple software environments, many
of which are not supported by the Company's products, and numerous competitors
in the areas of tools, methodology and services. Furthermore, the C++
programming language is very complex. Should the C++ programming language lose
market acceptance or be replaced by another programming language, the Company's
business, financial condition and results of operations would be materially and
adversely affected. The Company's financial performance will depend in part upon
continued growth in the object-oriented technology and C++ markets and the
development of standards that the Company's products address. There can be no
assurance that the market will continue to grow or that the Company will be able
to respond effectively to the evolving requirements of the market.

The adoption of the C++ programming language by software programmers who
have traditionally used other technology requires reorientation to significantly
different programming methods, and there can be no assurance that the acceptance
of the C++ programming language will expand beyond the early adopters of the
technology. Furthermore, there can be no assurance that potential corporate
customers will be willing to make the investment required to retrain programmers
to build software using C++ rather than structured or other object-oriented
programming techniques. Many of the Company's customers have purchased only
small quantities of the Company's products and there can be no assurance that
these or new customers will broadly implement C++ programming or purchase
additional products.

In addition, the Company has recently introduced several products for use in
the Java market. The Company has spent and will continue to devote resources on
the development of new and enhanced products that address the Java market. There
can be no assurance that the Company will be successful in marketing its
existing or future Java products or that the market for Java products will grow.
If the Java market fails to grow, or grows more slowly than the Company
currently anticipates, the Company's business, financial condition and results
of operations could be materially and adversely affected. See
"Business--Industry Background," "--The Rogue Wave Strategy" and "--Product
Development."

COMPETITION. The market for the Company's products is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for C++ software parts
and programming tools, and the Company's competitors offer a variety of products
and services to address this market. The Company believes that the principal
competitive factors in this market are product quality, flexibility,
performance, functionality and features, use of standards based technology,
quality of support and service, company reputation and price. While price is
less significant than other factors for corporate customers, price can be a
significant factor for individual programmers. Direct competitors include
Microsoft (with its Microsoft Foundation Classes,

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"MFC"), IBM and several privately held companies. Microsoft is a particularly
strong competitor due to its large installed base and the fact that it bundles
its MFC library with its own and other C++ compilers. Microsoft may decide in
the future to devote more resources to or may broaden the functions of MFC in
order to address and more effectively compete with the functionality of the
Company's products. Software applications can also be developed using software
parts and programming tools in environments other than C++. Indirect competitors
with such offerings include Microsoft (with its ActiveX technology), Borland,
Oracle, ParcPlace-Digitalk and Powersoft (a subsidiary of Sybase). Many of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and larger installed bases of customers than the Company. In addition, several
database vendors, such as Informix, Oracle and Sybase are increasingly
developing robust software parts for inclusion with their database products and
may begin to compete with the Company in the future. These potential competitors
have well-established relationships with current and potential customers and
have the resources to enable them to more easily offer a single vendor solution.
Like the Company's current competitors, many of these companies have longer
operating histories, significantly greater resources and name recognition and
larger installed bases of customers than the Company. As a result, these
potential competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. In addition, the Company faces competition from Borland, Symantec and
other companies for its current Java products and it expects to face significant
competition in the future from such companies with respect to other Java
products the Company may introduce.

The Company also faces competition from systems integrators and internal
development efforts. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution more easily,
and already have a reputation among potential customers for offering
enterprise-wide solutions to software programming needs. There can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market competitive software products in the
future. It is also possible that new competitors or alliances among competitors
will emerge and rapidly acquire significant market share. The Company also
expects that competition will increase as a result of software industry
consolidation. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially and
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, financial condition and results of operations.

MANAGEMENT OF GROWTH. The Company is experiencing a period of transition
and aggressive product introductions that has placed, and may continue to place,
a significant strain on its resources, including its personnel. Following the
Inmark Merger, management and other personnel have focused a significant amount
of attention on the integration of Inmark with the Company, including the
integration of Inmark personnel, as well as the integration of zApp and zApp
Factory with the Company's existing product line and the introduction of
JFactory. Expansion of the Company's product lines, additional product
development and product introductions, or acquisitions of other technologies or
companies, when added to the day-to-day activities of the Company, will place a
further strain on the Company's resources and personnel. The Inmark Merger has
also resulted in the Company's product development team being distributed in
three separate sites across the country. Managing this distribution requires a
significant amount of attention from management, particularly the Vice
President, Development and the Chief Technology Officer, to ensure that the
Company's development efforts are timely, consistent and well integrated.

Furthermore, the Company believes that its ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting and training sufficient direct sales personnel and establishing and
maintaining relationships with its outside sales representatives. Although the
Company is currently investing, and plans to continue to invest, significant
resources to expand its direct sales force and to develop distribution
relationships with outside sales representatives, the Company has at times
experienced and continues to experience difficulty in recruiting qualified sales
personnel and in establishing necessary sales representative relationships. The
Company believes that the hiring and retaining of qualified individuals at all
levels in the Company is essential to the Company's ability to manage growth
successfully, and there can be no

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assurance that the Company will be successful in attracting and retaining the
necessary personnel. If Company management is unable to effectively manage
growth, the Company's business, financial condition and results of operations
will be materially and adversely affected. See "--Future Acquisitions,"
"Business--The Rogue Wave Strategy" and "Business--Sales, Marketing and Customer
Support."

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS. The market for
software development tools is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company must respond rapidly to developments related to
hardware platforms, operating systems and applicable programming languages. Such
developments will require the Company to continue to make substantial product
development investments. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenue.

The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cost-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that its enhanced and new products will
achieve market acceptance. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products. Such delays were primarily associated with increasing product
functionality and implementing new customer requirements. To date, such delays
have not resulted in a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will not experience similar delays in the future. Any failure by the
Company to anticipate or respond adequately to changes in technology and
customer preferences, or any significant delays in product development or
introduction, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Dependence on Emerging
Market for C++ and Java" and "Business--Products" and "--Product Development."

FUTURE ACQUISITIONS. While there are currently no commitments or
negotiations with respect to any particular acquisition, the Company frequently
evaluates strategic opportunities available to it and may in the future pursue
acquisitions of complementary technologies, products or businesses. Future
acquisitions of complementary technologies, products or businesses by the
Company will result in the diversion of management's attention from the
day-to-day operations of the Company's business and may include numerous other
risks, including difficulties in the integration of the operations, products and
personnel of the acquired companies. Future acquisitions by the Company may also
result in dilutive issuances of equity securities, the incurrence of debt and
amortization expenses related to goodwill and other intangible assets. Failure
of the Company to successfully manage future acquisitions may have a material
adverse effect on the Company's business, financial condition and results of
operations.

DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The Company believes that the technological and creative skills of its personnel
are essential to establishing and maintaining a leadership position,
particularly in light of the fact that its intellectual property, once sold to
the public market, is easily replicated. The loss of the services of one or more
of the Company's executive officers or key technical personnel would have a
material adverse effect on the Company's business, financial condition and
results of operations. In particular, the services of Thomas Keffer, Dan
Whitaker and Michael Scally, the Company's President and Chief Executive
Officer, Executive Vice President and Chief Operating Officer, respectively,
would be difficult to replace. The Company has key person life insurance
policies in the amount of $1.0 million on each of Dr. Keffer, Mr. Whitaker and
Mr. Scally. The Company's future success also depends on its continuing ability
to attract and retain highly-qualified technical, sales and managerial
personnel. In the past, the Company has experienced some difficulty in
attracting key technical personnel to work at its headquarters in Corvallis,
Oregon. Competition for such personnel is intense,

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and there can be no assurance that the Company can retain its key technical,
sales and managerial employees or that it can attract, assimilate or retain
other highly qualified technical, sales and managerial personnel in the future.
See "Business--Sales, Marketing and Customer Support" and "Management."

VARIABILITY OF SALES CYCLES. The Company distributes its products through
two different direct sales channels, a telesales force and a field sales force,
each of which is subject to a variable sales cycle. Products sold by the
Company's telesales force may be sold after a single phone call or may require
several weeks of education and negotiation before a sale is made. As such, the
sales cycle associated with telesales typically ranges from a few days to two
months. On the other hand, the purchase of products from the Company's field
sales force is often an enterprise-wide decision and may require the sales
person to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. For these and other
reasons, the sales cycle associated with the sale of the Company's products
through its field sales force typically ranges from two to six months and is
subject to a number of significant delays over which the Company has little or
no control. Due to the foregoing factors, quarterly revenue and operating
results can be variable and are difficult to forecast, and the Company believes
that period-to-period comparisons of quarterly revenue are not necessarily
meaningful and should not be relied upon as an indicator of future revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales, Marketing and Customer Support."

PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. The
Company relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technological leadership
position. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. The Company currently has one patent application pending in
the United States. There can be no assurance that the Company's pending patent
application, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design around the Company's pending patent. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. The nature of many of the
Company's products requires the release of the source code to all customers. As
such, policing unauthorized use of the Company's products is difficult, and
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology.

The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, financial condition and results of
operations would be materially and adversely affected.

LIMITED INTERNATIONAL SALES AND MARKETING EXPERIENCE. The Company opened
its first international sales office in Germany in January 1996. As of September
30, 1996, there were six employees in the German office. International revenue
accounted for approximately 19% of the Company's total revenue in fiscal 1996.
The

9
<PAGE>
Company believes that in order to increase sales opportunities and profitability
it will be required to expand its international operations. The Company has
committed and continues to commit significant management time and financial
resources to developing direct and indirect international sales and support
channels. There can be no assurance, however, that the Company will be able to
maintain or increase international market demand for its products. To the extent
that the Company is unable to do so in a timely manner, the Company's
international revenue would be limited, and the Company's business, financial
condition and results of operations would be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales, Marketing and Customer Support."

RISKS INHERENT IN INTERNATIONAL OPERATIONS. International operations are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign markets, longer receivables collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences, and political and economic
instability. There can be no assurance that the Company will be able to sustain
or increase international revenue from licenses or from maintenance and service,
or that the foregoing factors will not have a material adverse effect on the
Company's future international revenue and, consequently, on the Company's
business, financial condition and results of operations. The Company's direct
international revenue is generally denominated in local currencies. The Company
does not currently engage in hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on international revenue and thus the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--Sales,
Marketing and Customer Support."

PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, financial condition and
results of operations.

RISK OF PRODUCT DEFECTS. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Also, new products or enhancements
may contain undetected errors, or "bugs," or performance problems that, despite
testing, are discovered only after a product has been installed and used by
customers. There can be no assurance that such errors or performance problems
will not be discovered in the future, causing delays in product introduction and
shipments or requiring design modifications that could materially and adversely
affect the Company's competitive position and operating results. The Company's
products are typically intended for use in applications that may be critical to
a customer's business. As a result, the Company expects that its customers and
potential customers have a greater sensitivity to product defects than the
market for software products generally. Although the Company has not experienced
material adverse effects resulting from any such errors to date, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, the payment of monetary
damages, damage to the Company's reputation, or increased service and warranty
costs, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business--Product
Development."

CONTROL BY EXISTING STOCKHOLDERS. Upon completion of this offering, the
Company's executive officers, directors and 5% stockholders together will
beneficially own approximately 54.8% of the outstanding shares of Common Stock
(50.5% if the Underwriters' over-allotment option is exercised in full). In
particular, upon completion of this offering, Thomas Keffer, the Company's
President and Chief Executive Officer, will own

10
<PAGE>

approximately 21.0% of the outstanding shares of Common Stock (19.7% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders will be able to exercise control over matters requiring stockholder
approval, including the election of directors, mergers, consolidations and sales
of all or substantially all of the assets of the Company. This stockholder
control may prevent or discourage tender offers for the Company's Common Stock
unless the terms are approved by such stockholders. See "Principal and Selling
Stockholders."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. If an active public
market for the Common Stock does not develop or is not sustained, stockholders
could experience difficulty selling the Common Stock at a price at or above the
initial public offering price, or at all. The initial public offering price was
determined by negotiations between the Company, the representatives of the
Selling Stockholders and the representatives of the Underwriters. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The trading price of the Company's Common Stock
could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the software
and computer industries and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations that
have affected the market price for many companies in industries similar or
related to that of the Company and that have been unrelated to the operating
performance of these companies. These market fluctuations may materially and
adversely affect the market price of the Company's Common Stock.

ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
LAW. The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The Preferred
Stock could be issued with voting, liquidation, dividend and other rights
superior to those of the Common Stock. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales, or the
potential for sales, whether or not such sales actually occur, of substantial
numbers of shares of Common Stock in the public market following this offering
could adversely affect the market price for the Common Stock. Upon completion of
this offering, the Company will have outstanding an aggregate of 7,562,198
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options and based upon the number of
shares outstanding as of September 30, 1996. Of these shares, the 2,450,000
shares sold in this offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. In
addition, 583,054 shares issued in connection with the Inmark Merger will be
freely tradeable without restriction upon the expiration of the lock-up period
described below. The remaining 4,529,144 shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k), 145 or 701 promulgated under the
Securities Act. Holders of an aggregate of 4,793,090 shares of Common Stock
after the offering, have agreed that they will not, without the prior written
consent of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire shares of Common Stock owned by them during the 180-day period
commencing on the date of this Prospectus. Upon expiration of the lock-up
period, in addition to

11
<PAGE>

the 583,054 shares issued in connection with the Inmark Merger, approximately
475,441 shares of Common Stock held by existing stockholders will be eligible
for sale without restriction pursuant to Rule 144(k) or Rule 701, and
approximately 3,057,933 shares held by existing stockholders will be eligible
for sale subject to the volume and other restrictions of Rule 144. The remaining
995,770 shares held by existing stockholders will become eligible for sale
pursuant to Rule 144 upon the expiration of their two-year holding periods. In
addition, as of September 30, 1996, 1,450,726 shares were subject to outstanding
options. Substantially all of these shares are subject to the lock-up agreements
described above. Upon the expiration of such lock-up agreements, approximately
659,152 shares subject to such options will be vested. 4,150,654 of the shares
outstanding immediately following the completion of this offering will be
entitled to registration rights with respect to such shares upon termination of
lock-up agreements. The number of shares sold in the public market could
increase if registration rights are exercised. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."

UNCERTAINTY AS TO USE OF PROCEEDS. The principal purposes of this offering
are to increase the Company's equity capital and to create a public market for
the Company's Common Stock, which will enhance the ability of the Company to use
its Common Stock as consideration for acquisitions and as a means for attracting
and retaining key employees. As of the date of this Prospectus, the Company has
no specific plans to use the net proceeds from this offering other than for
working capital and general corporate purposes. Accordingly, the Company's
management will retain broad discretion as to the allocation of the net proceeds
from this offering. Pending the uses described above, the Company plans to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities. See "Use of Proceeds."

IMMEDIATE AND SUBSTANTIAL DILUTION. Investors participating in this
offering will incur immediate, substantial dilution of $7.93 per share. To the
extent outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. If the net proceeds of this offering, together
with available funds and cash generated from operations, are insufficient to
satisfy the Company's cash needs, the Company may be required to sell additional
equity or convertible debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. See "Dilution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

THE COMPANY

The Company was founded in 1989 and operated as an unincorporated business
until its incorporation in Oregon in July 1991. The Company reincorporated into
Delaware on the date of this Prospectus. Unless the context otherwise requires,
"Rogue Wave" and the "Company" refer to Rogue Wave Software, Inc. and its
subsidiaries. The Company's executive offices are located at 850 SW 35th Street,
Corvallis, Oregon 97333. Its telephone number is (541) 754-3010. The Company
maintains a Web site on the World Wide Web.

The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.

Rogue Wave-Registered Trademark-, .h++-Registered Trademark-,
zApp-Registered Trademark- and zApp Factory-Registered Trademark- are registered
trademarks of the Company. JFactory, JMoney, JTools, JWidgets, DBTools and
DBFactory are trademarks of the Company. All other brand names or trademarks
appearing in this Prospectus are the property of their respective holders.

12
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,363,890 shares of
Common Stock offered by the Company hereby are estimated to be $25,531,012
($25,572,862 if the Underwriters' over-allotment option is exercised in full) at
the initial public offering price of $12.00 per share. The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."

The principal purposes of this offering are to increase the Company's equity
capital and to create a public market for the Company's Common Stock, which will
enhance the ability of the Company to use its Common Stock as consideration for
acquisitions and as a means for attracting and retaining key employees.

The Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes, including expansion of
general sales and customer support activities to accommodate growth in the
Company's business and customer base. The amounts actually expended by the
Company for working capital purposes will vary significantly depending upon a
number of factors, including future revenue growth, the amount of cash generated
by the Company's operations and the progress of the Company's product
development efforts, and hence the Company's management will retain broad
discretion in the allocation of the proceeds from this offering. In addition,
the Company may make one or more acquisitions of technologies, products or
businesses that broaden or enhance the Company's current product offerings. The
Company has no specific agreements or commitments, however, and is not currently
engaged in any negotiations for any such acquisition. The Company has received
notice from Eugene O. Cho, a stockholder of the Company, indicating his intent
to exercise his dissenters' rights in connection with the Company's
reincorporation into Delaware. In the event Mr. Cho perfects his dissenters'
rights, the Company would be required to repurchase all of his shares, the
number of which is in dispute, at a price per share equal to the fair value of
the shares on the day of the reincorporation, which occurred on the date of this
Prospectus. See "Legal Proceedings." Pending the uses described above, the
Company plans to invest the net proceeds in short-term, interest-bearing,
investment-grade securities. The Company believes that the net proceeds from the
offering, together with the anticipated cash flows from operations and cash and
cash equivalents, will be adequate to meet its cash needs for working capital
and capital expenditures for at least the next 18 months.

DIVIDEND POLICY

In June 1994, the Company, as a Subchapter S corporation, declared and paid
a cash dividend in the aggregate amount of $500,000. The Company currently
intends to retain any future earnings to finance the growth and development of
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future. In addition, pursuant to the terms of the Company's secured
equipment term loan, the Company is and will be restricted in its ability to pay
dividends on its capital stock, except for dividends payable solely in its
capital stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

13
<PAGE>
CAPITALIZATION

The following table sets forth (i) the capitalization of the Company as of
September 30, 1996, (ii) the pro forma capitalization of the Company after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock, and (iii) the pro forma capitalization as adjusted to reflect
the sale by the Company of the 2,363,890 shares of the Common Stock offered
hereby at the initial offering price of $12.00 per share.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current portion
(1)........................................... $ 322 $ 322 $ 322
Mandatorily redeemable preferred stock, $.001
par value; 2,350,000 shares authorized;
1,543,000 shares issued and outstanding,
actual; none issued and outstanding, pro forma
and as adjusted............................... 4,664 -- --
Stockholders' equity:
Common Stock, $.001 par value; 13,000,000
shares authorized; 3,655,000 shares issued
and outstanding, actual; 5,198,000 shares
issued and outstanding, pro forma; and
7,562,000 shares issued and outstanding, as
adjusted (2)................................ 4 5 7
Additional paid-in capital.................... 676 5,339 30,868
Stockholder note receivable................... (13) (13) (13)
Retained earnings............................. 24 24 24
Cumulative translation adjustment............. (23) (23) (23)
------ --------- -----------
Total stockholders' equity................ 668 5,332 30,863
------ --------- -----------
Total capitalization.................... $5,654 $5,654 $31,185
------ --------- -----------
------ --------- -----------
</TABLE>

- ------------------------
(1) See Notes 4 and 5 of Notes to Consolidated Financial Statements for a
description of the Company's long-term obligations, less current portion.

(2) Excludes 2,766,205 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Equity Incentive Plan (the "Equity Incentive Plan"),
under which options to purchase 1,450,726 shares of Common Stock were
outstanding as of September 30, 1996 at a weighted average exercise price of
$2.38. Also excludes 350,000 shares of Common Stock reserved for issuance
pursuant to the Company's Employee Stock Purchase Plan (the "Purchase
Plan").

14
<PAGE>
DILUTION

The pro forma net tangible book value of the Company, as of September 30,
1996, was approximately $5.2 million or $1.01 per share. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of outstanding shares of Common Stock,
assuming conversion of all outstanding shares of Preferred Stock into Common
Stock. After giving effect to the sale of the 2,363,890 shares of Common Stock
offered by the Company hereby (at the initial public offering price of $12.00
per share), the pro forma net tangible book value of the Company at September
30, 1996 would have been approximately $30.8 million or $4.07 per share. This
represents an immediate increase in such net tangible book value of $3.06 per
share to existing stockholders and an immediate dilution of $7.93 per share to
new investors purchasing shares in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $ 12.00
Pro forma net tangible book value per share as of September 30,
1996.............................................................. $ 1.01
Increase per share attributable to new investors................... 3.06
---------
Pro forma net tangible book value per share after this offering...... 4.07
---------
Dilution per share to new investors.................................. $ 7.93
---------
---------
</TABLE>

The following table summarizes on a pro forma basis, as of September 30,
1996, the differences between the number of shares purchased from the Company,
assuming conversion of all outstanding shares of Preferred Stock into Common
Stock, the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at the initial public
offering price of $12.00 per share:

<TABLE>
<CAPTION>
AVERAGE PRICE
PER SHARE
-------------
SHARES TOTAL
PURCHASED CONSIDERATION
---------------- --------------------
NUMBER PERCENT AMOUNT PERCENT
------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......... 5,198,308 68.7% $ 5,331,000 15.8% $ 1.03
New investors (1).................. 2,363,890 31.3 28,366,680 84.2 12.00
------- ------- ----------- -------
Total.......................... 7,562,198 100.0% $33,697,680 100.0%
------- ------- ----------- -------
------- ------- ----------- -------
</TABLE>

The foregoing tables exclude 2,766,205 shares of Common Stock reserved for
issuance pursuant to the Equity Incentive Plan, under which options to purchase
1,450,726 shares of Common Stock at a weighted average exercise price of $2.38
were outstanding as of September 30, 1996, and 350,000 shares of Common Stock
that have been reserved for issuance under the Purchase Plan. To the extent that
outstanding options are exercised in the future, there may be further dilution
to new stockholders. If all outstanding options were exercised, the dilution per
share to new investors would be $8.20. See "Management--Equity Incentive Plans."

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

(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 5,112,198 shares or approximately
67.6% of the total shares of Common Stock outstanding after this offering
and will increase the number of shares held by new investors to 2,450,000
shares or approximately 32.4% of the total shares of Common Stock
outstanding after this offering.

15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The selected consolidated
financial data presented below for each of the years in the three-year period
ended September 30, 1996 and the balance sheet data as of September 30, 1995 and
1996 are derived from the Consolidated Financial Statements of the Company,
which are included elsewhere in this Prospectus and have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report thereon
also is included herein.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue.......................................... $ 2,949 $ 6,652 $ 10,417 $ 14,986
Service and maintenance revenue.......................... 263 557 1,520 3,859
--------- --------- --------- ---------
Total revenue.......................................... 3,212 7,209 11,937 18,845
--------- --------- --------- ---------
Cost of revenue:
Cost of license revenue.................................. 301 693 1,048 1,276
Cost of service and maintenance revenue.................. 166 331 1,123 1,663
--------- --------- --------- ---------
Total cost of revenue.................................. 467 1,024 2,171 2,939
--------- --------- --------- ---------
Gross profit........................................... 2,745 6,185 9,766 15,906
--------- --------- --------- ---------
Operating expenses:
Product development...................................... 893 2,109 3,204 5,548
Sales and marketing...................................... 1,330 2,652 4,880 8,234
General and administrative............................... 342 780 1,487 2,204
--------- --------- --------- ---------
Total operating expenses............................... 2,565 5,541 9,571 15,986
--------- --------- --------- ---------
Income (loss) from operations.......................... 180 644 195 (80)
Other income (expense), net................................ (5) 4 (10) 91
--------- --------- --------- ---------
Income before income taxes............................. 175 648 185 11
Income tax expense (benefit)............................... -- 80 106 (24)
--------- --------- --------- ---------
Net income............................................. $ 175 $ 568 $ 79 $ 35
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share (1)............................ $ 0.04 $ 0.14 $ 0.02 $ 0.01
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share calculation (1)................... 3,914 4,154 5,009 6,045

Pro forma net income data (2):
Income before income taxes, as reported.................. $ 175 $ 648
Pro forma income tax expense............................. 32 142
--------- ---------
Pro forma net income................................... $ 143 $ 506
--------- ---------
--------- ---------
Pro forma net income per common share...................... $ 0.04 $ 0.12
--------- ---------
--------- ---------
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 76 $ 609 $ 1,010 $ 1,714
Total assets................................................. 881 3,301 4,758 10,194
Long-term obligations, less current portion.................. 59 166 230 322
Mandatorily redeemable preferred stock....................... -- 941 1,140 4,664
Total stockholders' equity................................... 457 536 619 668
</TABLE>

- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the calculation of the number of shares used in the calculation of net
income per common share.

(2) The Company was a Subchapter S corporation until June 30, 1994 and
accordingly not subject to federal and state income taxes during the periods
indicated. Pro forma net income reflects federal and state income taxes as
if the Company has been a C corporation, based on effective tax rates during
the periods indicated. See Notes 1 and 6 of Notes to Consolidated Financial
Statements.

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.

OVERVIEW

Rogue Wave was founded in 1989 to provide reusable software parts for the
development of object-oriented software applications. The Company operated as a
Subchapter S corporation until June 1994. In October 1995, Rogue Wave merged
with Inmark Development Corporation ("Inmark"), a privately held corporation
specializing in the development, distribution and support of an object-oriented
graphical user interface library written in the C++ programming language. The
transaction was accounted for as a pooling-of-interests business combination.
See Note 2 of Notes to Consolidated Financial Statements. The Inmark graphical
user interface library is currently being marketed by Rogue Wave as a component
of its Visual User Interface family of products. The Company intends to
integrate these products into future product releases.

The Company has experienced significant revenue growth over the last several
years. During 1995, the Company shifted its focus from achieving profitability
to expanding its sales channels, marketing efforts and product development
capacity. The shift resulted in expenses growing faster than revenue, causing a
substantial decrease in net income in fiscal 1995 and fiscal 1996. As part of
the shift toward expanding its product development capacity, the Company
acquired Inmark. The Inmark Merger also contributed to the Company's higher
product development expenses as a percentage of total revenue because, prior to
the time of the Inmark Merger, Inmark was engaged in a new product development
effort that resulted in increased product development expenses.

In recent periods, the Company has begun to refocus its attention on
improving profitability while continuing to expand its sales channels, marketing
efforts and product development capacity. The Company's recent efforts have
included a reorganization designed to focus its marketing and product
development efforts and a reduction in the number and amount of discounts
granted on volume product purchases.

While the Company expects operating expenses to continue to increase in
absolute dollar amounts, the Company expects operating expenses to decrease as a
percentage of total revenue. There can be no assurance that the Company will be
profitable on a quarterly or annual basis. The Company's limited operating
history makes the prediction of future operating results difficult, if not
impossible. See "Risk Factors--Limited Operating History" and "--Uncertainty of
Future Operating Results; Fluctuations in Quarterly Operating Results."

To date, the Company's revenue has been derived from licenses of its
software products and related maintenance, training and consulting services.
License revenue is recognized upon execution of a license agreement and shipment
of the product if no significant contractual obligations remain and collection
of the resulting receivable is probable. Allowances for credit risks and for
estimated future returns are provided for upon shipment. Returns to date have
not been material. Service and maintenance revenue consists of fees that are
charged separately from the product licenses. Maintenance revenue consists of
fees for ongoing support and product updates and is recognized ratably over the
term of the contract, which is typically 12 months. Service revenue consists of
training and consulting services and is recognized upon completion of the
related activity. For all periods presented, the Company has recognized revenue
in accordance with Statement of Position 91-1, SOFTWARE REVENUE RECOGNITION. See
Note 1 of Notes to Consolidated Financial Statements.

The Company markets its products primarily through its direct sales force,
and to a lesser extent through the Internet and an indirect channel consisting
of OEMs, VARs, dealers and distributors. The Company's direct sales force
consists of an inside telesales group that focuses on smaller orders ($50,000 or
less), and an outside sales force that focuses on larger site licenses. The
Company makes all of its products available for sale and distribution over the
Internet to customers in the United States. Revenue through this channel has not
been significant to date, and there can be no assurance that the Company will be
successful in marketing its products through this channel.

17
<PAGE>

International revenue accounted for approximately 19% of total revenue in
fiscal 1996. The Company does not track the percentage of total profits
represented by international revenue. In January 1996, the Company established a
wholly-owned subsidiary in Germany to market and support the Company's products
in Germany and neighboring countries. The Company anticipates establishing
similar organizations in other locations in Europe, and possibly in Asia. The
Company expects that international license and service and maintenance revenue
will account for an increasing portion of its total revenue in the future. The
Company has committed and continues to commit significant management time and
financial resources to developing direct and indirect international sales and
support channels. There can be no assurance, however, that the Company will be
able to maintain or increase international market demand for its products. To
date, other than revenue generated by the Company's German subsidiary, the
Company's international revenue has been denominated in United States dollars
and the Company has not engaged in hedging activities. Although exposure to
currency fluctuations to date has been insignificant, to the extent
international revenue is denominated in local currencies, foreign currency
translations may contribute to significant fluctuations in, and could have a
material adverse effect upon, the Company's business, financial condition and
results of operations. See "Risk Factors--Risks Inherent in International
Operations."

RESULTS OF OPERATIONS

The following table sets forth certain operating data expressed as a
percentage of total revenue for each period indicated:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue:
License revenue................................................................ 92.3% 87.3% 79.5%
Service and maintenance revenue................................................ 7.7 12.7 20.5
----- ----- -----
Total revenue................................................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Cost of license revenue........................................................ 9.6 8.8 6.8
Cost of service and maintenance revenue........................................ 4.6 9.4 8.8
----- ----- -----
Total cost of revenue........................................................ 14.2 18.2 15.6
----- ----- -----
Gross profit................................................................. 85.8 81.8 84.4
----- ----- -----
Operating expenses:
Product development............................................................ 29.3 26.8 29.4
Sales and marketing............................................................ 36.8 40.9 43.7
General and administrative..................................................... 10.8 12.5 11.7
----- ----- -----
Total operating expenses..................................................... 76.9 80.2 84.8
----- ----- -----
Income (loss) from operations................................................ 8.9 1.6 (0.4)
Other income (expense), net...................................................... 0.1 (0.1) 0.5
----- ----- -----
Income before income taxes................................................... 9.0 1.5 0.1
Income tax expense (benefit)..................................................... 1.1 0.8 (0.1)
----- ----- -----
Net income................................................................... 7.9% 0.7% 0.2%
----- ----- -----
----- ----- -----
</TABLE>

REVENUE

The Company's total revenue increased 58% to $18.8 million in fiscal 1996
from $11.9 million in fiscal 1995. Total revenue in fiscal 1995 increased 65%
from $7.2 million in fiscal 1994. License revenue increased 44% to $15.0 million
in 1996 from $10.4 million in fiscal 1995. License revenue in fiscal 1995
increased 55% from $6.7 million in fiscal 1994. License revenue increased
primarily as a result of an increase in the number of licenses sold to existing
and new customers, reflecting additional product offerings, an expanding market,
increased market awareness and expansion of the Company's direct sales
organization. In particular, the Company introduced its DBTools.h++ product in
the first half of fiscal 1995 and its Standard C++ Library product during the
third quarter of fiscal 1995, and established its field sales force in the
second quarter of fiscal 1995.

18
<PAGE>
During fiscal 1996, the Company introduced its DBFactory product and a suite of
Java products in addition to new releases of its Tools.h++, DBTools.h++ and zApp
Developers Suite products. License revenue decreased as a percentage of total
revenue due to the relatively faster growth in service and maintenance revenue.

Service and maintenance revenue increased 160% to $3.9 million in fiscal
1996 from $1.5 million in fiscal 1995. Service and maintenance revenue in fiscal
1995 increased 169% from $557,000 in fiscal 1994. These increases in service and
maintenance revenue were generally attributable to the growing installed base of
the Company's products and the associated increase in demand for maintenance and
training services. The increase in service and maintenance revenue as percentage
of total revenue during the periods fiscal 1994 to fiscal 1996 is primarily due
to in increased focus on marketing support and maintenance services, which
include upgrades and telephone support, as well as the introduction of mentoring
services, also contributed to increased service and maintenance revenue for
fiscal 1995 and fiscal 1996.

COST OF REVENUE

COST OF LICENSE REVENUE. Cost of license revenue consists primarily of
amortization of purchased software, materials, packaging and freight expenses.
Cost of license revenue was $693,000, $1.0 million and $1.3 million in fiscal
1994, 1995 and 1996, respectively, representing 10.4%, 10.1%, and 8.5% of the
license revenue for the respective periods. The period to period dollar
increases in cost of license revenue were primarily the result of an increase in
the number of licenses sold. Fluctuations in cost of license revenue as a
percentage of total license revenue are primarily the result of varying levels
of royalties paid, changes in product mix, the timing of large site license
sales and the timing of product upgrades.

COST OF SERVICE AND MAINTENANCE REVENUE. Cost of service and maintenance
revenue consists primarily of personnel-related and facilities costs incurred in
providing customer support and training services, as well as third-party costs
incurred in providing training services. Cost of service and maintenance revenue
was $331,000, $1.1 million and $1.7 million in fiscal 1994, 1995 and 1996,
respectively, representing 59.4%, 73.9% and 43.1% of the service and maintenance
revenue for each respective period and 32.3%, 51.7% and 56.6% of total cost of
revenue for each such respective period. The period to period dollar increases
in cost of service and maintenance revenue were primarily the result of expenses
associated with the development of training programs, utilization of training
and mentoring consultants and additional product support personnel. The higher
percentages of cost of service and maintenance revenue as a percentage of
service and maintenance revenue for fiscal 1995 reflect the fact that the
increase in such costs occurred prior to an anticipated increase in demand. The
decrease as a percentage of service and maintenance revenue for fiscal 1996 was
primarily the result of the increase in service and maintenance revenue. The
increases in cost of service and maintenance revenue as a percentage of total
cost of revenue during the respective periods reflect the fact that license
revenue grew at a lower percentage rate than did service and maintenance revenue
during such periods, and the gross profit margin on service and maintenance
revenue is lower than the gross profit margin on license revenue.

OPERATING EXPENSES

PRODUCT DEVELOPMENT. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $2.1 million, $3.2
million and $5.5 million in fiscal 1994, 1995 and 1996, respectively. As a
percentage of total revenue, product development expenses were 29.3%, 26.8% and
29.4% in each respective period. The increases in product development expenses
were primarily attributable to the

19
<PAGE>
hiring of additional product development personnel. The Company anticipates that
it will continue to devote substantial resources to product development and that
product development expenses will increase in dollar amount for fiscal 1997 as
the Company continues to increase its product development capacity, although the
Company does not believe such expenses will increase as a percentage of total
revenue. All costs incurred in the research and development of software products
and enhancements to existing products have been expensed as incurred. See Note 1
of Notes to Consolidated Financial Statements.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, and travel, entertainment and promotional expenses. Sales and
marketing expenses were $2.7 million, $4.9 million and $8.2 million in fiscal
1994, 1995 and 1996, respectively. As a percentage of total revenue, sales and
marketing expenses were 36.8%, 40.9% and 43.7% in each respective period. The
increase in sales and marketing expenses reflects the hiring of additional sales
and marketing personnel and related costs, as well as increased costs associated
with expanded promotional activities. The Company expects that sales and
marketing expenses will increase in dollar amount for fiscal 1997 as the Company
continues to hire additional sales and marketing personnel and increase
promotional activities. The Company does not expect sales and marketing expenses
to change as a percentage of total revenue in fiscal 1997.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$780,000, $1.5 million and $2.2 million in fiscal 1994, 1995 and 1996,
respectively. As a percentage of total revenue, general and administrative
expenses were 10.8%, 12.5% and 11.7% in each respective period. The increases in
general and administrative expenses were primarily due to increased staffing,
investment in infrastructure and associated expenses necessary to manage and
support the Company's growing operations. The Company believes that its general
and administrative expenses will increase in dollar amount for fiscal 1997 as a
result of an anticipated expansion of the Company's administrative staff
required to support its growing operations and as a result of an increase in
expenses associated with being a public company. The Company does not expect
general and administrative expenses to change as a percentage of total revenue
in fiscal 1997.

OTHER INCOME (EXPENSE), NET

Other income (expense), net primarily represents interest income earned on
the Company's cash, cash equivalents and short-term investments, net of interest
expense.

PROVISION FOR INCOME TAXES

The Company was a cash basis taxpayer through fiscal 1994. Prior to July 1,
1994, the Company was taxed under the S corporation provisions of the Internal
Revenue Code. Under those provisions, the Company did not pay federal or state
corporate income taxes on its income. The Company's income taxes since July 1,
1994, and Inmark's income taxes for all periods presented, have been accounted
for in accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES. The Company's effective tax rates were 12.3%, 57.3%
and (218.2)% for fiscal 1994, 1995 and 1996. The 12.3% rate of fiscal 1994
reflects three quarters of exclusion of earnings due to the Subchapter S status
of the Company and marginal profitability of Inmark. The tax rate for fiscal
1995 reflects the inability to offset Inmark's losses against the Company's
income for the period. The tax benefit in fiscal 1996 was due to the use of
Inmark net operating loss carryforwards. As a result of the merger with Inmark,
utilization of federal and state net operating loss carryforwards of $186,000
and $172,000, respectively, are limited to the future income attributable to
Inmark.

NET INCOME

The Company's net income was $568,000, $79,000, and $35,000 in fiscal 1994,
1995 and 1996, respectively. The decrease in net income is primarily a result in
an increase in operating expenses from $5.5 million and 76.9% of total revenue
in fiscal 1994 to $9.6 million and 80.2% of total revenue in fiscal 1995, and to
$16.0 million and 84.8% of total revenue in fiscal 1996 associated with a shift
in focus away from achieving profitability toward expanding the Company's sales
channels, marketing efforts and product development capacity. While the Company
plans to continue to invest in expanding its sales channels, marketing efforts
and product development capacity, it expects operating expenses to represent a
lower percentage of total revenue in the near term, and accordingly expects net
income to increase in fiscal 1997 over fiscal 1996. However, there can be no
assurance that the Company will be profitable on a quarterly or annual basis.
The Company's limited operating history makes the prediction of future operating
results difficult, if not impossible. See "Risk Factors--Limited Operating
History" and "--Uncertainty of Future Operating Results; Fluctuations in
Quarterly Operating Results."

20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following tables set forth the quarterly financial data for the six
quarters ended September 30, 1996, including such amounts expressed as a
percentage of total revenue, as well as certain operating data. This quarterly
information is unaudited, has been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of the Company's
management, reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented. Such statement of operations data should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto. Operating results for any quarter are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1995 1995 1995 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue................................ $ 2,447 $ 2,850 $ 2,733 $ 3,697 $ 4,175 $ 4,381
Service and maintenance revenue................ 426 558 804 950 833 1,272
---------- ---------- ---------- ---------- ---------- ----------
Total revenue................................ 2,873 3,408 3,537 4,647 5,008 5,653
---------- ---------- ---------- ---------- ---------- ----------
Cost of revenue:
Cost of license revenue........................ 274 262 219 242 412 403
Cost of service and maintenance revenue........ 249 348 294 343 388 638
---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue........................ 523 610 513 585 800 1,041
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................................. 2,350 2,798 3,024 4,062 4,208 4,612
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Product development............................ 763 903 924 1,486 1,574 1,564
Sales and marketing............................ 1,305 1,544 1,606 2,101 2,262 2,265
General and administrative..................... 329 502 472 500 624 608
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 2,397 2,949 3,002 4,087 4,460 4,437
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations................ (47) (151) 22 (25) (252) 175
Other income (expense), net...................... (6) 9 14 43 11 23
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............ (53) (142) 36 18 (241) 198
Income tax expense (benefit)..................... (30) (81) 7 4 (84) 49
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (23) $ (61) $ 29 $ 14 $ (157) $ 149
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------

AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue................................ 85.2% 83.6% 77.3% 79.6% 83.4% 77.5%
Service and maintenance revenue................ 14.8 16.4 22.7 20.4 16.6 22.5
---------- ---------- ---------- ---------- ---------- ----------
Total revenue................................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license revenue........................ 9.5 7.7 6.2 5.2 8.3 7.1
Cost of service and maintenance revenue........ 8.7 10.2 8.3 7.4 7.7 11.3
---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue........................ 18.2 17.9 14.5 12.6 16.0 18.4
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................................. 81.8 82.1 85.5 87.4 84.0 81.6
Operating expenses:
Product development............................ 26.6 26.5 26.1 32.0 31.4 27.7
Sales and marketing............................ 45.4 45.3 45.5 45.2 45.2 40.1
General and administrative..................... 11.4 14.7 13.3 10.8 12.4 10.7
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 83.4 86.5 84.9 88.0 89.0 78.5
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations................ (1.6) (4.4) 0.6 (0.6) (5.0) 3.1
Other income (expense), net...................... (0.2) 0.3 0.4 0.9 0.2 0.4
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............ (1.8) (4.1) 1.0 0.3 (4.8) 3.5
Income tax expense (benefit)..................... (1.0) (2.3) 0.2 0.0 (1.7) 0.9
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................ (0.8)% (1.8)% 0.8% 0.3% (3.1)% 2.6%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

Prior growth rates in the Company's revenue and net income should not be
considered indicative of future operating results. Future operating results will
depend upon many factors, including the demand for the Company's products, the
level of product and price competition, the length of the Company's sales cycle,
the size and timing of individual license transactions, the delay or deferral of
customer implementations, the budget cycles of the Company's customers, the
Company's success in expanding its direct sales force and indirect distribution
channels, the timing of new product introductions and product enhancements, the
mix of products and services

21
<PAGE>
sold, levels of international sales, activities of and acquisitions by
competitors, the timing of new hires, changes in foreign currency exchange
rates, and the ability of the Company to develop and market new products and
control costs. A significant portion of the Company's revenue has been, and the
Company believes will continue to be, derived from relatively large orders, and
the timing of such orders has caused and may continue to cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. The Company generally ships orders as received and as a result typically
has little or no backlog. Quarterly revenue and operating results therefore
depend on the volume and timing of orders received during the quarter, which are
difficult to forecast. In addition, the Company has historically earned a
substantial portion of its revenue in the last days of each quarter. To the
extent this trend continues, the failure to achieve such revenue during the last
days of any given quarter will have a material adverse effect on the Company's
business, financial condition and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has funded its operations through cash flows
from operations and the private sale of $5.3 million of equity securities. As of
September 30, 1996, the Company had $1.7 million in cash and cash equivalents.
Net cash from operating activities was $1.1 million, $493,000 and $(520,000) in
fiscal 1994, 1995 and 1996, respectively. For fiscal 1995, net cash from
operating activities of $493,000 was primarily attributable to increases in
accounts payable and accrued expenses of $440,000 and deferred revenue of
$702,000, offset by an increase in accounts receivable of $1.1 million, and
adjusted for depreciation and amortization of $514,000. For fiscal 1996, net
cash from operating activities of $(520,000) was primarily attributable to an
increase in accounts receivable of $2.4 million, partially offset by an increase
in deferred revenue of $1.5 million.

The Company currently does not employ a line of credit for support of its
working capital requirements. In October 1996, the Company entered into a
secured equipment term loan for $1.0 million. The loan bears an interest rate
equal to the prime rate. Interest is payable monthly and principal is payable in
42 equal monthly installments beginning in March 1997. The loan contains certain
financial covenants that require the Company to maintain a specified minimum
tangible net worth and term liquidity coverage ratios and restrict the Company's
ability to incur additional indebtedness, pay cash dividends on its capital
stock and merge or consolidate with another corporation.

As of September 30, 1996, the Company's primary investing activities have
consisted of purchases of equipment and software rights. The Company's
expenditures for equipment, including those under capital leases, totaled
$414,000, $672,000 and $2.4 million in fiscal 1994, 1995 and 1996, respectively.
Capital expenditures increased significantly in fiscal 1996 primarily due to the
purchase of computer and telecommunications equipment for over 60 new employees
and due to the costs associated with the purchase of Internet infrastructure
hardware and new software used in support of product development and other
Company activities.

Deferred revenue consists primarily of the unrecognized portion of revenue
under maintenance and support contracts, which revenue is deferred and
recognized ratably over the term of such contracts and for the unrecognized
portion of revenue associated with product license subscription contracts. See
Note 1 of Notes to Consolidated Financial Statements.

The Company believes that the net proceeds from the offering, together with
the anticipated cash flows from operations and cash and cash equivalents, will
be adequate to meet its cash needs for working capital and capital expenditures
for at least the next 18 months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes, and may
seek to raise such additional funds through public or private equity financing
or from other sources. There can be no assurance that such additional financing
will be available on terms favorable to the Company, if at all, and will not be
dilutive to the Company's then current stockholders.

NEW ACCOUNTING PRONOUNCEMENTS

During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123"), which establishes a fair value based method of
accounting for equity compensation plans. The Company believes that there will
be no impact of the pronouncement other than pro forma disclosures in the
footnotes to the financial statements and it will continue to account for
employee stock options under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. SFAS 123 is effective for fiscal years beginning after December 15,
1995.

22
<PAGE>
BUSINESS

INDUSTRY BACKGROUND

INCREASING DEPENDENCE ON SOFTWARE. Businesses are increasingly relying on
information systems as a strategic resource and as a way of differentiating
themselves from their competitors. A sophisticated enterprise-wide information
system can allow a company to take advantage of new markets before a competitor,
reduce operating expenses and increase ties with suppliers and customers.
Internet and intranet technologies can be particularly effective in extending
the information system outside the bounds of a company, creating even more
opportunities. Of all the pieces that make up an information system, it is
increasingly software that plays a critical role. Therefore, as businesses
become more dependent on these information systems, they become more dependent
on software. In addition, electronic systems manufacturers and independent
software vendors are increasingly dependent on the development of software to
provide critical functionality and product differentiation.

NEED FOR IMPROVED SOFTWARE DEVELOPMENT TECHNOLOGIES AND METHODS. Software
development technologies and methods have not kept pace with the increasing
reliance on software systems. In fact, the intricacies of modern software
systems have tended to make the software development process longer, more
complicated and increasingly error prone. For example, many businesses are
implementing client-server applications that must be scalable (capable of
growing to support additional users) enough to handle hundreds or thousands of
users, yet flexible enough to meet continually changing business requirements.
Businesses implementing enterprise-wide information systems face a particularly
difficult challenge in developing software for the distributed, heterogeneous
environments that these systems typically demand. In addition, businesses
recognize that not only are these software systems expensive to develop, they
can also be expensive to maintain.

Organizations have taken an initial step in addressing the complexity and
cost of today's software systems by breaking software applications into
functional segments to be developed by separate teams of programmers. However,
traditional software development methodologies often produce unnecessary and
complex interdependencies among functional software segments. The resulting
software is typically difficult to develop and test, as well as expensive to
modify and maintain.

ADOPTION OF OBJECT-ORIENTED TECHNOLOGIES. To address the difficulties of
developing and maintaining complex software systems, organizations are
increasingly adopting object-oriented technologies and development
methodologies. Object-oriented programming allows software to be written in
terms of objects that are used as building blocks to model real-world objects
and systems. Objects are self-contained units that encapsulate a collection of
data and related procedures. Although objects may be internally complex, they
are designed to have simple interfaces that allow programmers to develop and
change objects independently without affecting other segments of the software
system. The generalized, self-contained nature of well-designed objects allows
them to be reused within a single software system and in subsequent
applications. To a large extent, developing software applications then becomes a
matter of assembling new and existing objects, rather than writing entire
programs from scratch, resulting in significantly reduced development times and
improved software quality. In addition, because the internal details of each
object are relatively insulated from the rest of the system, objects can be
tested, modified and maintained independently.

23
<PAGE>
As object-oriented technologies have been adopted over the last several
years, C++ has emerged as the de facto standard computer language for
object-oriented software development. Java, another object-oriented programming
language that is similar to C++, has been recently popularized through the
growth of the Internet and intranet environments. Java offers additional
benefits in the areas of platform independence and distributed computing.

NEED FOR ROBUST THIRD-PARTY SOFTWARE PARTS. While objects are easy to use
once built, developing robust, well-designed objects can be extremely difficult
and time consuming. Many technical details must be addressed, including support
for various platforms, graphical user interfaces, databases and networking
protocols. As a result, object-oriented software development can be improved
significantly through the use of pre-built, industry-standard objects ("software
parts"). Software parts are typically sold as a "class library," a group of
20-100 related object types ("classes"). Organizations seek to improve quality
and time-to-market by purchasing pre-written objects from independent vendors to
handle fundamental operations ranging from simple functions such as date
handling to more complex functions such as network communications. Using
off-the-shelf parts for such tasks allows programmers to focus on the core
functionality of the systems they are developing. For example, using a standard
object for database connectivity allows a programmer to develop an application
without regard to the low level details of programming to any particular
database while allowing the freedom to switch between different database
vendors. In addition, commercially available software parts typically are more
thoroughly tested and provide more complete functionality than parts developed
in-house. The Company believes that the use of third-party software parts will
enable organizations to develop robust software applications more rapidly, at
lower cost and with more functionality than applications using only internally
developed objects.

THE ROGUE WAVE SOLUTION

Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's products are designed to enable customers to
construct robust applications more quickly, with higher quality and across
multiple platforms, while reducing the complexity associated with the
development process. The Company provides customers with proven object-oriented
development technology so that they can better apply the principles of software
reuse to their own software development efforts. Rogue Wave's products are
designed to be general purpose in nature, supporting a broad range of
development environments and methodologies. The Company's software parts span a
range of functionality from low-level ANSI/ISO standardized data structures to
higher level database connectivity objects. The Company follows a cross-platform
strategy that allows most objects to be used on the most popular operating
systems, such as Windows and UNIX. The Company offers a broad suite of software
parts and related tools for C++, the de facto standard object-oriented
programming language. In addition, the Company is developing a suite of
Java-based software parts and related tools, and believes it was the first to
deliver a commercially available Java interface builder.

The Company's products and services provide professional programmers with
the following benefits:

IMPROVED SOFTWARE QUALITY. Rogue Wave's products improve software quality
by providing professional programmers with robust and reusable software parts
and related tools. The use of the Company's products can result in applications
that are internally simpler and contain less untested code, resulting in fewer
bugs and higher quality.

ACCELERATED DEVELOPMENT TIME. By using the Company's software parts,
developers produce and test fewer lines of original code, thereby reducing
overall development time. In addition, the Company's C++ and Java application
builders simplify and accelerate prototyping and development efforts by offering
visual design environments along with code generation and testing capabilities.

INCREASED FLEXIBLITY. Most of the Company's software parts have been
written to be cross-platform. In addition, the database products can be used
with a wide variety of databases, and the visual products with a wide variety of
GUIs. This flexiblity allows programmers to develop applications with minimal
regard to the environments in which they will be deployed. Businesses gain the
ability to deploy software systems in a wide variety of environments with
minimal redevelopment.

24
<PAGE>
INCREASED FOCUS ON CRITICAL FUNCTIONALITY. Rogue Wave's products
encapsulate fundamental operations within software parts, allowing developers to
focus on creating the critical business logic within applications rather than
the arcane features of the environments in which they are developing.

REDUCED MAINTENANCE COST. Rogue Wave's products are designed to reduce
overall maintenance and support costs over the life of an application. The use
of the Company's products helps programmers develop flexible, modular
applications that can be more easily updated, modified and refined.

THE ROGUE WAVE STRATEGY

PROMOTE "TOOLS.H++ EVERYWHERE" STRATEGY. In order to establish brand
awareness and cultivate a loyal base of programmers using the Company's
products, the Company promotes the widespread use of its Tools.h++ product. The
Company believes that Tools.h++ is the most widely used cross-platform C++ class
library. In addition to its direct sales efforts, the Company has entered into
OEM agreements to bundle Tools.h++ with popular compilers offered by leading
vendors, including Fujitsu, Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon
Graphics and Sun Microsystems. The Company believes its "Tools.h++ Everywhere"
strategy enables the Company to leverage its installed base of Tools.h++
customers by offering additional object-oriented software parts and related
tools through its telesales organization.

EXTEND TECHNOLOGICAL LEADERSHIP. The Company believes that it has developed
industry-leading, standards-based class libraries. The Company is an active
participant on the ANSI/ISO C++ Standards Committee and has authored several
standards. The Company's implementation of the ANSI/ISO Standard C++ Library has
been evaluated and selected by several compiler vendors such as Hewlett-Packard,
Siemens-Nixdorf, Silicon Graphics and Sun Microsystems. The Company intends to
continue to invest significant resources to maintain and extend its
technological leadership.

LEVERAGE C++ EXPERTISE TO ADDRESS THE JAVA MARKET. The Company has
considerable expertise in the C++ language, gained through the development of
its class libraries, that is directly applicable to the Java language. Java has
many of the same features of C++ but is simpler to use. Java also explicitly
supports cross-platform, distributed applications. The Company believes it was
the first to deliver a commercially available Java interface builder (JFactory)
and believes it will be able to leverage its C++ expertise to continue to
address the Java marketplace. The Company's strategy is to continue to focus on
the Java language in order to expand its product offering by developing a full
suite of Java class libraries and related development tools.

PROMOTE THE ENTERPRISE-WIDE ADOPTION OF ROGUE WAVE PRODUCTS. The Company
has traditionally marketed its products to individual professional programmers,
and the Company has sold over 50,000 end-user licenses to date. The Company
intends to leverage its installed customer base of corporate programmers to
approach its customers' higher level management and promote the standardization
of its products within customer organizations. Furthermore, the Company intends
to broaden its suite of complementary products, allowing the Company to fulfill
more of its customers' software development needs.

CONTINUE TO PROVIDE FLEXIBLE CROSS-PLATFORM SOFTWARE. The Company supports
multiple development platforms, including Windows 3.1, Windows 95, Windows NT,
UNIX, OS/2 and MacOS. In addition, the Company is committed to providing "policy
free" class libraries that provide users the flexibility to use Rogue Wave's
products with a wide variety of C++ based programming environments and
methodologies. The Company believes that this flexibility improves the
competitiveness of its products.

EXPAND WORLDWIDE DISTRIBUTION. The Company distributes its products
primarily through its direct telesales and field sales organizations and, to a
lesser extent, through OEMs and VARs. The Company intends to expand its global
distribution capabilities by increasing its presence in strategic international
markets. In particular, the Company believes that there are significant growth
opportunities in Europe. The Company intends to build on the success of its
German subsidiary, established in January 1996, by establishing direct sales
forces in additional European markets. The Company also plans to continue to
increase its domestic sales force in order to expand its market presence.

25
<PAGE>
PRODUCTS

Rogue Wave's products are designed to be used individually, with each other,
or with other industry standard products. They fall into six different product
groups: Foundation (general purpose data structures and algorithms); Database
(software parts for interfacing to relational databases as well as related
tools); Visual User Interface (GUI libraries as well as related tools);
Mathematical (software parts for numerical and mathematical calculations);
Distributed (software parts for facilitating distributed computing); and Java
(Java software parts and related tools). All products are portable between
Windows and UNIX, except Heap.h++ and View.h++, which are for UNIX only.

The table below summarizes the development and release history of Rogue
Wave's principal products, and includes current list prices for perpetual-use
single-user licenses and single-user multiple platform licenses. Support is
generally available at an annual cost equal to 20% to 50% of the list price.
Rogue Wave offers site pricing for 25, 50 and 100 users.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
PRICE
ORIGINAL SINGLE-USER
RELEASE CURRENT LATEST RELEASE SINGLE-USER MULTI-PLATFORM
PRODUCT LINE DATE VERSION DATE LICENSES LICENSES
<S> <C> <C> <C> <C> <C>
FOUNDATION
Standard C++ Library 1995 2.0 October 1996 $ 195 $ 390
Tools.h++ 1990 7.0 July 1996 395 790
Heap.h++ 1994 1.0 September 1994 995 N/A
Threads.h++ 1996 1.0 September 1996 695 1,390
DATABASE
DBTools.h++ 1994 2.0 June 1996 $ 1,295 $ 2,090
DBFactory 1996 1.0 February 1996 995 1,990
VISUAL USER INTERFACE
zApp Developers Suite 1994 3.0 July 1996 $ 2,995 $ 4,990
View.h++ 1993 1.3 February 1996 1,995 N/A
MATHEMATICAL
Money.h++ 1994 1.3 October 1995 $ 1,295 $ 2,590
Math.h++ 1989 6.0 May 1996 595 1,190
LAPACK.h++ 1994 2.0 July 1996 795 1,590
DISTRIBUTED
Net.h++ 1995 1.1 May 1996 $ 1,495 $ 2,490
ORBstreams.h++ 1996 1.0 May 1996 395 790
JAVA
JFactory 1996 1.1 July 1996 $ 195 $ 390
JMoney 1996 2.0 September 1996 99 198
JTools 1996 1.0 July 1996 99 198
JWidgets 1996 2.0 September 1996 99 198
</TABLE>

FOUNDATION

STANDARD C++ LIBRARY. Rogue Wave has played an active role on the ANSI/ISO
C++ Standards Committee and has leveraged that experience to develop its version
of the Standard C++ Library. Rogue Wave's Standard C++ Library includes
fundamental data structures, as well as string, numeric limits, complex,
allocator, valarray, iostream and locale classes. Rogue Wave's Standard C++
Library has been adopted by many of the leading C++ compiler vendors, including
Fujitsu, Hewlett-Packard, Siemens-Nixdorf, Silicon Graphics, Sun Microsystems
and others.

26
<PAGE>
TOOLS.H++. Tools.h++ encapsulates and extends the Standard C++ Library,
making the Standard C++ Library easier to use by introducing object-oriented
constructs and adding new classes, such as hash tables, that are not part of the
Standard C++ Library. Used together, Tools.h++ and the Standard C++ Library give
users the portability of the Standard C++ Library plus the safety and
reusability associated with object-oriented design.

HEAP.H++. Heap.h++ is a replacement for the standard memory allocator that
comes with UNIX machines. This product uses a proprietary memory allocation
algorithm that allocates memory faster and with less fragmentation than most
native allocators.

THREADS.H++. Threads.h++, which is built on top of the Tools.h++ foundation
class library, is a C++ class library for developing multi-threaded
applications. Multi-threaded applications can offer improved responsiveness and
performance. By writing to the Threads.h++ Application Programming Interface
("API"), users can write code that is both simpler and platform independent.

DATABASE

DBTOOLS.H++. DBTools.h++, which is built on top of the Tools.h++ foundation
class library, provides a common, object-oriented interface to relational
databases. Applications can be written once to the DBTools.h++ API and then
deployed to any of the supported databases, regardless of the differences in
data structures and function calls between the different databases. DBTools.h++
provides native access to Informix, Ingres, Oracle and Sybase, plus general
connectivity to these and other relational databases through the ODBC standard.
In addition, DBTools.h++ provides a flexible error-handling model and
encapsulates SQL 92 DML functionality, including SQL extensions such as stored
procedures.

DBFACTORY. DBFactory is a development tool that automatically creates
business objects represented in the schemas held in a relational database.
DBFactory maps schema information, stored procedure activation and query results
into DBTools.h++ classes. Code generation is controlled through a
point-and-click interface, which displays database and schema information on the
screen. DBFactory uses "style files" to control code generation. The user can
edit the style files to tailor output to specific needs.

VISUAL USER INTERFACE

ZAPP DEVELOPERS SUITE. The zApp Developers Suite consists of three
different products: the zApp Application Framework, zApp Factory and the zApp
Interface Pack. The zApp Application Framework, which is built on top of the
Tools.h++ foundation class library, is an object-oriented, GUI library written
in C++ that provides portability among Windows 95, Windows NT, OS/2 and many
versions of UNIX. The user programs once to the zApp API and is then able to
deploy to any supported platform with minimal changes. zApp Factory allows the
user to create an application visually. The user drags and drops various user
elements, such as push buttons, edit boxes and drop down lists, onto a window,
thereby building an application more quickly. zApp Factory then generates calls
to the zApp Application Framework library needed to represent the visual
interface. zApp Interface Pack provides high-level visual objects and custom
controls and extends the functionality of the zApp Application Framework. zApp
Interface Pack consists of approximately 100 classes, including tables,
toolbars, status lines, 3D controls and bitmap buttons. The zApp Developers
Suite was acquired by the Company in the Inmark Merger in October 1995.

VIEW.H++. View.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ library that provides an object-oriented, C++ interface to
OSF/Motif, the industry standard GUI for UNIX machines. View.h++ supports both
Motif 1.1 and Motif 1.2 features.

MATHEMATICAL

MONEY.H++. Money.h++ is a C++ class library for representing and
manipulating exact decimal fractions, primarily in banking and other financial
applications. It also includes I/O formatting objects, error handling, control
over rounding and explicit representation for several non-numeric values.

27
<PAGE>
MATH.H++. Math.h++ is a C++ class library that improves the performance and
reliability of any code that manipulates arrays of numbers. It includes vectors,
matrices, arrays, random number generators and Fast Fourier Transforms. Math.h++
is useful in mathematical and numerical applications.

LAPACK.H++. LAPACK.h++ is a C++ class library that is designed to solve
numerical linear algebra problems. It manages the details of data
representation, enabling the programmer to concentrate on application
development.

DISTRIBUTED

NET.H++. Net.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ class library for developing applications that communicate
across a network. By programming to the Net.h++ API, the user can write code
that is both simpler and platform independent.

ORBSTREAMS.H++. ORBstreams.h++, which is built on top of the Tools.h++
foundation class library, is a C++ library that makes C++ programming in an OMG
CORBA environment much easier by providing C++ classes that stream complicated
C++ objects across a CORBA interface, eliminating the need to write custom
marshalling and unmarshalling routines.

JAVA

JFACTORY. JFactory is similar to zApp Factory, except that it generates
Java calls to the Abstract Windowing Toolkit (from Sun Microsystems), instead of
C++ calls to the zApp Application Framework. The user can design an application
visually by dragging and dropping elements, such as radio buttons and edit
boxes, onto a window. Once the look of the application has been designed,
JFactory automatically generates the code for the application.

JMONEY. JMoney is a Java class library for representing and manipulating
exact decimal fractions, primarily for banking and other financial applications.
It also includes algorithms for calculating amortization and other schedules.

JTOOLS. JTools is a Java class library that extends the set of utility data
structures that comes with the Java Development Kit distributed by Sun
Microsystems.

JWIDGETS. JWidgets is a Java class library that extends the set of user
controls that comes with the Java Development Kit distributed by Sun
Microsystems. It includes such controls as trees, tabbed notebooks, grids and
others.

28
<PAGE>
CUSTOMERS

The Company's products are used by programmers to develop software
applications for organizations in a wide variety of industries. To date, the
Company has sold over 50,000 end-user licenses. The following is a
representative list of customers responsible for more than $50,000 in revenue
during the 24 months ended September 30, 1996.

TELECOMMUNICATIONS
- ----------------------------------------
Bell Atlantic
Bell Northern Research
BellSouth Telecommunications
Bosch Telecom
Deutche Telecom
Ericsson
Lucent Technologies
MCI
Motorola
Northern Telecom
NYNEX
US West Communications

INFORMATION SYSTEMS/SOFTWARE
- ----------------------------------------
Cadence Design Systems
ComputerVision
D&B Software
ICON Solutions
Netscape
Objective Systems Integrators

SYSTEMS INTEGRATORS
- ----------------------------------------
American Management Systems
Andersen Consulting
Cap Gemini
E Systems
PSI AG

FINANCIAL INSTITUTIONS
- ----------------------------------------
Citicorp
Deutsche Bank
Edward D. Jones and Company
Lehman Brothers
Morgan Guaranty Trust Co.
Morgan Stanley
Smith Barney
The Options Clearing Corporation
Union Bank of Switzerland
Westdeutche Landesbank

INDUSTRIAL, CONSUMER & OTHER
- ----------------------------------------
A.C. Nielsen Company
Blue Cross/Blue Shield
DOD, Maryland Procurement Office
FedEx
Ford Motor Company
Hughes Electronics
Lockheed Martin
Loral
Mead Data Central
Medaphis Corporation
Schlumberger Technologies
TASC

COMPUTER/ELECTRONICS
- ----------------------------------------
3Com
Cable Data
Cabletron Systems
IBM
Sony

TRANSPORTATION
- ----------------------------------------
Sabre Decision Technologies
TransQuest Information Systems
Worldspan

VARS AND OEMS
- ----------------------------------------
Hewlett-Packard
Microware
Rational Software
Siemens Nixdorf
Silicon Graphics
Sun Microsystems
Tandem Computers

SALES, MARKETING AND CUSTOMER SUPPORT

The Company markets its software primarily through its direct sales
organization and, to a lesser extent, through outside sales representatives and
indirect channel partners. As of September 30, 1996, the Company's sales and
marketing organization consisted of 64 individuals. In addition, the Company's
products and related tools are sold directly through VARs and OEMs. The Company
sells perpetual use, non-exclusive licenses to use its products for an up front
fee. The licenses generally include a 30-day right of return policy.

TELESALES. As of September 30, 1996, the Company employed 28 telesales
representatives. A significant part of the Company's "Tools.h++ Everywhere"
strategy is the sale of its products to individual and small groups of
programmers. The Company uses OEM generated and other targeted mailing lists to
distribute product catalogs to those individuals. The Company's telesales force
complements the "Tools.h++ Everywhere" strategy by fielding inquiries and orders
from a broad range of users who are exposed to one or more of the Company's
products. Sales through this channel are typically less than $50,000 per order
and the sales cycle is generally less than two months.

DIRECT FIELD SALES. To date, the Company has primarily conducted its direct
sales activities in the United States and through a recently established sales
office in Germany. As of September 30, 1996, the Company employed eight direct
field sales representatives supported by one technical sales representative. The
Company's field sales force targets Fortune 500 customers in strategic
industries, such as financial services and telecommunications. The field sales
force typically focuses on reaching chief information officers or similar
enterprise-wide technology purchasers. The sales cycle for this "top down"
approach typically ranges from two to six months. The Company maintains domestic
direct sales offices or personnel in Oregon, California, Colorado and New York.
German direct sales operations are located in Aschaffenburg, Germany.

29
<PAGE>
ORIGINAL EQUIPMENT MANUFACTURERS AND VALUE ADDED RESELLERS. The Company's
foundation products are bundled with many leading C++ compilers and distributed
by major OEMs and VARs. Although this use of OEMs and VARs does not contribute
significantly to the Company's revenue, it does further the Company's "Tools.h++
Everywhere" strategy by increasing the exposure of C++ users to the Company's
products and providing name recognition for the Company.

The Company's marketing efforts are directed at broadening the market for
its products by increasing awareness among corporate programmers and chief
information officers. In support of its sales efforts, the Company's marketing
department conducts comprehensive programs that include advertising, direct
mail, public relations, trade shows, seminars and ongoing customer
communications programs. The Company also keeps its customers informed of
advances in the field through technical papers and other mailings. The Company
maintains a Web site on the Internet that provides Company and product
information and handles sales and distribution of JFactory. The Company makes
all of its products available for sale and distribution over the Internet to
customers in the United States.

The Company believes that a high level of customer support is important to
the successful marketing and sale of its products. The Company offers telephone,
electronic mail, fax and Internet-based customer support through its support
services staff. Initial product license fees include 30 days of customer
support. The Company also offers annual maintenance agreements that include
technical support and upgrades, and offers introductory and advanced classes and
training programs.

PRODUCT DEVELOPMENT

As of September 30, 1996, there were 62 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1994, 1995 and 1996 were $2.1 million, $3.2 million and $5.5 million,
respectively, and represented 29.3%, 26.8% and 29.4% of revenue, respectively.
The Company expects that it will continue to commit substantial resources to
product development in the future.

The majority of the Company's research and development department is located
at the Company's headquarters in Corvallis, Oregon, with additional groups in
Mountain View, California and Charlotte, North Carolina. The Company's research
and development department is organized into six different teams, reflecting the
six different product groups, Foundation, Database, Visual User Interface,
Mathematical, Distributed and Java. Each team has a lead architect who is
responsible for the technical content of the product group, as well as a
development manager who is responsible for the personnel in the group, both of
whom work closely with a corresponding marketing manager in the marketing
department. Although development teams are responsible for the overall design,
implementation and testing of products, the Company has a Quality Engineering
("QE") team that designs test suites and maintains configuration management
systems.

The Company has begun to adopt ClearCase from Atria Software for
configuration management. The Company intends to perform synchronization between
sites using the ClearCase "Remote Site" option. Full adoption is expected by
late calendar 1996. In addition, the Company uses Purify and Quantify from Pure
Software to improve product quality. All products developed by the Company are
tested using Purify during the Company QE process. The Company uses an internal
DESIGN AND STYLE GUIDE to ensure consistency of general architectural, design
and style features. Furthermore, the Chief Technical Officer is responsible for
the design and implementation of common architectural features across all
products.

Rogue Wave is continuing to expand and enhance its catalogue of C++ class
libraries and related development tools. In addition, Rogue Wave is working to
solidify its place as a leader in the newly developing Java tools market.

An important architectural principle of the Company is that all products
should be "policy-free." That is, they should not dictate how the product should
be used and in what environment. As an example, DBTools.h++ can manage database
connections (how and when they are established and terminated) or it can allow
the programmer to manage them manually.

30
<PAGE>
C++ PRODUCTS. The Company plans to introduce a new version of DBTools.h++
that will support SQL 3 features, as well as improved performance and support
for transactions. The Company is also working on libraries to facilitate
developing distributed intranet applications.

Rogue Wave plans to introduce a new product designed to integrate and
enhance the functionality of its code generation tools, zApp Factory and
DBFactory. The new product is being designed to enable customers to create
business objects that can include both visual and database access components.
The product is being designed to utilize live data, even in design mode, to
enhance the realism of applications as they are being developed. It is expected
to be able to generate both C++ code and database schema information to model
business objects. The Company currently estimates that this new product will be
introduced by the third quarter of fiscal 1997.

JAVA PRODUCTS. The Company is also developing additional products for Java.
Although the Java language comes with a development library, the built-in
library lacks the breadth and sophistication of a complete foundation library
like Rogue Wave's Tools.h++. Rogue Wave plans to fill this gap by continuing to
augment JTools, its Java foundation library. Rogue Wave also plans to enhance
the current JFactory product with a family of products designed to allow the
building of business objects in Java. The new products will utilize the same
underlying code base used in the Company's C++ Factory product line. As with the
C++ Factory products, the resulting business objects can have both visual and
database components.

The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cost-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that its enhanced and new products will
achieve market acceptance. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products, and there can be no assurance that the Company will not experience
similar delays in the future. Any failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, would have a material
adverse effect on the Company's business, financial condition and results of
operations.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
technological leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company currently has one patent
application pending in the United States. The technology covered by the pending
patent application currently is not included in any of the Company's products.
There can be no assurance that the Company's pending patent application, whether
or not being currently challenged by applicable governmental patent examiners,
will be issued with the scope of the claims sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology or design around the
Company's pending patent. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. The nature of many of the Company's products requires the release
of the source code to all customers. As such, policing unauthorized use of the
Company's products is difficult, and while the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competition will not independently develop similar technology.

31
<PAGE>
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially and adversely affected.

COMPETITION

The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's products are targeted
at the emerging market for C++ software parts and programming tools, and the
Company's competitors offer a variety of products and services to address this
market. The Company believes that the principal competitive factors in this
market are product quality, flexibility, performance, functionality and
features, use of standards based technology, quality of support and service,
company reputation and price. While price is less significant than other factors
for corporate customers, price can be a significant factor for individual
programmers. Direct competitors include Microsoft (with its MFC), IBM and
several privately held companies. Microsoft is a particularly strong competitor
due to its large installed base and the fact that it bundles its MFC library
with its own and other C++ compilers. Microsoft may decide in the future to
devote more resources to or may broaden the functions of MFC in order to address
and more effectively compete with the functionality of the Company's products.
Software applications can also be developed using software parts and programming
tools in environments other than C++. Indirect competitors with such offerings
include Microsoft (with its ActiveX technology), Borland, Oracle,
ParcPlace-Digitalk and Powersoft (a subsidiary of Sybase). Many of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and larger installed bases of customers than the Company. In addition, several
database vendors, such as Informix, Oracle and Sybase are increasingly
developing robust software parts for inclusion with their database products and
may begin to compete with the Company in the future. These potential competitors
have well-established relationships with current and potential customers and
have the resources to enable them to more easily offer a single vendor solution.
Like the Company's current competitors, many of these companies have longer
operating histories, significantly greater resources and name recognition and
larger installed bases of customers than the Company. As a result, these
potential competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. In addition, the Company faces competition from Borland, Symantec and
other companies for its current Java products and it expects to face significant
competition in the future from such companies with respect to other Java
products the Company may introduce.

32
<PAGE>
EMPLOYEES

As of September 30, 1996, the Company had a total of 172 employees, of which
166 were based in the United States and six were based in Germany. Of the total,
64 were engaged in sales and marketing, 62 were in product development, 18 were
in customer support, and 28 were in finance, administration and operations. The
Company's future performance depends in significant part upon the continued
service of its key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. The loss of the services of one or
more of the Company's key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success also depends on its continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key technical, sales and managerial personnel in the future. The
Company has not experienced any work stoppages and considers it relations with
its employees to be good.

FACILITIES

The Company's principal administrative, sales, marketing, support and
product development offices are located in facilities consisting of
approximately 41,000 square feet in Corvallis, Oregon and 13,000 square feet in
Mountain View, California. The leases on the Corvallis facilities expire on
various dates from 1998 through 2001 and the lease on the Mountain View facility
expires in 1999. The Company currently leases other domestic sales and support
offices in Colorado, New York, North Carolina and Oregon. The Company also rents
space on a month-to-month basis for its international office in Germany. Note 4
of Notes to Consolidated Financial Statements describes the amount of the
Company's lease obligations. The Company believes that its existing facilities
are adequate for its current needs and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.

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<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES

The directors, executive officers and certain key employees of the Company,
and their ages as of September 30, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ------------------------------------
<S> <C> <C>
Thomas Keffer, Ph.D. 44 President, Chief Executive Officer
(1)...................... and Chairman of the Board of
Directors
Dan Whitaker.............. 42 Executive Vice President, Marketing
and Director
Michael Scally............ 45 Chief Operating Officer
Robert M. Holburn, Jr..... 50 Chief Financial Officer and
Secretary
Thomas B. Brookes......... 33 Vice President, Corporate Counsel
Michael A. Foreman........ 45 Vice President, Development
Allan Vermeulen, Ph.D..... 31 Chief Technical Officer
Thomas M. Atwood.......... 47 Director
Howard M. Love, Jr........ 36 Director
Richard P. Magnuson 40 Director
(1)(2)...................
Thomas H. Peterson 40 Director
(1)(2)...................
</TABLE>

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

(2) Member of the Audit Committee.

THOMAS KEFFER, PH.D., President, Chief Executive Officer and Chairman of the
Board of Directors, has been with the Company since its inception in 1989. Dr.
Keffer was a founder of the Company. Prior to 1989, Dr. Keffer was an Assistant
Professor of Oceanography at the University of Washington. Dr. Keffer received
his Ph.D. in Physical Oceanography from Oregon State University and his B.A.
from Cornell University.

DAN WHITAKER, Executive Vice President, Marketing and a director, has been
with the Company since January 1992. From June 1990 until January 1992, Mr.
Whitaker was the Vice President of Marketing for Evergreen Technologies, a
computer hardware company. Mr. Whitaker was a founder of the Software
Association of Oregon and served as its Director from 1989 to 1990. From 1982 to
1989 Mr. Whitaker served as President of Software Support Services, Inc., a
software company. Mr. Whitaker received his B.A. from Oregon State University.

MICHAEL SCALLY has served as the Chief Operating Officer of the Company
since June 1996. From May 1994 until June 1996, he served as Vice President,
National Telesales of Intersolv, a software company. From November 1988 until
April 1994, he was the Vice President, General Manager of Carnegie Group Inc., a
computer consulting company. Mr. Scally received his B.S. from Michigan
Technological University.

ROBERT M. HOLBURN, JR., the Chief Financial Officer and Secretary of the
Company, has been with the Company since October 1994. Between March 1994 and
October 1994, he served as the Chief Financial Officer for MacSema, Inc., a
manufacturer of electronic data storage systems. From August 1993 until March
1994, he served as an independent financial consultant. From August 1992 until
August 1993, he served as the Chief Financial Officer for Pacific Coast
Technologies, an electronics company. From 1987 until August 1992, Mr. Holburn
served as Vice President of Administration, Chief Financial Officer and
Secretary of Advanced Power Technology, a semiconductor manufacturer. Prior to
1987, he was employed for 13 years with Texas Instruments, Inc., an electronics
company, where he last served as Controller for its world-wide MOS memory
operations. Mr. Holburn received his M.B.A. from the College of William and Mary
and his B.S. from the University of Rhode Island.

THOMAS B. BROOKES has served as the Company's Vice President, Corporate
Counsel since June 1996 and has been employed as legal counsel by the Company
since March 1994. From May 1993 to March 1994, Mr. Brookes was a practicing
attorney. From July 1992 to December 1992, Mr. Brookes served as the Vice
President of Text-Tel, Inc., a developer and designer of products for the
hearing impaired. From October 1989 to July 1992, Mr. Brookes was an attorney
with the law firm Wood Tatum Wonnacot & Landis. Mr. Brookes received his B.A.
from the University of Oregon and his J.D. from the University of Washington.

34
<PAGE>
MICHAEL A. FOREMAN has served as Vice President, Development of the Company
since September 1996. From March 1995 to June 1996, he served as Vice President
of Research and Development for EyeSys Technologies, a medical device company.
Between May 1992 and March 1995, he was Senior Manager, Software Development at
Informix Software, a software company. Prior to joining Informix, he was
employed for nine years with Hewlett-Packard, a computer hardware company, where
he last served as Research and Development Project Manager, Software Engineering
Systems Division. Mr. Foreman received his M.B.A. from the University of
Maryland and his B.S. from Virginia Polytechnic Institute.

ALLAN VERMEULEN, PH.D. has served in a variety of positions with the Company
since January 1993, serving as Chief Technical Officer since October 1995. From
November 1994 to October 1995, Dr. Vermeulen served as Senior Software Engineer.
From January 1993 to November 1994, he served as a Technical Manager and
Software Engineer. Mr. Vermeulen was enrolled in a doctoral program at the
University of Waterloo, Canada prior to joining the Company. Dr. Vermeulen
received his Ph.D. in Systems Design Engineering and his B.S. from the
University of Waterloo, Canada.

THOMAS M. ATWOOD has been a director of the Company since October 1994. Mr.
Atwood is currently Chief Executive Officer of Cinebase Software, a software
company. Prior to that, he founded Object Design, Inc., a software company, in
1988 and served as its Chairman through December 1995.

HOWARD M. LOVE, JR. has been a director of the Company since October 1995.
Since May 1996, Mr. Love has been General Partner of Love Capital Partners,
L.P., an investment fund. From June 1984 until October 1995, Mr. Love served as
President and Chairman of the Board of Inmark.

RICHARD P. MAGNUSON has been a director of the Company since November 1995.
Mr. Magnuson served as a general partner of Menlo Ventures, a venture capital
firm, from 1984 until December 1995. Mr. Magnuson also serves as a director of
OrCAD, Inc., a software company, California Water Service Company, a water
utility, and several privately held companies.

THOMAS H. PETERSON has been a director of the Company since July 1994. Mr.
Peterson has been a general partner of certain venture capital funds associated
with El Dorado Ventures, a venture capital company, since May 1991. From 1986 to
May 1991, Mr. Peterson was an associate with El Dorado Ventures. Mr. Peterson
also serves as a director of several privately held companies.

The Company currently has authorized six directors. The current directors
were elected pursuant to the provisions of the Company's Certificate of
Incorporation in effect prior to the closing of this offering, and a voting
agreement that will expire upon the closing of this offering. The Certificate of
Incorporation provides for the election of two directors solely by the holders
of Preferred Stock, two directors solely by the holders of Common Stock and the
remaining two directors by the holders of Preferred Stock and Common Stock
voting together as a class, one of whom is designated in accordance with the
voting agreement. Upon the closing of this offering, the Certificate of
Incorporation will provide for the election of directors by a majority of the
outstanding shares of capital stock. Each director holds office until the next
annual meeting of stockholders or until a successor is duly elected and
qualified. The Company's officers serve at the discretion of the Board of
Directors.

COMMITTEES

The Audit Committee consists of Mr. Magnuson and Mr. Peterson. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.

The Compensation Committee consists of Dr. Keffer, Mr. Magnuson and Mr.
Peterson. The Compensation Committee makes recommendations regarding the
Company's 1996 Equity Incentive Plan and Employee Stock Purchase Plan and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.

35
<PAGE>
DIRECTORS' COMPENSATION

The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Upon the completion of this offering, non-employee directors
will be eligible to participate in the Equity Incentive Plan. See "--Equity
Incentive Plans."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of Directors
or Compensation Committee. See "Certain Transactions" for a description of
transactions between the Company and entities affiliated with members of the
Compensation Committee.

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the three other most highly compensated executive
officers (collectively, the "Named Executive Officers") whose salary and bonus
for the fiscal year ended September 30, 1996 were in excess of $100,000 for
services rendered in all capacities to the Company for that fiscal year:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION ---------------------
------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) SALARY ($) OPTIONS (#) COMPENSATION ($)
- ---------------------------------------------------------- ------------- --------------------- ----------------
<S> <C> <C> <C>
Thomas Keffer............................................. $ 145,000 -- --
President, Chief Executive Officer and Chairman of the
Board
Dan Whitaker.............................................. 120,000 -- --
Executive Vice President, Marketing and Director
Robert M. Holburn, Jr..................................... 105,000 26,666 --
Chief Financial Officer and Secretary
Thomas A. Nora (2)........................................ 101,844 -- $ 43,052(3)
Former Vice President of Sales
</TABLE>

- ------------------------
(1) Michael Scally, who joined the Company in June 1996 as Chief Operating
Officer, is paid an annual salary of $175,000 and would have been a Named
Executive Officer had he served during the entire fiscal 1996.

(2) Mr. Nora served as the Company's Vice President of Sales from March 1994
until July 1996.

(3) Represents commissions paid.

EQUITY INCENTIVE PLANS

1996 EQUITY INCENTIVE PLAN. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") was adopted by the Board of Directors in June 1996 and
was approved by the stockholders in October 1996. The Equity Incentive Plan
amends and restates the Company's 1994 Stock Option Plan and the Inmark Stock
Option Plan. The Company has reserved a total of 3,000,000 shares of Common
Stock for issuance under the Equity Incentive Plan. The Equity Incentive Plan
provides for the following types of stock-based awards: incentive stock options
for employees (including officers and employee directors); nonstatutory stock
options for employees (including officers and employee directors), directors and
consultants; and restricted stock purchase awards, stock bonuses and stock
appreciation rights to employees (including officers and employee directors) and
consultants. The Equity Incentive Plan is administered by the Board of Directors
or a committee appointed by the Board, which determines recipients and types of
awards to be granted, including the exercise prices, numbers of shares subject
to the awards and the exercisability thereof, provided that the terms of options
granted to non-employee directors are specified in the Equity Incentive Plan.

Non-employee directors are eligible only for nonstatutory option grants.
Each of the Company's existing non-employee directors (Messrs. Atwood, Love,
Magnuson and Peterson) will be granted an option to purchase 10,000 shares of
Common Stock on the completion of this offering. In addition, each person who
becomes a non-employee director after the completion of this offering will
automatically be granted an option to purchase 10,000 shares of Common Stock on
the date of his or her election to the Board. Such options will vest in 36 equal

36
<PAGE>
monthly installments. Following each annual meeting of the Company's
stockholders occuring after September 30, 1997, each non-employee director who
has continuously served as a non-employee director since the last annual meeting
will be granted an option to purchase 3,500 shares of Common Stock, and each
other person who is then a non-employee director will be granted an option to
purchase a prorated number of shares of Common Stock based on the number of days
such person has continuously served as a non-employee director since the last
annual meeting. These options will be fully vested when granted.

The term of a stock option granted under the Equity Incentive Plan generally
may not exceed 10 years. The exercise price of options granted under the Equity
Incentive Plan is determined by the Board of Directors, but, in the case of an
incentive stock option, cannot be less than 100% of the fair market value of the
Common Stock on the date of grant. Options granted under the Equity Incentive
Plan vest at the rate specified in the option agreement, except that options
shall be fully vested if the optionee dies before the end of the three-month
period (12 months if the optionee is totally disabled) commencing with the
termination of the optionee's relationship with the Company. No stock option may
be transferred by the optionee other than by will or the laws of descent or
distribution or, in certain limited instances, pursuant to a domestic relations
order, provided that an optionee may designate a beneficiary who may exercise
the option following the optionee's death and a nonstatutory option may be
transferred to the extent provided in the option agreement. An optionee whose
relationship with the Company or any related corporation ceases for any reason
(other than by death or permanent and total disability) may exercise options in
the three-month period following such cessation (unless such options terminate
sooner or later by their terms). Options may be exercised for up to twelve
months after an optionee's relationship with the Company and related
corporations ceases due to death or disability (unless such options terminate
sooner or later by their terms).

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the option
does not exceed five years from the date of grant. The aggregate fair market
value, determined at the time of grant, of the shares of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year (under all such plans of the Company and
its affiliates) may not exceed $100,000.

Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the Equity Incentive Plan. Shares subject to exercised stock
appreciation rights will not again become available for the grant of new awards.

The Board of Directors has the authority to reprice outstanding options and
stock appreciation rights and to offer optionees and holders of stock
appreciation rights the opportunity to replace outstanding options and stock
appreciation rights with new options or stock appreciation rights for the same
or a different number of shares.

Restricted stock purchase awards granted under the Equity Incentive Plan may
be granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded in
consideration of past services without a purchase payment. Rights under a stock
bonus or restricted stock bonus agreement may not be transferred other than by
will, the laws of descent and distribution or a domestic relations order while
the stock awarded pursuant to such an agreement remains subject to the
agreement. Stock appreciation rights granted under the Equity Incentive Plan may
be tandem rights, concurrent rights or independent rights.

Upon certain changes in control of the Company, all outstanding awards under
the Equity Incentive Plan must either be assumed or substituted by the surviving
entity. If the surviving entity determines not to assume or substitute such
awards, and with respect to persons then performing services as employees,
directors or consultants, the time during which such awards may be exercised
must be accelerated and the awards terminated if not exercised prior to such
change in control.

As of September 30, 1996, 233,795 shares of Common Stock had been issued
upon the exercise of options granted under the Equity Incentive Plan, options to
purchase 1,450,726 shares of Common Stock at a weighted average exercise price
of $2.38 were outstanding and 1,315,479 shares remained available for future
grant. The Equity Incentive Plan will terminate in June 2006 unless sooner
terminated by the Board of Directors.

37
<PAGE>

EMPLOYEE STOCK PURCHASE PLAN. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Board of Directors in June 1996 and was
approved by the stockholders in October 1996. The Company has reserved a total
of 350,000 shares of Common Stock for issuance under the Purchase Plan. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code. Under the Purchase
Plan, the Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the Purchase
Plan. The offering period for any offering will be no more than 27 months.

Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors. Employees who
participate in an offering can have up to 15% (as determined by the Board for
each offering) of their earnings withheld pursuant to the Purchase Plan and
applied, on specified dates determined by the Board of Directors, to the
purchase of shares of Common Stock. The price of Common Stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair market value of
the Common Stock on the commencement date of each offering period or the
relevant purchase date. Employees may end their participation in the offering at
any time during the offering period, and participation ends automatically on
termination of employment with the Company.

In the event of certain changes of control, the Company and the Board of
Directors have discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation,
or the Board may shorten the offering period and provide for all sums collected
by payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's discretion.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options made during the
fiscal year ended September 30, 1996 to each of the Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTION TERM ($)(4)
OPTIONS GRANTED IN EXERCISE EXPIRATION ----------------------
NAME (1) GRANTED (2) FISCAL 1996 (3) PRICE ($/SH) DATE 5% 10%
- ----------------------------------- ----------- --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas Keffer...................... -- -- -- -- -- --
Dan Whitaker....................... -- -- -- -- -- --
Robert M. Holburn, Jr.............. 26,666 4.8% $ 6.75 6/6/2006 $ 113,198 $ 286,866
Thomas A. Nora..................... -- -- -- -- -- --
</TABLE>

- ------------------------
(1) Mr. Scally was granted options to purchase 200,000 shares in June 1996, each
with an exercise price of $6.75 per share. These options have a term of 10
years.

(2) 25% of these options vest on the first anniversary of the date of grant and
an additional 2.083% vest each month thereafter. These options have a term
of 10 years.

(3) Based on an aggregate of 555,066 shares subject to options granted to
employees of the Company under the Equity Incentive Plan in fiscal 1996,
including the Named Executive Officer.

(4) The potential realizable value is calculated based on the term of the option
at the time of grant (10 years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date
of grant appreciates at the indicated rate for the entire term of the option
and that the option is exercised at the exercise price and sold on the last
day of its term at the appreciated price.

38
<PAGE>
AGGREGATE OPTIONS EXERCISED IN 1996 AND YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended September 30, 1996 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at September
30, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS (1)
SHARES VALUE -----------------------------
NAME ACQUIRED ON EXERCISE REALIZED EXERCISABLE
- ------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Thomas Keffer............ -- -- --
Dan Whitaker............. -- -- 150,493
Robert M. Holburn, Jr.... 10,000 $ 58,500 17,361
Thomas A. Nora........... 48,264 183,828 12,842

VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS (2)
--------------------------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE

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

<S> <C> <C> <C>
Thomas Keffer............ -- -- --

Dan Whitaker............. 127,340 $ 1,103,866 $ 934,039

Robert M. Holburn, Jr.... 65,971 125,727 303,268

Thomas A. Nora........... -- 93,348 --

</TABLE>

- ------------------------
(1) These options vest monthly over four years and have a term of 10 years.

(2) Based on the difference between the deemed fair market value as determined
by the Board of Directors on September 30, 1996 ($7.50 per share) and the
exercise price.

401(K) PLAN

In January 1993, the Board adopted an employee savings and retirement plan
(the "401(k) Plan") covering certain of the Company's employees who have at
least 90 days of service with the Company, work a minimum of 1,000 hours during
the plan year and have attained the age of 21. Pursuant to the 401(k) Plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 20% of such compensation or the statutorily prescribed annual limit
($9,500 in 1996) and have the amount of such reduction contributed to the 401(k)
Plan. The Company matches all employee contributions up to 3% of earnings and
half of employee contributions from 3% to 5% of earnings. In addition, eligible
employees may make roll-over contributions to the 401(k) Plan from a
tax-qualified retirement plan. Employees become 20% vested in these Company
contributions after two years of service, and increase their vested percentages
by an additional 20% for each year of service thereafter. The 401(k) Plan is
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended, so that contributions by employees or by the Company to the 401(k)
Plan, and income earned on the 401(k) Plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by the
Company, if any, will be deductible by the Company when made. The trustee under
the 401(k) Plan, at the direction of each participant, invests the 401(k) Plan
employee salary deferrals in selected investment options.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its other employees and agents to the fullest
extent permitted by Delaware law. The Company is also empowered under its Bylaws
to enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person it is required or permitted to
indemnify. Pursuant to this provision, the Company expects to enter into
indemnity agreements with each of its directors and executive officers.

In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and the Company and for improper distributions
to stockholders and loans to directors and officers. This provision also does
not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.

39
<PAGE>
The Company expects to enter into agreements with its directors and officers
that require the Company to indemnify such persons against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a director or officer of the Company or any
of its affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

CERTAIN TRANSACTIONS

Thomas Peterson, a director of the Company, is a general partner of El
Dorado Venture Partners III, the general partner of El Dorado Ventures III, L.P.
("El Dorado III"), El Dorado Technology IV, L.P. and El Dorado C&L Fund, L.P.
Richard Magnuson, a director of the Company, is a limited partner of MV
Management VI, L.P., the general partner of Menlo Ventures VI.

In July 1994, the Company issued an aggregate of 666,666 shares of Series A
Preferred Stock for cash consideration of $1.0 million to entities affiliated
with El Dorado III. The purchase price of the Series A Preferred Stock was
determined through arms-length bargaining between the Company and El Dorado III.
At the time of the negotiations, Mr. Peterson was not a director of the Company.
Some of the factors that the Company and El Dorado III used to determine the
price for the Series A Preferred Stock were the Company's current revenue level,
its prospects for revenue growth, the status of its product development efforts,
the size of the perceived market for the Company's products, El Dorado III's
experience in valuing private companies and the market values of comparable
companies, both public and private. The entities affiliated with El Dorado III
were the only purchasers of Series A Preferred Stock in the transaction. Each
share of Series A Preferred Stock will convert into one share of Common Stock
upon the closing of this offering. In connection with the purchase, the Company
granted El Dorado III an option to purchase up to an additional 133,333 shares
of the Company's Series A Preferred Stock at the same price per share for six
months.

In December 1994, the Company issued an aggregate of 133,333 shares of
Series A Preferred Stock for cash consideration of $200,000 to entities
affiliated with El Dorado III upon the exercise of their option to purchase such
shares. The entities affiliated with El Dorado III were the only purchasers of
Series A Preferred Stock in the transaction. Each share of Series A Preferred
Stock will convert into one share of Common Stock upon the closing of this
offering.

In November 1995, the Company issued an aggregate of 742,533 shares of
Series B Preferred Stock for cash consideration of approximately $3.5 million.
In connection with such financing, the Company issued (i) 247,225 shares of
Series B Preferred Stock to entities affiliated with El Dorado III for cash in
the amount of $1,175,563 and (ii) 453,248 shares of Series B Preferred Stock to
entities affiliated with Menlo Ventures VI, L.P. ("Menlo Ventures VI") for cash
in the amount of $2,155,197. The purchase price of the Series B Preferred Stock
was determined through arms-length bargaining between the Company and Menlo
Ventures VI. At the time of the negotiations, Mr. Magnuson was not a director of
the Company. Some of the factors that the Company and Menlo Ventures VI used to
determine the price for the Series B Preferred Stock were the Company's record
of revenue growth, its prospects for future revenue growth, the status of its
product development efforts, Menlo Ventures VI's experience in valuing private
companies and the market values of comparable companies, both public and
private. The entities affiliated with El Dorado III and Menlo Ventures purchased
94.3% of the Series B Preferred Stock sold in the transaction. Each share of
Series B Preferred Stock will convert into one share of Common Stock upon the
closing of this offering.

40
<PAGE>

As part of the Inmark Merger, Howard M. Love, Jr., exchanged all of his
outstanding shares of Common Stock of Inmark for 284,233 shares of Common Stock
of the Company. The exchange ratio was determined through arms-length bargaining
between the Boards of Directors of Inmark and the Company. Some of the factors
that the respective Boards used to calculate the exchange ratio were the
relative revenue levels of the two companies, the relative prospects for revenue
growth and the number and types of products offered and under development by
each company. Mr. Love held approximately 33% of the outstanding shares of
Common Stock of Inmark. In connection with the Inmark Merger, Mr. Love was
elected a director of the Company. In addition, the Company entered into an
employment agreement with Mr. Love that provided for Mr. Love to remain with the
Company until January 1, 1996. The terms of the agreement provided for a payment
of $55,500 for back wages and a severance payment upon his termination of
employment of $16,667. Mr. Love terminated his employment in January 1996.

In June 1996, the Board of Directors amended the terms of the stock options
held by Mr. Holburn, Mr. Brookes and Mr. Nora, officers of the Company, to
provide that, upon a change in control of the Company, 50% of the unvested
options of each such officer would become immediately vested. The stock options
were amended to make them consistent with the terms of stock options granted to
other officers.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties.

41
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock as of September
30, 1996, and as adjusted to reflect the sale of the Common Stock being offered
hereby by (i) each person (or group of affiliated persons) who is known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, (iv) each of
the Selling Stockholders, and (v) all directors and executive officers of the
Company as a group. The table assumes the conversion of all outstanding
Preferred Stock into Common Stock upon the completion of this offering. Unless
otherwise specified, the address of the stockholder is the address of the
Company set forth herein.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER
OFFERING (1) OF SHARES OFFERING (1)(2)
------------------------ BEING ----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------------------- ---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Thomas Keffer, Ph.D....................................... 1,591,200 30.6% -- 1,591,200 21.0%
Entities affiliated with.................................. 1,130,984 21.8 -- 1,130,984 15.0
El Dorado Ventures III, L.P. (3)
20300 Stevens Creek Blvd., Suite 395
Cupertino, CA 95014
Entities affiliated with.................................. 606,809 11.7 -- 606,809 8.0
Menlo Ventures VI, L.P. (4)
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Dan Whitaker (5).......................................... 550,903 10.3 -- 550,903 7.1
Thomas A. Nora (6)........................................ 61,110 1.2 61,110 -- --
Mary F. Rabe (7).......................................... 34,999 * 13,000 21,999 *
Robert M. Holburn, Jr. (8)................................ 30,139 * 30,139 *
Thomas H. Peterson (3).................................... 1,130,984 21.8 -- 1,130,984 15.0
Richard P. Magnuson (9)................................... 6,666 * -- 6,666 *
Howard M. Love, Jr. (10).................................. 303,725 5.8 -- 303,725 4.0
Thomas M. Atwood (11)..................................... 6,944 * -- 6,944 *
Peter Handsman (12)....................................... 46,695 * 7,000 39,695 *
Mark Richards (13)........................................ 12,994 * 5,000 7,994 *
All directors and executive officers as a group (9
persons) (14)............................................ 3,667,783 67.5 -- 3,667,783 47.0
</TABLE>

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

* Represents beneficial ownership of less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 5,198,308 shares of Common
Stock outstanding as of September 30, 1996 and 7,562,198 shares of Common
Stock outstanding after completion of this offering.

(2) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." If the Underwriters' over-allotment option is exercised in
full, the Company and certain stockholders will sell up to an aggregate of
367,500 shares of Common Stock of the Company, and 7,565,948 shares of
Common Stock will be outstanding after the completion of this offering.
Specifically, (i) the Company will sell 3,750 shares, (ii) entities
affiliated with El Dorado III will sell an aggregate of up to 136,000 shares
and will beneficially own 994,984 shares, or 13.2% of the Company's Common
Stock, after completion of this offering, (iii) entities affiliated with
Menlo Ventures VI will sell an aggregate of up to 72,000 shares and will
beneficially own

42
<PAGE>

534,809 shares, or 7.1% of the Company's Common Stock, after completion of
this offering, (iv) Thomas Keffer will sell 103,750 shares and will
beneficially own 1,487,450 shares, or 19.7% of the Company's Common Stock,
after completion of this offering, (v) Howard M. Love, Jr. will sell 15,000
shares and will beneficially own 288,725 shares, or 3.8% of the Company's
Common Stock, after completion of this offering, (vi) Allan Vermeulen will
sell 16,000 shares and will beneficially own 121,156 shares or 1.6% of the
Company's Common Stock, after completion of this offering, (vii) Kevin
Gartner, an employee of the Company, will sell 16,000 shares and will
beneficially own 226,970 shares, or 3.0% of the Company's Common Stock,
after completion of this offering, and (viii) Michael Scally will sell 5,000
shares and will beneficially own 42,222 shares (less than 1% of the
Company's Common Stock) after completion of this offering.

(3) Represents 1,075,019 shares held by El Dorado III, 36,059 shares held by El
Dorado Technology IV, L.P., and 19,906 shares held by El Dorado C&L Fund,
L.P. Mr. Peterson, a director of the Company, is a general partner of El
Dorado Venture Partners III, the general partner of the entities affiliated
with El Dorado III. Mr. Peterson disclaims beneficial ownership of such
shares except to the extent of his partnership interest therein.

(4) Represents 597,708 shares held by Menlo Ventures VI and 9,101 shares held
by Menlo Entrepreneurs Fund VI, L.P.

(5) Includes 162,069 shares subject to stock options exercisable within 60 days
of September 30, 1996.

(6) Includes 12,846 shares subject to stock options exercisable within 60 days
of September 30, 1996.

(7) Includes 28,333 shares subject to stock options exercisable within 60 days
of September 30, 1996.

(8) Includes 20,139 shares subject to stock options exercisable within 60 days
of September 30, 1996.

(9) Represents 6,666 shares held by Richard P. and Amy C. Magnuson, Trustees of
the Magnuson Revocable Trust dated 1/14/94. Does not include 597,708 shares
held by Menlo Ventures VI and 9,101 shares held by Menlo Entrepreneurs Fund
VI, L.P. Mr. Magnuson, a director of the Company, is a limited partner of MV
Management VI, L.P., general partner of the entities affiliated with Menlo
Ventures VI. Mr. Magnuson disclaims beneficial ownership of such shares
except to the extent of his partnership interest therein.

(10) Includes 3,300 shares held by Howard M. Love, Sr., Trustee of the Cynthia
Annabel Love 1996 Trust dated 10/8/96.

(11) Represents 6,944 shares subject to stock options exercisable within 60 days
of September 30, 1996.

(12) Includes 37,346 shares subject to stock options exerciable within 60 days
of September 30, 1996.

(13) Includes 2,598 shares subject to stock options exercisable within 60 days
of September 30, 1996.

(14) Includes 236,374 shares subject to stock options exercisable within 60 days
of September 30, 1996.

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.

Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock, and the amendment of the Company's Certificate of
Incorporation, will consist of 35,000,000 shares of Common Stock, $.001 par
value, and 5,000,000 shares of Preferred Stock, $.001 par value. As of September
30, 1996, there were approximately 74 holders of record of the Company's Common
and Preferred Stock.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and, as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock have
no preemptive rights and no right to convert their

43
<PAGE>
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

PREFERRED STOCK

The Preferred Stockholders have elected to convert their Preferred Stock
into Common Stock upon the closing of this offering. All outstanding shares of
Preferred Stock will be converted into 1,542,532 shares of Common Stock. See
Note 7 of Notes to Consolidated Financial Statements for a description of the
currently outstanding Preferred Stock. Following the conversion, the Company's
Certificate of Incorporation will be restated to delete all references to the
prior series of Preferred Stock. The Board of Directors has the authority,
without further action by the stockholders, to issue any undesignated shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by stockholders. The issuance
of Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.

REGISTRATION RIGHTS

After this offering, the holders of approximately 4,150,654 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act, pursuant to the Amended and Restated
Investors' Rights Agreement among such holders and the Company, dated November
10, 1995 as amended June 27, 1996 (the "Investors' Rights Agreement"). Under the
terms of the Investors' Rights Agreement, if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled, subject to
certain limitations, to include shares therein. The holders may also require the
Company to file a registration statement under the Securities Act with respect
to their shares, and the Company is required to use its best efforts to effect
two such registrations. Furthermore, the holders may require the Company to
register their shares on Form S-3 when such form becomes available to the
Company. Generally, the Company is required to bear all registration and selling
expenses incurred in connection with any such registrations. These rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration. Such registration rights terminate seven years from the date of
this offering.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

The Company's Certificate of Incorporation also requires that, effective
upon the closing of this offering, any action required or permitted to be taken
by stockholders of the Company must be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer. These provisions may have the effect of delaying, deferring
or preventing a change in control of the Company.

TRANSFER AGENT AND REGISTRAR

ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock. Its telephone number is
(415) 954-9512.

44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales, or the potential for sales, whether or not such sales
actually occur, of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.

Upon completion of the offering, the Company will have outstanding an
aggregate of 7,562,198 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
based upon the number of shares outstanding as of September 30, 1996. Of these
shares, all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Affiliates"). In addition, 583,054 shares issued
in connection with the Inmark Merger will be freely tradeable without
restriction upon the expiration of the lock-up period described below. The
remaining 4,529,144 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules
are summarized below.

Upon completion of this offering, the holders of 4,150,654 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by Affiliates) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."

The Company, the Selling Stockholders and certain other stockholders of the
Company, including the executive officers and directors, who will own in the
aggregate 4,793,090 shares of Common Stock after the offering, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire shares of Common
Stock owned by them during the 180-day period commencing on the date of this
Prospectus. The Company may, however, issue shares of Common Stock upon the
exercise of stock options that are currently outstanding, and may grant
additional options under the Equity Incentive Plan, provided such additional
options shall not be transferable during such period.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an Affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned Restricted Shares for at least three years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.

The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 and Rule 144(k) to become eligible for resale in the public
market. This proposal, if adopted, would substantially increase the number of
shares of Common Stock eligible for immediate resale following the expiration of
the lock-up agreements described above. No assurance can be given concerning
whether or when the proposal will be adopted by the Securities and Exchange
Commission.

45
<PAGE>
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144. Rule 701 is available for stockholders of the Company as to all shares
issued pursuant to the exercise of options granted prior to this offering.

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Equity Incentive Plan and the Purchase Plan. Based on the number of options
outstanding and options and shares reserved for issuance at September 30, 1996,
such registration statement would cover approximately 3,116,205 shares. Such
registration statement is expected to be filed and to become effective as soon
as practicable after the date hereof. Shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to Affiliates,
be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company or the lock-up agreements described above.
See "Management."

LEGAL PROCEEDINGS

On December 15, 1995, the Company filed suit in the Circuit Court of Benton
County (Oregon) against Eugene O. Cho, former Vice President of Marketing,
seeking a declaration of the rights of the parties in connection with 162,483
shares of Common Stock of the Company. The shares were the subject of two Stock
Restriction Agreements dated as of July 1, 1994 (the "Restriction Agreements"),
the meaning of the second of which is in dispute. The Company and Mr. Cho had
entered into a Separation Agreement on July 17, 1995 (the "Separation
Agreement") granting the Company repurchase rights as to certain of the shares
covered by the second Restriction Agreement and covering other issues relating
to Mr. Cho's termination of employment. After Mr. Cho refused to perform the
Separation Agreement that had been executed, the Company filed suit as described
above. The Company claims that the formula controlling the vesting of the
subject shares was inadvertently misstated in the second Restriction Agreement,
and seeks reformation of that agreement to reflect the true intent of the
parties, such that, effective upon the termination of Mr. Cho in May 1995, the
Company was entitled to repurchase 92,763 shares of Common Stock of the Company
at $0.15 per share. A First Amended Complaint was filed by the Company on March
26, 1996. On April 26, 1996, Mr. Cho filed an answer and counterclaims against
the Company, denying the Company's claims and seeking damages in connection with
the alleged breach by the Company of the Restriction Agreements and the
Separation Agreement. Mr. Cho also asserts a claim for rescission of the second
Restriction Agreement. The Company has denied the material allegations of the
counterclaims. The Company filed a Second Amended Complaint on August 23, 1996
adding a claim for breach of contract in connection with the Separation
Agreement. On September 16, 1996, Mr. Cho filed an answer denying the Company's
claims and asserting the same counterclaims as previously set forth. The case is
currently in the discovery stage. Trial is set for December 2, 1996.

The Company has received a letter, dated October 1, 1996, from legal counsel
for Thomas Nora asserting various claims against the Company relating to the
termination of Mr. Nora's employment with the Company. The letter asserts Mr.
Nora's ownership of 140,000 shares of the Company's Common Stock and seeks to
have the Company repurchase such shares at a deemed fair value and to reimburse
Mr. Nora for specified expenses and unpaid wages. The Company believes that Mr.
Nora rightfully owns 48,264 shares of Common Stock and has the right to purchase
an additional 12,842 shares pursuant to stock options that expire on October 23,
1996.

On October 30, 1996, Mark Anthony Pinone, a former employee of the Company,
filed a Complaint in Santa Clara Superior Court, alleging cause for claims
against the Company and Mr. Nora of breach of contract, breach of the implied
covenant of good faith and fair dealing, unlawful disability discrimination,
wrongful termination in violation of public policy, and intentional and
negligent infliction of emotional distress. The Company denies the material
allegations in the Complaint and is defending the lawsuit.

46
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Wessels, Arnold & Henderson, L.L.C., have severally agreed to purchase from
the Company and the Selling Stockholders the following respective numbers of
shares of Common Stock.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC............................................................. 850,000
Wessels, Arnold & Henderson, L.L.C................................................ 850,000
Alex. Brown & Sons Incorporated................................................... 60,000
Cowen & Company................................................................... 60,000
Montgomery Securities............................................................. 60,000
Morgan Stanley & Co. Incorporated................................................. 60,000
Robertson, Stephens & Company LLC................................................. 60,000
Smith Barney Inc.................................................................. 60,000
UBS Securities LLC................................................................ 60,000
Adams, Harkness & Hill, Inc....................................................... 30,000
Robert W. Baird & Co. Incorporated................................................ 30,000
Dain Bosworth Incorporated........................................................ 30,000
Furman Selz LLC................................................................... 30,000
Interstate/Johnson Lane Corporation............................................... 30,000
Janney Montgomery Scott Inc....................................................... 30,000
Punk, Ziegel & Knoell, L.P........................................................ 30,000
Ragen Mackenzie Incorporated...................................................... 30,000
SoundView Financial Group, Inc.................................................... 30,000
Unterberg Harris.................................................................. 30,000
Van Kasper & Company.............................................................. 30,000
----------
Total....................................................................... 2,450,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.48 per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $0.10 per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.

The Company and certain stockholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 367,500 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total number of shares of
Common Stock offered hereby. The Company and such stockholders will be
obligated, pursuant to the option, to sell shares to the Underwriters to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of shares of Common
Stock offered hereby.

47
<PAGE>
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.

In November 1995, the Company issued an aggregate of 742,533 shares of
Series B Preferred Stock for an aggregate consideration of approximately $3.5
million. In connection with such financing, the Company issued 21,030 shares of
Series B Preferred Stock to WA & H Investments, L.L.C. ("WA & H"), an entity
affiliated with Wessels, Arnold & Henderson, L.L.C. for cash consideration of
approximately $100,000. In January 1996, certain officers of the Company sold an
aggregate of 251,573 shares of Common Stock for an aggregate consideration of
approximately $1.0 million. In connection with such sale, certain officers of
the Company sold 7,125 shares of Common Stock to WA & H for cash consideration
of approximately $28,000. The prices of the Series B Preferred Stock and the
Common Stock were the same paid by all other purchasers in such transactions.
Each share of Series B Preferred Stock will convert into one share of Common
Stock upon the closing of the offering.

The Company, the Selling Stockholders and certain other stockholders of the
Company, including the executive officers, directors and WA & H, who will own in
the aggregate 4,857,529 shares of Common Stock after the offering, have agreed
that they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire shares of Common
Stock owned by them during the 180-day period commencing on the date of this
Prospectus. The Company may, however, issue shares of Common Stock upon the
exercise of stock options that are currently outstanding, and may grant
additional options under the Equity Incentive Plan, provided such additional
options shall not be transferable during such period.

Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock was determined by
negotiation among the Company, the Selling Stockholders and the Representatives.
Among the factors considered in determining the initial public offering price
were prevailing market and economic conditions, revenue and earnings of the
Company, market valuations of other companies engaged in activities similar to
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Menlo Park, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Fenwick & West LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements of the Company as of September 30,
1995 and 1996 and for each of the years in the three-year period ended September
30, 1996 have been included in this Prospectus and elsewhere in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in accounting and auditing.

48
<PAGE>
ADDITIONAL INFORMATION

A Registration Statement on Form SB-2, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"). This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and copies of all or any part thereof may be
obtained from the Commission upon the payment of certain fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information filed
electronically with the Commission. The address of the site is
http://www.sec.gov.

49
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP........................................... F-2

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

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

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

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

Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Rogue Wave Software, Inc.
and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1996 in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Portland, Oregon
October 16, 1996

F-2
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
ASSETS 1995 1996 1996
--------- --------- -----------
(UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 1,010 $ 1,714
Accounts receivable, net....................................... 2,164 4,527
Prepaid expenses and other current assets...................... 212 873
Deferred income taxes.......................................... 80 108
--------- ---------
Total current assets......................................... 3,466 7,222
Furniture, fixtures and equipment, net........................... 889 2,718
Other noncurrent assets, net..................................... 403 254
--------- ---------
Total assets................................................. $ 4,758 $ 10,194
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... 520 637
Accrued expenses............................................... 668 805
Deferred revenue............................................... 1,351 2,881
Current portion of long-term obligations....................... 230 217
--------- ---------
Total current liabilities.................................... 2,769 4,540
Long-term obligations, less current portion...................... 230 322
--------- ---------
Total liabilities............................................ 2,999 4,862
--------- ---------
Commitments and contingencies
Mandatorily redeemable preferred stock, $.001 par value.
Authorized 1,200 and 2,350 shares at September 30, 1995 and
1996, respectively; issued and outstanding 800 and 1,543 shares
at September 30, 1995 and 1996, respectively ($1,200 and $4,731
aggregate liquidation and redemption preference at September 30,
1995 and 1996, respectively); pro forma no shares issued and
outstanding..................................................... 1,140 4,664 $ --
--------- --------- -----------
Stockholders' equity:
Common stock, $.001 par value. Authorized 13,000 shares; issued
and outstanding 3,425 and 3,655 shares at September 30, 1995
and 1996, respectively; pro forma 5,198 shares issued and
outstanding................................................... 3 4 5
Additional paid-in capital..................................... 640 676 5,339
Stockholder note receivable.................................... (13) (13) (13)
Retained earnings (deficit).................................... (11) 24 24
Cumulative translation adjustment.............................. -- (23) (23)
--------- --------- -----------
Total stockholders' equity................................... 619 668 $ 5,332
--------- --------- -----------
-----------
Total liabilities and stockholders' equity................... $ 4,758 $ 10,194
--------- ---------
--------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Revenue:
<S> <C> <C> <C>
License revenue................................................. $ 6,652 $ 10,417 $ 14,986
Service and maintenance revenue................................. 557 1,520 3,859
--------- --------- ---------
Total revenue................................................. 7,209 11,937 18,845
--------- --------- ---------
Cost of revenue:
Cost of license revenue......................................... 693 1,048 1,276
Cost of service and maintenance revenue......................... 331 1,123 1,663
--------- --------- ---------
Total cost of revenue......................................... 1,024 2,171 2,939
--------- --------- ---------
Gross profit.................................................. 6,185 9,766 15,906
--------- --------- ---------
Operating expenses:
Product development............................................. 2,109 3,204 5,548
Sales and marketing............................................. 2,652 4,880 8,234
General and administrative...................................... 780 1,487 2,204
--------- --------- ---------
Total operating expenses...................................... 5,541 9,571 15,986
--------- --------- ---------
Income (loss) from operations................................. 644 195 (80)
Other income (expense), net....................................... 4 (10) 91
--------- --------- ---------
Income before income taxes.................................... 648 185 11
Income tax expense (benefit)...................................... 80 106 (24)
--------- --------- ---------
Net income.................................................... $ 568 $ 79 $ 35
--------- --------- ---------
--------- --------- ---------
Net income per common share....................................... $ 0.14 $ 0.02 $ 0.01
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculation.............................. 4,154 5,009 6,045
Pro forma net income data (unaudited):
Income before income taxes, as reported......................... $ 648
Pro forma income tax expense.................................... 142
---------
Pro forma net income.......................................... $ 506
---------
---------
Pro forma net income per common share (unaudited)................. $ 0.12
---------
---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDER RETAINED CUMULATIVE TOTAL
--------------- PAID-IN NOTE EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) ADJUSTMENT EQUITY
------ ------ ---------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993........... 3,342 $ 3 $ 612 $ -- $ (158) $ -- $ 457
Issuance of common stock................ 83 -- 24 (13) -- -- 11
Dividends paid.......................... -- -- -- -- (500) -- (500)
Net income.............................. -- -- -- -- 568 -- 568
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1994........... 3,425 3 636 (13) (90) -- 536
Issuance of common stock................ -- -- 4 -- -- -- 4
Net income.............................. -- -- -- -- 79 -- 79
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1995........... 3,425 3 640 (13) (11) -- 619
Exercise of stock options............... 230 1 36 -- -- -- 37
Net income.............................. -- -- -- -- 35 -- 35
Foreign currency translation
adjustment............................. -- -- -- -- -- (23) (23)
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1996........... 3,655 $ 4 $ 676 $ (13) $ 24 $ (23) $ 668
------ ------ ---------- ----------- --------- ----------- -----
------ ------ ---------- ----------- --------- ----------- -----
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income........................................................... $ 568 $ 79 $ 35
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization...................................... 266 514 807
Loss on disposal of equipment...................................... -- 23 --
Changes in assets and liabilities:
Accounts receivable.............................................. (618) (1,115) (2,385)
Prepaid expenses and other current assets........................ (105) (54) (661)
Deferred income taxes............................................ -- (80) (28)
Other noncurrent assets.......................................... (54) (16) (72)
Accounts payable and accrued expenses............................ 610 440 254
Deferred revenue................................................. 462 702 1,530
--------- --------- ---------
Net cash from operating activities............................. 1,129 493 (520)
--------- --------- ---------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment........................ (368) (326) (2,040)
(Purchase) maturity of short-term investments........................ (344) 344 --
Payments for software rights......................................... (174) -- --
--------- --------- ---------
Net cash from investing activities............................. (886) 18 (2,040)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term obligations.................................... (162) (313) (296)
Dividends paid....................................................... (500) -- --
Net proceeds from issuance of mandatorily redeemable preferred
stock............................................................... 941 199 3,524
Proceeds from issuance of common stock............................... 11 4 --
Proceeds from exercise of stock options.............................. -- -- 37
--------- --------- ---------
Net cash from financing activities............................. 290 (110) 3,265
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents........... -- -- (1)
--------- --------- ---------
Net change in cash and cash equivalents........................ 533 401 704
Cash and cash equivalents at beginning of period....................... 76 609 1,010
--------- --------- ---------
Cash and cash equivalents at end of period............................. $ 609 $ 1,010 $ 1,714
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................... $ 9 $ 53 $ 37
Cash paid for taxes.................................................. 18 258 106
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment financed by capital lease obligations....... 46 346 375
Purchase of software rights financed by long-term debt............... 445 -- --
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Rogue Wave Software, Inc. (the Company) was founded in 1989 and is primarily
engaged in the development, sale and support of object-oriented software parts
and related tools. As more fully discussed in note 2, the Company acquired
Inmark Development Corporation (Inmark) in a transaction accounted for as a
pooling of interests effective October 27, 1995. Financial statements for the
periods prior to the merger have been restated to reflect the combined amounts
for the Company and Inmark.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Rogue Wave Software GmbH (incorporated
January 1996) and Inmark. The Company translates the accounts of its foreign
subsidiary using the local foreign currency as the functional currency. All
significant intercompany balances and transactions have been eliminated in
consolidation.

CASH EQUIVALENTS

Cash equivalents consist of investments in highly liquid investment
instruments with original maturities of three months or less to the Company.

ACCOUNTS RECEIVABLE

Accounts receivable are shown net of allowance for doubtful accounts of $251
and $107 at September 30, 1995 and 1996, respectively.

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. Maintenance and
repairs are expensed as incurred. Equipment under capital leases is stated at
the present value of future minimum lease payments at the inception of the
lease.

Depreciation of furniture, fixtures and equipment is calculated on the
straight-line method over the estimated useful lives of the assets ranging from
three to seven years. Equipment held under capital leases is amortized
straight-line over the shorter of the lease term or estimated useful lives of
the assets.

INTANGIBLE ASSETS

Other noncurrent assets include purchased software rights and a covenant not
to compete, which are amortized over three years using the straight-line method.
Original cost of these intangibles was $670 at September 30, 1995 and 1996.
Accumulated amortization at September 30, 1995 and 1996 was $341 and $562,
respectively. Amortization charged to expense was $106, $224 and $221 for the
years ended September 30, 1994, 1995 and 1996, respectively.

REVENUE RECOGNITION

License revenue is recognized at the time of shipment. Revenue from service
contracts sold in conjunction with product sales is also recognized at the time
of sale. The service contracts generally are for thirty days.

Maintenance and service revenue includes maintenance revenue which is
recognized ratably over the maintenance period and revenue from training and
consulting services, which is recognized as services are performed.

The Company generally provides a thirty-day right of return policy for
software sales. The allowance for returns was $111 at September 30, 1995 and
1996.

F-7
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
accounts receivable. Management believes the credit risk associated with cash
and cash equivalents is minimal. At September 30, 1996, one customer accounted
for approximately 11% of accounts receivable.

The Company sells its products primarily to major corporations that serve a
wide variety of U.S. and foreign markets. International revenue accounted for
approximately 19% of the Company's total revenue in 1996.

RESEARCH AND DEVELOPMENT

Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company begins capitalization upon completion of a working model. To date, such
capitalizable costs have not been material. Accordingly, the Company has charged
all such costs to product development expense. Future capitalized costs, if any,
will be amortized on a straight-line basis over the estimated life of the
products or the ratio of current revenue to the total of current and anticipated
future revenue, whichever expense is greater.

INCOME TAXES

Prior to July 1, 1994, the Company was taxed under the S Corporation
provisions of the Internal Revenue Code. Under those provisions, the Company did
not pay federal or state corporate income taxes on its taxable income. Instead,
the stockholders were liable for federal and state income taxes on the Company's
taxable income.

Effective June 30, 1994, the S Corporation election was terminated. The
Company's income taxes since that date, as well as unaudited pro forma and
Inmark income taxes for all periods presented, have been provided for under
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES
(SFAS No. 109). SFAS No. 109 is an asset and liability approach that requires
deferred tax assets and liabilities to be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

COMPUTATION OF NET INCOME PER SHARE

Net income per share is computed using the weighted average number of shares
of common and common equivalent shares outstanding. Common equivalent shares are
excluded from the computation if their effect is antidilutive, except that
pursuant to the Securities and Exchange Staff Accounting Bulletins, common and
common equivalent shares issued at prices below the public offering price during
the twelve months immediately preceding the initial filing date have been
included in the calculation as if they were outstanding for all periods
presented using the treasury stock method and the initial public offering price.
Common equivalent shares consist of the common shares issuable upon the
conversion of the Series A preferred stock (using the if-converted method) and
incremental shares issuable upon the exercise of stock options and upon the
conversion of the Series B preferred stock (using the treasury stock method).

FINANCIAL INSTRUMENTS

The recorded amounts of financial instruments approximate their fair market
values.

F-8
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

(2) MERGER
On October 27, 1995, the Company acquired all of the common stock of Inmark
in exchange for 878 shares of the Company's common stock in a transaction
accounted for as a pooling of interests. Inmark was a privately held corporation
specializing in the development, distribution and support of object-oriented
graphical user interface library software. The Company's consolidated financial
statements and notes to consolidated financial statements have been restated to
include the results of Inmark for all periods presented.

Separate results of operations for the periods prior to the merger are as
follows:

<TABLE>
<CAPTION>
THE COMPANY INMARK COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Year ended September 30, 1994:
Total revenue.................................................... $ 4,570 $ 2,639 $ 7,209
Net income....................................................... 528 40 568
Year ended September 30, 1995:
Total revenue.................................................... 8,663 3,274 11,937
Net income (loss)................................................ 349 (270) 79
One month ended October 31, 1995:
Total revenue.................................................... 835 237 1,072
Net income (loss)................................................ (58) 16 (42)
</TABLE>

Merger costs of $120 were incurred and charged to expense in the first
quarter of 1996 for services rendered to facilitate completion of the
transaction.

(3) BALANCE SHEET COMPONENTS

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
------ ---------
<S> <C> <C>
Computer equipment....................... $1,213 $ 3,257
Furniture, fixtures and equipment........ 179 550
------ ---------
1,392 3,807
Less accumulated depreciation and
amortization............................ 503 1,089
------ ---------
Furniture, fixtures and equipment,
net................................... $ 889 $ 2,718
------ ---------
------ ---------
</TABLE>

Depreciation expense for the years ended September 30, 1994, 1995, and 1996
was $160, $262 and $586, respectively.

F-9
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(3) BALANCE SHEET COMPONENTS (CONTINUED)
ACCRUED EXPENSES

The Company's accrued expenses include the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1995 1996
---- ----
<S> <C> <C>
Accrued payroll and related
liabilities............................. $316 $471
Other accrued expenses................... 352 334
---- ----
Accrued expenses....................... $668 $805
---- ----
---- ----
</TABLE>

(4) LEASES
The Company leases certain of its office space through noncancelable
operating lease arrangements. The leases expire 1997 through 2001 and are net
leases with the Company paying all executory costs, including insurance,
utilities and maintenance. Rent expense for operating leases during the years
ended September 30, 1994, 1995 and 1996 was $157, $210 and $566, respectively.

Property under capital leases at September 30, 1995 and 1996 is as follows:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Computer equipment........................................ $388 $750
Office furniture and equipment............................ 26 39
---- ----
Total................................................... 414 789
Less accumulated amortization............................. 112 282
---- ----
Property under capital leases, net...................... $302 $507
---- ----
---- ----
</TABLE>

Amortization expense is included in depreciation expense for furniture,
fixtures and equipment.

Future minimum lease payments under capital and operating leases (with
initial or remaining lease terms in excess of one year) and the present value of
future minimum capital lease payments are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
Year ending September 30:
1997............................................ $248 $ 606
1998............................................ 217 700
1999............................................ 121 650
2000............................................ 4 259
2001............................................ -- 156
------- ---------
Total minimum lease payments.................. 590 $2,371
---------
---------
Less amounts representing interest................ 51
-------
Present value of future minimum lease
payments..................................... 539
Less current portion.............................. 217
-------
Obligations under capital leases, less current
portion...................................... $322
-------
-------
</TABLE>

F-10
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(5) LONG-TERM DEBT
Long-term debt consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
Note payable to bank, secured by all accounts
receivable, inventory and equipment, payable in
monthly installments of $3, including interest at
9.5%, due February 1996, guaranteed by certain
stockholders...................................... $ 17
Notes payable in installments of $150 and $125, due
July 1, 1995 and July 1, 1996, respectively,
noninterest bearing (less unamortized discount of
$19 at September 30, 1995, based on imputed
interest rate of 8.75%)........................... 106
---
123
Less current portion of long-term debt............. 123
---
Long-term debt, less current portion............. $ --
---
---
</TABLE>

(6) INCOME TAXES
As described in note 1, the Company was taxed as an S Corporation through
June 30, 1994. Pro forma figures for 1994 are presented to show the impact as if
the Company's earnings from continuing operations had been subject to federal
and state income taxes as a C Corporation in that year. Actual figures for 1994
and all remaining periods presented reflect the Company's taxes as a C
Corporation effective July 1, 1994 and Inmark's taxes as a C Corporation.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1994 1994 1995 1996
--- ------------- --------- ---------
(UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C> <C>
Current:
Federal..................................................... $ 62 $ 154 $ 142 $ --
State and local............................................. 18 42 44 4
--
--- --- ---------
80 196 186 4
--
--- --- ---------
Deferred:
Federal..................................................... -- (37) (49) (22)
State and local............................................. -- (17) (31) (6)
--
--- --- ---------
-- (54) (80) (28)
--
--- --- ---------
Total..................................................... $ 80 $ 142 $ 106 $ (24)
--
--
--- --- ---------
--- --- ---------
</TABLE>

F-11
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(6) INCOME TAXES (CONTINUED)
Income tax expense differs from the expected tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to net income before
income taxes) as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1994 1995 1996
--------- ------------- --------- ---------

<CAPTION>
(UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C> <C>
Computed expected income tax expense........................................ $ 220 $ 220 $ 63 $ 4
Increase (reduction) in income tax expense resulting from:
State income tax expense.................................................. 14 32 1 3
Research and experimentation credit....................................... (57) (152) (110) (108)
Change in valuation allowance............................................. 16 16 120 43
Rate differential......................................................... -- -- 14 --
Exclusion of earnings for period that S Corporation election was valid.... (121) -- -- --
Non-deductible meals and entertainment.................................... 3 4 9 14
Other, net................................................................ 5 22 9 20
--- --- --------- ---------
Income tax expense (benefit)............................................ $ 80 $ 142 $ 106 $ (24)
--- --- --------- ---------
--- --- --------- ---------
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1995 1996
----- -----
Deferred tax assets:
<S> <C> <C>
Intangible assets.............................. $ 25 $ 37
Accrued expenses............................... 142 95
Net operating loss carryforwards............... 171 74
Foreign operating loss carryforwards........... -- 66
Research and experimentation credit
carryforward.................................. 120 217
Other.......................................... 3 14
----- -----
Total gross deferred tax assets.............. 461 503
Valuation allowance............................ (314) (357)
----- -----
Net deferred tax assets...................... 147 146
Deferred tax liabilities:
Cash to accrual adjustment..................... 27 18
Property and equipment, due to differences in
depreciation.................................. 40 20
----- -----
Total gross deferred tax liabilities......... 67 38
----- -----
Net deferred taxes........................... $ 80 $ 108
----- -----
----- -----
</TABLE>

At September 30, 1996, the Company had net operating loss carryforwards for
federal, state and foreign income tax purposes of $186, $172 and $136,
respectively. The federal net operating losses expire 2007 to 2010 and the state
net operating loss expires in 2000. The Company also had $217 of tax credit
carryforwards that expire 2003 to 2011. The net operating loss and $120 of the
tax credit carryforwards were generated by Inmark prior to Inmark's merger with
the Company on October 27, 1995. As a result, utilization of all such amounts
are limited by the future taxable income of Inmark.

F-12
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(7) PREFERRED STOCK
The Company has 2,350 shares of preferred stock authorized at September 30,
1996. The stock has a par value of $.001 and was issued in mandatorily
redeemable Series A and Series B (Series A and B). The terms of the Series A and
B preferred stock are:

- Each share of Series A and B preferred stock is voting and convertible
into common stock using formulas specified in the Series A and B Preferred
Stock Purchase Agreements. Series A and B preferred stockholders have
non-cumulative dividend rights at the rate of $.09 per share and $.48 per
share, respectively, payable in preference and priority to common stock.
Upon liquidation, Series A and B preferred stockholders are entitled to be
paid out of the assets of the Company which are available for distribution
to its stockholders before any payment is made to common stockholders.
Series A and B preferred stockholders will receive an amount equal to
$1.50 per share and $4.76 per share, respectively, plus all related
declared and unpaid dividends.

- There is an automatic conversion of Series A and B preferred stock into
shares of common stock upon the affirmative vote of the holders of at
least 75% of the outstanding shares of the Series A and B preferred stock,
or immediately upon the closing of a firmly underwritten public offering
pursuant to an effective registration statement under the Securities Act
of 1933, as amended, covering the offer and sale of the Company's common
stock that results in gross cash proceeds of at least $10,000 and that has
a public offering price of at least $9.51 per share.

Other rights and restrictions of Series A and B preferred stockholders are
as follows:

- Redemption rights upon demand of at least a majority of the then
outstanding shares of Series A and B preferred stock in three equal annual
installments beginning on May 15, 1999 and ending on May 15, 2001. The
redemption rights provide for redemption rates identical to the
liquidation rates described above.

- Shares are subject to an Investors' Rights Agreement which provides for
the registration of the shares under the Securities Act of 1933 under
certain circumstances.

- Shares are subject to a Co-Sale and Voting Agreement which obligates the
Series A and B preferred stockholders to vote in a certain manner with
regard to the election of the Board members and which grants to preferred
stockholders and common "key stockholders" the opportunity to participate
on a pro-rata basis in subsequent sales of the common or preferred stock
of the Company made by each stockholder subject to this Agreement.

(8) EQUITY INCENTIVE PLAN
In June 1996, the Company's Board of Directors adopted the 1996 Equity
Incentive Plan (the Equity Incentive Plan). The Company has reserved 3,000
shares of common stock for issuance under the Equity Incentive Plan. The Equity
Incentive Plan replaces the Company's 1994 Stock Option Plan and the Inmark
Stock Option Plan.

The Equity Incentive Plan provides for grants of stock options to employees
(including officers and employee directors) and nonstatutory stock options to
employees (including officers and employee directors), directors and consultants
of the Company. The Equity Incentive Plan is administered by the Board of
Directors of a committee appointed by the Board, which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award and the exercisability thereof.

The terms of a stock option granted under the Equity Incentive Plan
generally may not exceed ten years (five years in the case of holders of more
than 10% of the Company's capital stock). The exercise price of options

F-13
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(8) EQUITY INCENTIVE PLAN (CONTINUED)
granted under the Equity Incentive Plan is determined by the Board of Directors
but, in the case of an incentive stock option, cannot be less than 100% of the
fair market value of the common stock on the date of grant. Options granted
under the Equity Incentive Plan vest at the rate specified in the option
agreement.

The following table summarizes stock option activity through September 30,
1996:

<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------
QUALIFIED NONQUALIFIED
INCENTIVE STOCK
OPTIONS OPTIONS TOTAL PRICE PER SHARE
--------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Outstanding options at September 30, 1993.... 103 -- 103 $ .39-1.94
Granted...................................... 1,085 -- 1,085 .15-1.94
Exercised.................................... -- -- -- --
Canceled..................................... -- -- -- --
--------- ----- ----- ---------------
Outstanding options at September 30, 1994.... 1,188 -- 1,188 .15-1.94
Granted...................................... 447 13 460 .15-1.94
Exercised.................................... -- -- -- --
Canceled..................................... (267) -- (267) .15
--------- ----- ----- ---------------
Outstanding options at September 30, 1995.... 1,368 13 1,381 .15-1.99
Granted...................................... 441 113 554 .53-7.50
Exercised.................................... (230) -- (230) .15-1.94
Canceled..................................... (255) -- (255) .15-6.76
--------- ----- ----- ---------------
Outstanding options at September 30, 1996.... 1,324 126 1,450 $ .15-7.50
--------- ----- ----- ---------------
--------- ----- ----- ---------------
</TABLE>

Of the 1,450 options outstanding, 446 options were vested and exercisable as
of September 30, 1996.

(9) EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board adopted the Employee Stock Purchase Plan (the
Purchase Plan) covering an aggregate of 350 shares of common stock. The Purchase
Plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code. Under the Purchase Plan,
the Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the Purchase
Plan. The offering period for any offering will be no more than 27 months.

Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specific dates determined by the
Board of Directors, to the purchase of shares of common stock. The price of
common stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the common stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.

(10) STOCK RESTRICTION AGREEMENTS
The Company has entered into stock restriction agreements with certain
stockholders which restrict the sale or transfer of "unvested shares" (shares
vest 50% on or after July 1, 1994, plus an additional 1.388% on or after the
first day of each full month thereafter; shares are 100% vested on or after July
1, 1997).

F-14
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(10) STOCK RESTRICTION AGREEMENTS (CONTINUED)
These agreements also give the Company the option to purchase stockholders'
unvested shares under certain conditions at prices determined according to terms
specified in the agreements.

These stock restriction agreements terminate upon the earlier to occur of
the following events:

- Consummation of the Company's sale of its common stock in a firm
commitment underwritten public offering pursuant to a registration
statement filed under the Securities Act of 1933, as amended, which
results in aggregate offering proceeds paid to the Company of at least
$7,500 and a public offering price of at least $11.25 per share (as
adjusted for subsequent stock dividends, stock splits and
recapitalizations) (see note 13); or

- The stockholder no longer holds any unvested shares.

(11) QUALIFIED PROFIT SHARING PLAN
The Company adopted a 401(k) profit sharing plan in January 1993. The plan
is offered to eligible employees and calls for a discretionary employer match of
employee contributions which is approved by the Board of Directors. To
participate in the plan, employees must be 21 years of age, have been employed
for 90 days, and work a minimum of 1,000 hours during the plan year. The Company
matches all employee contributions up to 3 percent of earnings and half of
employee contributions from 3 percent to 5 percent. Company contributions paid
in the years ended September 30, 1994, 1995 and 1996, were $49, $31 and $118,
respectively.

(12) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

(13) SUBSEQUENT EVENTS

The Company approved a 2 for 3 reverse stock split in October 1996. All
share and per share amounts have been restated to reflect the reverse split.

In October 1996, the Company entered into a secured equipment term loan for
$1.0 million. The loan bears an interest rate equal to the prime rate. Interest
is payable monthly and principal is payable in 42 equal monthly installments
beginning in March 1997. The loan contains certain financial covenants that
require the Company to maintain a specified minimum tangible net worth and term
liquidity coverage ratios and restrict the Company's ability to incur additional
indebtedness, pay cash dividends on its capital stock and merge or consolidate
with another corporation.

F-15
<PAGE>
THE SOFTWARE PARTS COMPANY [COMPANY LOGO]
FACTORIES FOR BUILDING C++ AND JAVA-TM- APPLICATIONS

[GRAPHIC DEPICTING SCREENS FROM THE COMPANY'S ZAPP FACTORY, DBFACTORY AND
JFACTORY PRODUCTS, INCLUDING TEXT NEXT TO THE ZAPP FACTORY SCREEN "BUILD CROSS
PLATFORM, NATIVE C++ GUI'S, DRAWING ON HUNDREDS OF PRE-BUILT CLASSES," TEXT NEXT
TO THE DBFACTORY SCREEN "GENERATE C++ CLASSES THAT MAP TO DATA IN AN RDBMS, AND
TEXT NEXT TO THE JFACTORY SCREEN "BUILD JAVA APPLICATIONS QUICKLY WITH THIS
INTUITIVE, DRAG-AND-DROP DESIGNER."]
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 5
Use of Proceeds...................................... 13
Dividend Policy...................................... 13
Capitalization....................................... 14
Dilution............................................. 15
Selected Consolidated Financial Data................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
Business............................................. 23
Management........................................... 34
Certain Transactions................................. 40
Principal and Selling Stockholders................... 42
Description of Capital Stock......................... 43
Shares Eligible for Future Sale...................... 45
Legal Proceedings.................................... 46
Underwriting......................................... 47
Legal Matters........................................ 48
Experts.............................................. 48
Additional Information............................... 49
Index to Consolidated Financial Statements........... F-1
</TABLE>

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UNTIL DECEMBER 16, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,450,000 SHARES

[LOGO]

COMMON STOCK

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PROSPECTUS
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HAMBRECHT & QUIST

WESSELS, ARNOLD & HENDERSON

NOVEMBER 21, 1996

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