ACTUATE SOFTWARE CORP, S-1/A, 1998-07-06

ACTUATE SOFTWARE CORP
S-1/A, 1998-07-06
PREPACKAGED SOFTWARE

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 6, 1998.
REGISTRATION NO. 333-55741

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
ACTUATE SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 7372 94-3193197
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

---------------
999 BAKER WAY, SUITE 270
SAN MATEO, CALIFORNIA 94404
(650) 425-2300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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NICOLAS C. NIERENBERG
CHIEF EXECUTIVE OFFICER
999 BAKER WAY, SUITE 270
SAN MATEO, CALIFORNIA 94404
(650) 425-2300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

---------------
COPIES TO:
ROBERT V. GUNDERSON, JR. DONALD M. KELLER, JR.
JEFFREY P. HIGGINS GLEN R. VAN LIGTEN
WILLIAM E. GROWNEY, JR. SANJAY K. KHARE
JOHN F. DIETZ WENDY M. PIZARRO
GUNDERSON DETTMER STOUGH VENTURE LAW GROUP
VILLENEUVE FRANKLIN & A PROFESSIONAL CORPORATION
HACHIGIAN, LLP 2800 SAND HILL ROAD
155 CONSTITUTION DRIVE MENLO PARK, CA 94025
MENLO PARK, CA 94025 (650) 854-4488
(650) 321-2400

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JULY 6, 1998

3,000,000 SHARES

[LOGO OF ACTUATE]

COMMON STOCK
(PAR VALUE $0.001 PER SHARE)

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Of the 3,000,000 shares of Common Stock offered hereby 2,890,000 shares are
being sold by Actuate Software Corporation (the "Company") and 110,000 shares
are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders". The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders.

Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $9.00 and $11.00 per share. For factors to be considered
in determining the initial public offering price, see "Underwriting".

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.

Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ACTU".

-----------

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>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT (1) COMPANY (2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total (3).......... $ $ $ $
</TABLE>
- -----

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deducting estimated expenses of $725,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted the Underwriters an
option for 30 days to purchase up to an additional 450,000 shares at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments, if any. If such option is exercised in
full, the total initial public offering price, underwriting discount,
proceeds to Company and proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Principal and Selling Stockholders"
and "Underwriting".

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The shares offered hereby are offered severally by the Underwriters as stated
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that the shares will be
ready for delivery through the facilities of DTC in New York, New York, on or
about , 1998, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON

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The date of this Prospectus is , 1998.
<PAGE>

ACTUATE REPORTING SYSTEM GRAPHIC

Description: Graphic illustration of boxes representing each of Actuate's
potential end users connected by a cloud representing the Internet to a
graphic illustration of boxes representing various applications and data
sources including: Human Resources, Legacy Systems, Data Warehouse, Multi-
Dimensional Data, E-Commerce, Sales & Marketing, Enterprise Resource Planning,
Internal Applications and Customer Information Systems.

Header: Meeting the Information Needs of the Enterprise.

Caption: Enterprise Reporting: Enterprise reporting solutions enable
organizations to efficiently extract, publish and disseminate corporate data
throughout the enterprise in both client/server and Internet environments.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE>

ENTERPRISE REPORTING GRAPHIC

Description: Graphic illustration consisting of boxes representing the
Company's products connected in the center of the graphic by a cloud
representing the Internet. Computer screenshots of Actuate Reporting System
reports utilized by the following companies appear to the right of the
graphic: Anthem Blue Cross and Blue Shield of Connecticut, Netscape,
PeopleSoft, Siebel and Vantive. Logos of the following companies appear at the
bottom on the graphic: Ariba, Ascend, Brio, Cambridge Technology Partners,
Clarify, PointCast, Portal, Prism Solutions, and Progress Software.

Header: A Leader in Enterprise Reporting

Left Graphic Captions

Caption: Actuate Architecture. The Actuate Reporting System is a server-
centric suite of products for developing, administering, viewing and
distributing reports via the Internet to users across an enterprise.

Caption: Actuate's ReportCast Channels focus the delivery of corporate
content to an organization's employees, customers and partners. Users are
notified when reports become available and can click on the headline to view
the report in its entirety.

Caption: Actuate Reporting System can generate HTML reports that resemble
standard Internet pages. These HTML reports can include graphs, GIF images,
standard URL links, and Java applets.

Caption: Actuate's Report Encyclopedia organizes reports and components into
hierarchial folders for simplified access.

Right Graphic Caption

Caption: Selected Customers. Actuate's customers span a wide variety of
industries and include some of the largest financial services,
telecommunications and health care companies. Actuate's partners include
vendors of some of the most widely deployed Enterprise Resource Planning,
Customer Asset Management, Sales Force Automation and Internet applications.

Screenshot Captions

Anthem
Caption: Anthem Blue Cross and Blue Shield of Connecticut utilizes the
Actuate Reporting System to provide its insurance analysts with summary and
detailed reports, which can be further customized by the analyst.

Netscape
Caption: Netscape's ECXpert, an Internet commerce solution, has been
combined with the Actuate Reporting System to enable the secure and efficient
distribution of transactional summaries and business data to Internet-based
customers all over the world.

PeopleSoft
Caption: PeopleSoft has embedded the Actuate Reporting System into its
applications in order to provide its customers with rapid response report
viewing and the ability to efficiently and securely distribute reports via the
Internet.

Siebel
Caption: Siebel 98 has been seamlessly integrated with the Actuate Reporting
System to provide Siebel customers with an interactive, easy-to-use and highly
scalable enterprise reporting solution that offers end users immediate access
to sales, marketing and customer information.

Vantive
Caption: Vantive embeds the Actuate Reporting System to provide companies
with a unified, strategic view of their customers, by compiling information
from front-office applications - sales, marketing, call center and field
service - into a single report that can be easily distributed via the
Internet.
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. 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" and elsewhere in this
Prospectus.

Unless otherwise indicated, the information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) reflects, except in
the Financial Statements, the conversion of all outstanding shares of Preferred
Stock into Common Stock upon completion of the offering, and (iii) assumes the
reincorporation of the Company from California to Delaware before the effective
date of this offering, and the associated changes in the Company's charter
documents.

THE COMPANY

Actuate Software Corporation is a leading provider of enterprise reporting
solutions that enable organizations to systematically extract, publish and
disseminate information across distributed computing environments. The Company
develops and markets software products that are designed to allow companies to
rapidly design, generate and distribute reports throughout the enterprise,
thereby increasing access to and the value of corporate data. Actuate's
products have been adopted in a wide variety of industries, including financial
services, telecommunications, technology, health care and others. Actuate's
customers include companies such as Chase Manhattan, Concert Communications,
Manpower, Merck and Toyota Motor Sales, USA. The Company has also established
strategic relationships with a number of enterprise application vendors,
including PeopleSoft, Siebel and Vantive, all of which embed the Company's
products as part of or as their entire standard reporting solution.

To succeed in today's increasingly competitive market, businesses must
accelerate the rate at which they identify and respond to changing business
conditions. An organization's success is, to a large extent, dependent upon its
ability to rapidly collect, organize and distribute information to make
effective business decisions. Reports are the primary means in virtually all
organizations by which critical business information is distributed and used by
employees, customers and suppliers. Other products such as On-line Analytical
Processing ("OLAP") and query tools generally serve as supplements to core
reporting systems and are only utilized by a small number of users for very
distinct and specialized data analysis. Historically, most reports have been
paper-based, designed using legacy computer languages such as COBOL and
delivered to users through physical means such as handcarts, inter-office mail
and the postal service.

Over the past decade, there has been a dramatic migration of critical
corporate information from mainframe computer systems to distributed computing
environments. This transition has been driven largely by the widespread
emergence and adoption of enterprise software applications, data warehouses,
corporate intranets and the Internet. Due to this fundamental shift in the way
corporations store and manage data, IT departments are now faced with the
challenge of providing users with secure access to business information
residing in a broad range of distributed systems. The Company believes
traditional reporting methods have not kept pace with the technological
advancements in application software and relational databases. As a result, it
has been extremely difficult for businesses to report information from these
systems efficiently, uniformly and securely across a single platform to users
within and outside of the organization.

3
<PAGE>

Due to the shortcomings of traditional reporting methods, the Company
believes organizations will increasingly adopt enterprise reporting solutions
which allow for the dissemination of information across distributed computing
environments. IDC estimates the market for such enterprise reporting solutions
will grow to over $900 million by the year 2002.

The Actuate Reporting System is a scalable, dynamic reporting platform which
is designed to allow organizations to replace traditional paper-based and on-
line reports with Live Report Documents. Live Report Documents feature rich
interactive capabilities, including hyperlinks, context-sensitive help, a
dynamic table of contents, and a report query feature. Architected specifically
to leverage the functionality of the Internet, the Actuate Reporting System is
designed to make reports accessible to an organization's employees, customers
and suppliers via corporate intranets and the Internet. Actuate's ReportCast
technology can be integrated with Internet or intranet web sites, making it
easier for organizations to notify users when corporate information is
available. The Actuate Reporting System also facilitates off-line analysis of
reports.

The Actuate Reporting System's server-centric architecture provides the
building blocks for an enterprise reporting environment of any size. Actuate's
open environment allows developers to create reports from virtually any data
source and in virtually any format required by end-users. The Actuate Report
Encyclopedia acts as a repository for reports and report components. Actuate's
Virtual Report Distribution technology reduces network traffic by minimizing
the movement of large reports and data sets. The Actuate Developer Workbench is
designed to give developers a complete visual environment for designing,
compiling, viewing and debugging sophisticated report designs. The Company
began shipping its Actuate Reporting System in January 1996, and the Company's
most recent version of the Actuate Reporting System, Version 3.1, began
shipping in May 1998.

The Company's strategy is to be the leading provider of enterprise reporting
solutions. Key elements of Actuate's strategy include (i) expanding its market
leadership position by establishing strategic relationships with the leading
enterprise application vendors, consulting firms and systems integrators, (ii)
extending its technology leadership through internal research and development
and integration of acquired technologies, (iii) broadening its domestic and
international distribution channels, and (iv) increasing its international
presence through expanded distribution and product localization.

The address of the Company's principal executive offices is 999 Baker Way,
Suite 270, San Mateo, California 94404 and its telephone number is (650) 425-
2300. The Company will reincorporate in Delaware prior to the closing of this
offering. Unless otherwise indicated, all references in this Prospectus to the
"Company" or "Actuate" refer to Actuate Software Corporation, a Delaware
corporation, and its California predecessor. Actuate and the Company's logo are
registered trademarks of the Company and Report Encyclopedia, ReportCast, Live
Report Document, Live Report Extension and Virtual Report Distribution are
trademarks of the Company. All other trademarks, service marks or trade names
referred to in this Prospectus are the property of their respective owners.

4
<PAGE>

THE OFFERING

Common Stock offered by the 2,890,000 shares
Company............................

Common Stock offered by Selling 110,000 shares
Stockholders.......................

Common Stock to be outstanding 13,376,017 shares(1)
after the offering.................

Use of Proceeds..................... For general corporate purposes, including
working capital and capital expenditures.
See "Use of Proceeds".

Proposed Nasdaq National Market "ACTU"
Symbol..............................

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

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees..................... $ -- $ 343 $ 7,542 $ 1,095 $ 3,190
Services......................... 22 308 1,976 284 873
------- ------- ------- ------- -------
Total revenues................. 22 651 9,518 1,379 4,063
------- ------- ------- ------- -------
Costs of revenues:
License fees..................... -- 171 647 103 280
Services......................... 53 305 1,263 195 730
------- ------- ------- ------- -------
Total cost of revenues......... 53 476 1,910 298 1,010
------- ------- ------- ------- -------
Gross profit (loss)............... (31) 175 7,608 1,081 3,053
Operating expenses:
Sales and marketing.............. 847 2,965 7,366 1,043 2,715
Research and development......... 1,883 2,731 6,213 926 1,674
General and administrative....... 240 603 1,317 140 556
------- ------- ------- ------- -------
Total operating expenses....... 2,970 6,299 14,896 2,109 4,945
------- ------- ------- ------- -------
Loss from operations.............. (3,001) (6,124) (7,288) (1,028) (1,892)
Equity in losses of affiliate and
write down of loans to affiliate. -- (25) (142) -- --
Interest and other income
(expense), net................... 166 90 82 (2) 22
------- ------- ------- ------- -------
Net loss.......................... $(2,835) $(6,059) $(7,348) $(1,030) $(1,870)
======= ======= ======= ======= =======
Pro forma basic and diluted net
loss per share(1)................ $ (0.82) $ (0.19)
======= =======
Shares used in computing pro forma
basic and diluted net loss per
share(1)......................... 8,940 9,786
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED(2)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $2,386 $28,538
Working capital (deficit).............................. (5,333) 20,819
Total assets........................................... 6,785 32,937
Long-term obligations.................................. 102 102
Stockholders' equity (deficit)......................... (4,134) 22,018
</TABLE>
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(1) Based on the number of shares outstanding as of March 31, 1998. Excludes
(i) 905,450 shares of Common Stock issuable upon the exercise of
outstanding stock options under the Company's 1994 Stock Option Plan as of
March 31, 1998 at a weighted average exercise price of approximately $1.26
per share, (ii) 1,300,000 shares of Common Stock reserved for issuance
under the Company's 1998 Equity Incentive Plan, (iii) 250,000 shares of
Common Stock reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan and (iv) 200,000 shares of Common Stock reserved for issuance
under the Company's 1998 Non-Employee Directors Option Plan. See
"Management--Stock Plans" and Notes 8 and 10 of Notes to Financial
Statements.
(2) Adjusted to reflect the sale of shares of Common Stock by the Company at an
assumed initial public offering price of $10.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization".

5
<PAGE>

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 this
section and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; LACK OF PROFITABILITY

The Company incurred net losses of $6.1 million and $7.3 million in fiscal
1996 and 1997, respectively, and $1.9 million for the three months ended March
31, 1998. As of March 31, 1998, the Company had an accumulated deficit of
approximately $18.9 million and a working capital deficit of approximately
$5.3 million. Given the Company's history of net losses, there can be no
assurance of revenue growth or profitability on a quarterly or annual basis in
the future. While the Company achieved significant quarter-to-quarter revenue
growth in fiscal 1997 and in the three months ended March 31, 1998, there can
be no assurance that the Company's revenues will increase in future periods.
In addition, the Company intends to increase its operating expenses
significantly in future periods; therefore, the Company's operating results in
the future will be adversely affected if revenues do not increase. Future
operating results will depend on many factors, including, among others, demand
for and acceptance of the Company's products and services, including ongoing
acceptance of maintenance and other services purchased by existing customers,
continued successful relationships and the establishment of new relationships
with enterprise application vendors, the level of product and price
competition from existing and new competitors, the ability of the Company to
control costs and to develop, market and deploy new products, the ability of
the Company to expand its direct sales force and indirect distribution
channels both domestically and internationally, the Company's success in
attracting and retaining key personnel, the growth of the market for
enterprise reporting and the ability of the Company to successfully integrate
technologies and businesses it may acquire in the future. The Company was
founded in November 1993 and began shipping its Actuate Reporting System in
January 1996. Accordingly, the Company has a limited operating history on
which to base an evaluation of its business and prospects. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in rapidly evolving markets. There can be no assurance
that the Company will be successful in addressing such risks, and the failure
to do so would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's limited operating history and the susceptibility of the
Company's operating results to significant fluctuations makes any prediction
of future operating results unreliable. In addition, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's operating results have in the past, and may in the future, vary
significantly due to factors such as demand for the Company's products, the
size and timing of significant orders and their fulfillment, sales cycles of
the Company's indirect channel partners, product life cycles, changes in
pricing policies by the Company or its competitors, changes in the Company's
level of operating expenses and its ability to control costs, budgeting cycles
of its customers, software defects and other product quality problems, hiring
needs and personnel changes, the pace of international expansion, changes in
the Company's sales incentive plans, continued successful relationships and
the establishment of new relationships with enterprise application vendors,
the impact of consolidation by competitors and indirect channel partners, and
general domestic and international economic and political conditions. In

6
<PAGE>

addition, the Company may, in the future, experience fluctuations in its gross
and operating margins due to changes in the mix of domestic and international
revenues and changes in the mix of direct sales and indirect sales, as well as
changes in the mix among the indirect channels through which the Company's
products are offered.

A significant portion of the Company's total revenues in any given quarter
are derived from existing customers. The Company's future profitability is
substantially dependent upon the Company's ability to increase revenues from
license fees and services from existing customers, to increase the quotas of
its sales employees, to have such employees achieve or exceed such quotas and
to increase the average size of its orders. To the extent that such increases
do not occur in a timely manner, the Company's business, operating results and
financial condition would be materially adversely affected. Because its
software products are typically shipped shortly after orders are received,
revenues in any quarter are substantially dependent on orders booked and
shipped throughout that quarter. Accordingly, revenues for any future quarter
are difficult to predict. Revenues from license fees are also difficult to
forecast because the market for enterprise reporting is rapidly evolving, and
because the sales cycle for the Company's products varies substantially from
customer to customer and by distribution channel and may increase in the
future. The Company's expense levels and plans for expansion, including its
plans to significantly increase its sales and marketing and research and
development efforts, are based in significant part on the Company's
expectations of future revenues and are relatively fixed in the short-term.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Consequently, if total revenue levels
are below expectations, the Company's business, operating results and
financial condition are likely to be adversely and disproportionately
affected.

Based upon all of the factors described above, the Company has limited
ability to forecast future revenues and expenses, and 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 the event that
operating results are below expectations, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to
the Company's business, the price of the Company's Common Stock would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

EXPANDING DISTRIBUTION CHANNELS AND RELIANCE ON THIRD PARTIES

To date, the Company has sold its products principally through its direct
sales force, as well as through indirect sales channels, such as enterprise
application vendors, resellers and distributors. Of the Company's revenues
from license fees in 1997 and the three months ended March 31, 1998,
approximately 38% and 39%, respectively, resulted from sales through indirect
channel partners. The Company's ability to achieve significant revenue growth
in the future will depend in large part on its success in expanding its direct
sales force and in further establishing and maintaining relationships with
enterprise application vendors, resellers and distributors. In particular, a
significant element of the Company's strategy is to embed its technology in
products offered by enterprise application vendors for resale to such vendors'
customers and end users. The Company intends to seek additional distribution
arrangements with other enterprise application vendors to embed the Company's
technology in their products and expects that these arrangements will continue
to account for a significant portion of the Company's revenues in future
periods. The Company's future success will depend on the ability of its
indirect channel partners to sell and support the Company's products. To the
extent that the sales and implementation cycles of the Company's indirect
channel partners are lengthy or variable in nature, that the Company's
enterprise application vendors experience difficulties embedding the Company's
technology into their products or that the Company fails to train the sales
and customer support personnel of such indirect channel partners in a timely
fashion, the Company's business, operating results and financial condition
could be materially adversely affected.

7
<PAGE>

Although the Company is currently investing, and plans to continue to
invest, significant resources to expand its direct sales force and to develop
relationships with enterprise application vendors, resellers and distributors,
the Company has at times experienced and continues to experience difficulty in
recruiting qualified sales personnel and in establishing necessary third-party
relationships. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels,
secure license agreements with additional enterprise application vendors on
commercially reasonable terms or at all, or otherwise further develop its
relationships with enterprise application vendors, resellers and distributors
or that any such expansion or additional license agreements would result in an
increase in revenues. Any inability by the Company to maintain existing or
establish new relationships with indirect channel partners or, if such efforts
are successful, a failure of the Company's revenues to increase
correspondingly with expenses incurred in pursuing such relationships, would
materially and adversely affect the Company's business, operating results and
financial condition. See "Business--Sales, Marketing and Services".

DEPENDENCE ON GROWTH OF MARKET FOR ENTERPRISE REPORTING; RISKS ASSOCIATED WITH
THE SOFTWARE INDUSTRY

The market for enterprise reporting software products is still emerging and
there can be no assurance that it will continue to grow or that, even if the
market does grow, businesses will adopt the Company's products. To date, all
of the Company's revenues have been derived from licenses for its enterprise
reporting software and related products and services, and the Company expects
this to continue for the foreseeable future. The Company has spent, and
intends to continue spending, considerable resources educating potential
customers and indirect channel partners about enterprise reporting and the
Company's products. However, there can be no assurance that such expenditures
will enable the Company's products to achieve any significant degree of market
acceptance, and if the market for enterprise reporting products fails to grow
or grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected.

In addition, the software industry has historically experienced significant
periodic downturns, often in connection with, or in anticipation of, declines
in general economic conditions during which management information systems
budgets often decrease. Such a change in economic conditions could result in a
slow down of the purchase of enterprise reporting products. As a result, the
Company's business, operating results and financial condition may in the
future reflect substantial fluctuations from period to period as a consequence
of buying patterns and general economic conditions in the software industry.

COMPETITION

8
<PAGE>

as Oracle and Microsoft, have greater name recognition and the ability to
leverage significant installed customer bases. These companies could integrate
competing enterprise reporting software with their products, resulting in a
loss of market share for the Company. The Company expects additional
competition as other established and emerging companies enter the enterprise
reporting software market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins, longer sales cycles and loss of market share, any of
which would materially adversely affect the Company's business, operating
results and financial condition.

Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the enterprise reporting needs of
the Company's prospective customers. The Company's current or future
enterprise application vendors and other indirect channel partners have in the
past, or may in the future, establish cooperative relationships with current
or potential competitors of the Company, thereby limiting the Company's
ability to sell its products through particular distribution channels.
Accordingly, it is possible that new competitors or alliances among current
and new competitors may emerge and rapidly gain significant market share. Such
competition could materially adversely affect the Company's ability to obtain
revenues from license fees from new or existing customers, and service
revenues from existing customers on terms favorable to the Company. Further,
competitive pressures may require the Company to reduce the price of its
software. In either case, the Company's business, financial condition, and
operating results would be materially adversely affected. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, operating results and financial
condition.

RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OF CERTAIN INTERNATIONAL
DISTRIBUTORS

The Company is a party to agreements with its Japanese distributor and the
parent company of its French, German and United Kingdom distributors (the
"International Distributors"), under which the Company is likely to (and under
certain circumstances, would bear substantial financial penalties if it did
not) acquire such International Distributors at some point in the future. In
connection with any such acquisition, the Company would be required to pay a
purchase price (equal to at least such distributor's last twelve months'
revenues as of the date of such acquisition) in registered shares of the
Company's Common Stock or in cash, which may have the effect of diluting
existing stockholders, adversely affecting the price of the Company's Common
Stock or reducing the available cash for working capital and other purposes.
At present, the Company is unable to predict the accounting treatment of any
such acquisitions, in part because it is unclear what accounting regulations,
conventions or interpretations may prevail in the future. If any such
acquisition is accounted for by the Company as a "purchase" transaction (as
opposed to a pooling of interests), it could cause the Company to recognize
substantial goodwill and other intangible asset amortization charges in the
quarters and fiscal years immediately following the date on which such an
acquisition is effected, depending upon the purchase price paid by the Company
for such acquisition. As a result, if the acquisition is accounted for as a
"purchase" transaction, it could have a material adverse effect on reported
earnings per share during these periods in which the Company records the
amortization of intangible assets acquired. Finally, any such acquisition
would require substantial management attention, impose costs on the Company
associated with integrating the acquired entities, require the Company to
coordinate sales and marketing efforts with the acquired companies and subject
the Company to additional, and potentially substantial, regulation as an owner
of foreign subsidiaries, any of which could have a material adverse effect on
the business, operating results and financial condition of the Company. See
"Certain Transactions".

RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON PRODUCT DEVELOPMENT

The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changing customer

9
<PAGE>

demands and evolving industry standards, any of which can render existing
products obsolete and unmarketable. The Company believes that its future
success will depend in large part on its ability to support current and future
releases of popular operating systems, databases and enterprise software
applications, to maintain and improve its current product line, to timely
develop new products that achieve market acceptance, to maintain technological
competitiveness and to meet an expanding range of customer requirements. There
can be no assurance that the announcement or introduction of new products by
the Company or its competitors or any change in industry standards will not
cause customers to defer or cancel purchases of existing products, which could
have a material adverse effect on the Company's business, operating results
and financial condition. As a result of the complexities inherent in
enterprise reporting, major new products and product enhancements can require
long development and testing periods. In addition, customers may delay their
purchasing decisions in anticipation of the general availability of new or
enhanced versions of the Company's products. As a result, significant delays
in the general availability of such new releases or significant problems in
the installation or implementation of such new releases could have a material
adverse effect on the Company's business, operating results and financial
condition. Any failure by the Company to successfully develop, on a timely and
cost effective basis, product enhancements or new products that respond to
technological change, evolving industry standards or customer requirements or
of such new products and product enhancements to achieve market acceptance
would have a material adverse effect upon the Company's business, operating
results and financial condition. See "Business--Research and Development".

LENGTHY AND VARIABLE SALES CYCLES

The purchase of the Company's products by its end user customers for
deployment within a customer's organization typically involves a significant
commitment of capital and other resources, and is therefore subject to delays
that are beyond the Company's control, such as the customers' internal
procedures to approve large capital expenditures, budgetary constraints and
the testing and acceptance of new technologies that affect key operations.
While the sales cycle for an initial order of the Company's products is
typically 3 to 6 months and the sales cycle associated with a follow-on large
scale deployment of the Company's products typically extends for another 6 to
9 months or longer, there can be no assurance that the Company will not
experience longer sales cycles in the future. Additionally, sales cycles for
sales of the Company's software products to enterprise application vendors
tend to be longer, ranging from 6 to 24 months or more (not including the
sales and implementation cycles of such vendors' own products, which are
typically significantly longer than the Company's sales and implementation
cycles) and involve convincing the vendor's entire organization that the
Company's products are the appropriate reporting solution for the application.
Certain of the Company's customers have in the past, or may in the future,
experience difficulty completing the initial implementation of the Company's
products. Any difficulties or delays in the initial implementation at the
Company's customer sites or those of its indirect channel partners, could
cause such customers to reject the Company's software or lead to the delay or
non-receipt of future orders for the large-scale deployment of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "--Fluctuations in
Quarterly Operating Results", "--Expanding Distribution Channels and Reliance
on Third Parties" and "Business--Sales, Marketing and Services".

MANAGEMENT OF GROWTH; DEPENDENCE ON AND NEED FOR ADDITIONAL QUALIFIED
PERSONNEL

The Company has recently experienced a significant expansion in the number
of its employees, the scope of its operating and financial systems and the
geographic area of its operations. From January 1997 through March 1998, the
Company increased its headcount from 38 to 114 full-time employees.
Furthermore, significant increases in the number of employees are anticipated
in 1998 and future periods. In particular, the Company currently plans to
expand the number of employees in sales and marketing, customer support and
research and development. This growth has resulted, and will

10
<PAGE>

continue to result, in new and increased responsibilities for management
personnel and may place a strain upon the Company's management, operating and
financial systems and resources. The Company expects that an expansion of its
international operations will lead to increased financial and administrative
demands associated with managing an increasing number of relationships with
foreign partners and customers and expanded treasury functions to manage
foreign currency risks. The Company's future operating results will also
depend on its ability to further develop indirect channels and expand its
support organization to accommodate growth in the Company's installed base.
The failure of the Company to manage its expansion effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Failure to Expand and Risks Associated with
International Sales and Operations", "Business--Employees" and "Management".

The Company's success depends to a significant degree upon the efforts of
certain key management, marketing, customer support and research and
development personnel. The Company believes that its future success will
depend in large part upon its continuing ability to attract and retain highly
skilled managerial, sales, marketing, customer support and research and
development personnel. Like other software companies, the Company faces
intense competition for such personnel, and the Company has experienced and
will continue to experience difficulty in recruiting qualified personnel,
particularly in the San Francisco Bay Area, where the employment market for
qualified sales, marketing and engineering personnel is extremely competitive.
There can be no assurance that the Company will be successful in attracting,
assimilating or retaining qualified personnel in the future. The loss of the
services of one or more of the Company's key personnel, particularly the
Company's executive officers, or the failure to attract and retain additional
qualified personnel, could have a material and adverse effect on the Company's
business, operating results and financial condition. See "Business--Employees"
and "Management".

FAILURE TO EXPAND AND RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS

During 1996, 1997 and the three months ended March 31, 1998, the Company
derived 6%, 2% and 3% of its total revenues, respectively, from sales outside
the United States. The Company's ability to achieve revenue growth in the
future will depend in large part on its success in increasing revenues from
international sales. Although the Company intends to continue to invest
significant resources to expand its sales and support operations outside the
United States and to enter additional international markets, there can be no
assurance that such efforts will be successful. In order to successfully
expand international sales, the Company must establish additional foreign
operations, expand its international channel management and support
organizations, hire additional personnel, recruit additional international
distributors and increase the productivity of existing international
distributors. To the extent that the Company is unable to do so in a timely
and cost-effective manner, the Company's business, operating results and
financial condition could be materially adversely affected.

The Company's international operations are generally subject to a number of
risks, including costs of localizing products for foreign countries, trade
laws and business practices favoring local competition, dependence on local
vendors, compliance with multiple, conflicting and changing government laws
and regulations, longer sales and payment cycles, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, greater difficulty or delay in accounts receivable collection,
foreign currency exchange rate fluctuations, multiple and conflicting tax laws
and regulations and political and economic instability, including recent
economic conditions in Asia. Because substantially all of the Company's
international revenues and costs, with the exception of sales in Japan, have
been denominated to date in U.S. dollars, increases in the value of the United
States dollar could increase the price of the Company's products so that they
become relatively more expensive to customers in the local currency of a
particular country, and result in a reduction in sales and profitability in
that country. The Company believes that an increasing portion of the Company's
revenues and costs will be denominated in foreign currencies. To the extent
such denomination in

11
<PAGE>

foreign currencies does occur, gains and losses on the conversion to U.S.
dollars of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to
fluctuations in the Company's results of operations. Any of the foregoing
factors could have a material adverse effect on the Company's business,
operating results and financial condition. Although the Company may from time
to time undertake foreign exchange hedging transactions to cover a portion of
its foreign currency transaction exposure, the Company does not currently
attempt to cover any foreign currency exposure, and there can be no assurance
that the Company will be successful in any future foreign exchange hedging
transactions or that such transactions, if any, will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. As a result, in
less than two years, computer systems and/or software used by many companies
will need to be upgraded to comply with "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. Although the Company believes that its
products are Year 2000 compliant, there can be no assurance that Year 2000
errors or defects will not be discovered in the Company's current and future
products. In addition, the Company believes that the purchasing patterns of
customers and potential customers may be impacted by Year 2000 issues.
Further, many companies are expending significant resources to correct or
patch their current software systems. These expenditures of funds may result
in reduced funds available to purchase software products such as those offered
by the Company. The occurrence of any of such events could have a material
adverse effect on the Company's business, results of operations or financial
condition. Additionally, to the extent the Company's products are embedded
with other companies' products that are not Year 2000 compliant, the Company's
reputation in the marketplace and indirect sales of its products by the
Company's indirect channel partners could be adversely affected, both of which
could result in a material adverse effect on the Company's business, operating
results and financial condition. The Company has conducted a preliminary
review of its internal computer systems to identify the systems that could be
affected by the Year 2000 issue and to develop a plan to resolve the issue.
Based on this preliminary review, the Company currently has no reason to
believe that its internal software systems are not Year 2000 compliant.
However, there can be no assurance that Year 2000 errors or defects will not
be discovered in the Company's internal computer systems and, if such errors
or defects are discovered, there can be no assurance that the costs of making
such systems Year 2000 compliant will not have a material adverse effect on
the Company's business, operating results and financial condition.

RISK OF SOFTWARE DEFECTS; PRODUCT LIABILITY

Software products as complex as those offered by the Company often contain
errors or defects, particularly when first introduced, when new versions or
enhancements are released and when configured to individual customer computing
systems. The Company currently has known errors and defects in its products.
There can be no assurance that, despite testing by the Company, additional
defects and errors, including Year 2000 errors, will not be found in current
versions, new versions or enhancements of its products after commencement of
commercial shipments, any of which could result in the loss of revenues or a
delay in market acceptance and thereby have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore,
there can be no assurance that when the Company's products are deployed
enterprise-wide by customers, the Company's products will meet all of the
expectations and demands of its customers. See "Business--Research and
Development".

12
<PAGE>

Although 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 that such limitation of liability
provisions may not be effective as a result of existing or future laws or
unfavorable judicial decisions. The Company has not experienced any product
liability claims to date. However, the sale and support of the Company's
products may entail the risks of such claims, which are likely to be
substantial in light of the use of the Company's products in business-critical
applications. A product liability claim brought against the Company could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Products and Technology" and "--Research
and Development".

LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT

The Company has one issued U.S. patent and one U.S. patent pending and
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary technology. For example, the Company licenses its software
pursuant to shrinkwrap or signed license agreements, which impose certain
restrictions on licensees' ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its intellectual property, including
requiring those persons with access to the Company's proprietary information
to execute confidentiality agreements with the Company and restricting access
to the Company's source code. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection.

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.
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 many countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. Any failure by the Company to
meaningfully protect its intellectual property could have a material adverse
effect on the Company's business, operating results and financial condition.

To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects enterprise reporting 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 or at all. A successful claim of
product infringement against the Company and the failure or inability of the
Company to license the infringed or similar technology could have a material
adverse effect upon the Company's business, operating results and financial
condition.

RISK OF CHANGES IN ACCOUNTING STANDARDS

13
<PAGE>

full implementation guidelines for this standard have not yet been issued.
Once available, such implementation guidance could lead to unanticipated
changes in the Company's current revenue accounting practices, and such
changes could materially adversely affect the Company's future revenue and
earnings. Such implementation guidance may necessitate significant changes in
the Company's business practices in order for the Company to continue to
recognize license fee revenue upon delivery of its software products. Such
changes may have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

NO PRIOR TRADING MARKET FOR THE COMMON STOCK; POTENTIAL 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 trading market will
develop or be sustained after this offering. The initial public offering price
will be determined by negotiation among the Company and the representatives of
the Underwriters, and may not be indicative of the price that will prevail in
the open market. The market price of the Common Stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to copyrights or proprietary rights,
conditions and trends in the software and other technology industries,
adoption of new accounting standards affecting the software industry, changes
in financial estimates by securities analysts, changes in the economic
conditions in the United States and abroad, general market conditions and
other factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the securities of technology companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
such company. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Underwriting".

CONTROL OF COMPANY BY EXISTING STOCKHOLDERS

Upon the consummation of this offering (based on 10,486,017 shares
outstanding as of March 31, 1998), the executive officers and directors of the
Company and their affiliates in the aggregate will beneficially own
approximately 56.5% of the outstanding Common Stock (53.2% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Principal and Selling Stockholders".

EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW

The Company's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated
("Bylaws"), contain certain provisions that may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals that a stockholder might consider favorable,
including provisions authorizing the issuance of "blank check" preferred stock
and eliminating the ability of stockholders to act by written consent. In
addition, certain provisions of Delaware law and the Company's 1998 Equity
Incentive Plan may also have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals. The anti-takeover effect of these provisions may also have an
adverse effect on the public trading price of the Company's Common Stock. See
"Management--Stock Plans", "Description of Capital Stock--Preferred Stock" and
"--Anti-Takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law".

14
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock after the offering
could adversely affect the market price of the Common Stock and could impair
the Company's ability to raise capital through the sale of equity securities.
Upon completion of the offering, the Company will have outstanding 13,376,017
shares of Common Stock (13,626,017 shares if the Underwriters' over-allotment
option is exercised in full), assuming no exercise of options after March 31,
1998. Of these shares, the 3,000,000 shares offered hereby (3,450,000 shares
if the Underwriters' over-allotment option is exercised in full) will be
freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144") described below. The remaining 10,376,017 shares
of Common Stock outstanding upon completion of the offering will be
"restricted securities" as that term is defined in Rule 144 (assuming no
exercise of the Underwriters' over-allotment option).

Restricted securities may be sold in the public market only if registered or
if they qualify for an exemption from the registration under Rule 144, 144(k)
or 701 promulgated under the Securities Act. As a result of the contractual
restrictions described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
10,376,017 shares will be eligible for sale upon expiration of lock-up
agreements between certain stockholders of the Company and the representatives
of the Underwriters and contractual obligations between certain stockholders
and the Company beginning 180 days after the date of this Prospectus,
8,616,337 of which shares shall initially be subject to the volume and manner
of sale restrictions under Rule 144. In addition to the foregoing, as of March
31, 1998, there were outstanding under the 1998 Equity Incentive Plan and its
predecessor plan, options to purchase an aggregate of 905,450 shares of Common
Stock. The shares underlying such options will be eligible for sale upon
expiration of the lock-up provisions contained in the Plan and its predecessor
plan (the "Plan Stand-off Agreements") beginning 180 days after the date of
this Prospectus, subject in certain cases to such shares underlying
outstanding options becoming eligible for sale more than 180 days after the
date of this Prospectus as such options vest. The Company has agreed not to
release shares from the lock-up provisions of the Plan Stand-Off Agreements
without the prior written consent of Goldman, Sachs & Co. In addition, the
Company intends to register, following this offering, approximately 2,655,450
shares of Common Stock subject to outstanding options or reserved for issuance
under the Company's stock and option plans. Further, certain stockholders
holding approximately 6,489,732 shares of Common Stock are entitled to demand
registration of their shares of Common Stock. By exercising their demand
registration rights, such stockholders could cause a large number of
securities to be registered and sold in the public market, which could have an
adverse effect on the market price of the Common Stock. See "Description of
Capital Stock" and "Shares Eligible for Future Sale".

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price will be substantially higher than the book
value per share of the outstanding Common Stock. As a result, investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution. To the extent outstanding options to purchase Common Stock are
exercised, there will be further dilution. See "Dilution" and "Shares Eligible
for Future Sale".

UNCERTAINTY AS TO USE OF PROCEEDS

The primary purposes of this offering are to increase the Company's equity
capital, to create a public market for the Company's Common Stock and to
facilitate future access to public markets. As of the date of this Prospectus,
the Company has no specific plans for the use of the net proceeds from this
offering other than for general corporate purposes, including working capital
and capital expenditures. Accordingly, the Company's management will retain
broad discretion as to the allocation of a substantial portion of the net
proceeds from this offering. Pending any such uses, the Company plans to
invest the net proceeds in investment-grade, interest-bearing securities. See
"--Risks Associated with Potential Acquisitions of Certain International
Distributors", "Use of Proceeds" and "Certain Transactions".

15
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,890,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$10.00 per share, are estimated to be $26.2 million ($28.5 million if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The primary purposes of this offering are to increase the
Company's equity capital, to create a public market for the Company's Common
Stock and to facilitate future access to public markets. As of the date of
this Prospectus, the Company has no specific plans to use the net proceeds
from this offering other than as set forth below.

The Company expects to use the net proceeds of the offering for general
corporate purposes, including working capital and capital expenditures.
Furthermore, from time to time the Company expects to evaluate the acquisition
of products, technologies and businesses, including the potential acquisition
of certain international distributors, that complement the Company's business,
for which a portion of the net proceeds may be used. Currently, however, the
Company does not have any understandings, commitments or agreements to use any
of the net proceeds of this offering with respect to any such acquisitions.
Pending use of the net proceeds for the above purposes, the Company plans to
invest the net proceeds in short-term, interest-bearing, investment-grade
obligations. See "Risk Factors--Risks Associated with Potential Acquisitions
of Certain International Distributors", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain Transactions".

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will
be retained by the Company to develop and expand its business. In addition,
the terms of the Company's line of credit prohibits the payment of cash
dividends without the lender's consent. See Note 10 of Notes to Financial
Statements.

16
<PAGE>

CAPITALIZATION

The following table sets forth the total capitalization of the Company as of
March 31, 1998, (i) on an actual basis, (ii) on a pro forma basis to reflect
the conversion of all outstanding shares of Preferred Stock into Common Stock
upon the closing of this offering and (iii) on a pro forma basis as adjusted
to reflect the sale of the shares of Common Stock offered hereby (at an
assumed initial offering price of $10.00 per share) and the application of the
net proceeds therefrom. See "Use of Proceeds". This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, current portion..... $ 113 $ 113 $ 113
======== ======== ========
Capital lease obligations, less current
portion....................................... $ 102 $ 102 $ 102
Stockholders' equity (deficit):
Convertible preferred stock: $0.001 par
value, 10,939,464 shares authorized,
6,489,732 shares outstanding, actual;
5,000,000 shares authorized, no shares
outstanding, pro forma and as adjusted...... 6 -- --
Common stock: $0.001 par value, 20,000,000
shares authorized, 3,996,285 shares
outstanding, actual; 35,000,000 shares
authorized, 10,486,017 shares outstanding,
pro forma; 35,000,000 shares authorized,
13,376,017 shares outstanding as
adjusted(1)................................. 4 10 13
Additional paid-in capital................... 15,054 15,054 41,203
Note receivable from officer................. (40) (40) (40)
Deferred stock compensation.................... (209) (209) (209)
Accumulated deficit............................ (18,949) (18,949) (18,949)
-------- -------- --------
Total stockholders' equity (deficit)........... (4,134) (4,134) 22,018
-------- -------- --------
Total capitalization....................... $ (4,032) $ (4,032) 22,120
======== ======== ========
</TABLE>
- --------
(1) Excludes (i) 905,450 shares of Common Stock issuable upon the exercise of
outstanding stock options under the Company's 1994 Stock Option Plan as of
March 31, 1998 at a weighted average exercise price of approximately $1.26
per share, (ii) 1,300,000 shares of Common Stock reserved for issuance
under the Company's 1998 Equity Incentive Plan, (iii) 250,000 shares of
Common Stock reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan and (iv) 200,000 shares of Common Stock reserved for
issuance under the Company's 1998 Non-Employee Directors Option Plan. See
"Management--Stock Plans" and Notes 8 and 10 of Notes to Financial
Statements.

17
<PAGE>

DILUTION

The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1998, giving effect to the conversion of all outstanding shares of
Preferred Stock into 6,489,732 shares of Common Stock upon the closing of this
offering, was a deficit of $4.1 million, or approximately $(0.39) per share.
"Pro forma net tangible book value" per share represents the amount of total
tangible assets of the Company less total liabilities, divided by the
10,486,017 shares of Common Stock outstanding. Dilution per share represents
the difference between the amount per share paid by purchasers of shares of
Common Stock in the offering made hereby and the pro forma net tangible book
value per share of Common Stock immediately after completion of the offering.
After giving effect to the sale of 2,890,000 shares of Common Stock in this
offering at an assumed initial public offering price of $10.00 per share and
the application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of March 31, 1998 would have been $22
million or $1.65 per share. This represents an immediate increase in pro forma
net tangible book value of $2.04 per share to existing stockholders and an
immediate dilution of $8.35 per share to purchasers of Common Stock in the
offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $10.00
------
Pro forma net tangible book value (deficit) per share as of
March 31, 1998................................................ $(0.39)
------
Increase per share attributable to new investors(1)............ $ 2.04
------
Pro forma net tangible book value per share after this
offering(2)..................................................... $ 1.65
------
Dilution per share to new investors.............................. $ 8.35
------
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1998,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors (before deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company) at an assumed initial offering price of $10.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED(3) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 10,486,017 78% $14,700,000 34% $ 1.40
New stockholders........... 2,890,000 22 $28,900,000 66 $10.00
------------ ------- ----------- -----
Totals................... 13,376,017 100.0% $43,600,000 100.0%
------------ ------- ----------- -----
</TABLE>
- --------
(1) Does not give effect to the exercise of the Underwriters' over-allotment
option.
(2) After deducting estimated underwriting discounts and commissions and
estimated offering expenses of approximately $2.7 million payable by the
Company.
(3) Excludes (i) 905,450 shares of Common Stock issuable upon the exercise of
outstanding stock options under the Company's 1994 Stock Option Plan as of
March 31, 1998, at a weighted average exercise price of approximately
$1.26 per share, (ii) 1,300,000 shares of Common Stock reserved for
issuance under the Company's 1998 Equity Incentive Plan, (iii) 250,000
shares of Common Stock reserved for issuance under the Company's 1998
Employee Stock Purchase Plan and (iv) 200,000 shares of Common Stock
reserved for issuance under the Company's 1998 Non-Employee Directors
Option Plan. To the extent outstanding options are exercised, there will
be further dilution to new investors. See "Management--Stock Plans" and
Notes 8 and 10 of Notes to Consolidated Financial Statements.

18
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and with the Financial Statements and Notes thereto which are
included elsewhere in this Prospectus. The statement of operations data for
the fiscal years ended December 31, 1995, 1996 and 1997 and the balance sheet
data at December 31, 1996 and 1997 are derived from the audited Financial
Statements included elsewhere in this Prospectus. The balance sheet data as of
December 31, 1995 is derived from audited financial statements that are not
included in this Prospectus. The statement of operations data for the three
months ended March 31, 1997 and 1998 and the balance sheet data as of March
31, 1998, are derived from unaudited financial statements included elsewhere
in this Prospectus, and in the opinion of the Company, include all
adjustments, consisting solely of normal recurring accruals, which are
necessary to present fairly the data for such period and as of such date. The
statement of operations data for the period from inception (November 1993) to
December 31, 1994 and the balance sheet data at December 31, 1994 are derived
from unaudited financial statements not included in this prospectus.
Historical results are not necessarily indicative of results in the future,
and the results for interim periods are not necessarily indicative of results
to be expected for the entire year.

<TABLE>
<CAPTION>
INCEPTION THREE MONTHS
THROUGH YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------------------- ----------------
1994 1995 1996 1997 1997 1998
------------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees........... $ -- $ -- $ 343 $ 7,542 $ 1,095 $ 3,190
Services............... -- 22 308 1,976 284 873
------ ------- ------- ------- ------- -------
Total revenues....... -- 22 651 9,518 1,379 4,063
------ ------- ------- ------- ------- -------
Cost of revenues:
License fees........... -- -- 171 647 103 280
Services............... -- 53 305 1,263 195 730
------ ------- ------- ------- ------- -------
Total cost of
revenues............ -- 53 476 1,910 298 1,010
------ ------- ------- ------- ------- -------
Gross profit (loss)..... -- (31) 175 7,608 1,081 3,053
Operating expenses:
Sales and marketing.... 118 847 2,965 7,366 1,043 2,715
Research and
development........... 635 1,883 2,731 6,213 926 1,674
General and
administrative........ 102 240 603 1,317 140 556
------ ------- ------- ------- ------- -------
Total operating
expenses............ 855 2,970 6,299 14,896 2,109 4,945
------ ------- ------- ------- ------- -------
Loss from operations.... (855) (3,001) (6,124) (7,288) (1,028) (1,892)
Equity in losses of
affiliate and write
down of loans to
affiliate.............. -- -- (25) (142) -- --
Interest and other
income (expense), net.. 18 166 90 82 (2) 22
------ ------- ------- ------- ------- -------
Net loss................ $ (837) $(2,835) $(6,059) $(7,348) $(1,030) $(1,870)
====== ======= ======= ======= ======= =======
Basic and diluted net
loss per share(1)...... $(0.32) $ (1.09) $(2.21) $ (2.52) $ (0.38) $ (0.57)
====== ======= ======= ======= ======= =======
Weighted average shares
outstanding used in per
share calculation(1)... 2,580 2,591 2,741 2,920 2,723 3,296
====== ======= ======= ======= ======= =======
Pro forma basic and
diluted net loss per
share(1)(2)............ $ (0.82) $ (0.19)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share(2)............... 8,940 9,786
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1994 1995 1996 1997 1998
------ ------ ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 59 $1,252 $ 1,040 $ 2,901 $ 2,386
Working capital (deficit)............ 3,628 637 (1,564) (3,424) (5,333)
Total assets......................... 3,690 1,710 3,664 7,481 6,785
Long-term obligations, less current
portion............................. -- 144 213 124 102
Stockholders' equity (deficit)....... 3,683 870 (1,191) (2,308) (4,134)
</TABLE>
- -------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing net loss per
share.
(2) Pro forma basic and diluted net loss per share reflects the conversion of
all outstanding Preferred Stock into Common Stock upon completion of this
offering.

19
<PAGE>

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

The following description of the Company's financial condition and results
of operations should be read in conjunction with the information included
elsewhere in this Prospectus. This description contains certain forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ significantly from the results discussed in the forward-
looking statements as a result of certain of the factors set forth under "Risk
Factors" and elsewhere in this Prospectus.

OVERVIEW

Actuate Software Corporation is a leading provider of enterprise reporting
solutions that enable organizations to systematically extract, publish and
disseminate information across distributed computing environments. The Company
began shipping its Actuate Reporting System in January 1996, and the Company's
most recent version of the Actuate Reporting System, Version 3.1, began
shipping in May 1998. The Company had net losses of $6.1 million and $7.3
million in 1996 and 1997, respectively, and a net loss of $1.9 million for the
three months ended March 31, 1998, and had an accumulated deficit of
approximately $18.9 million as of March 31, 1998.

The Company sells software products through two primary means: (i) directly
to end user customers through its direct sales force and (ii) through indirect
channel partners such as enterprise application vendors, resellers and
distributors. Enterprise application vendors generally integrate the Company's
products with their applications and either embed them into their products or
resell them with their products. The Company's other indirect channel partners
resell the Company's software products to end user customers. The Company's
revenues are derived primarily from license fees for software products and, to
a lesser extent, fees for services relating to such products, including
software maintenance and support, training and consulting.

License fee revenues from sales of software products directly to end user
customers are recognized as revenue after execution of a license agreement or
receipt of a definitive purchase order and shipment of the product, provided
no significant vendor obligations remain and collection of the resulting
receivables is deemed probable. The Company's products do not require
significant customization. The majority of license fee revenues from direct
sales to end user customers is from sales of specific individual products to
such customers and is recognized upon shipment of the applicable product.
Advance payments from end user customers, in arrangements in which the end
user customer has the right to future unspecified products, are deferred and
recognized as revenue ratably over the estimated term of the period, typically
one year, during which the end user is entitled to receive the products.

License arrangements with indirect channel partners such as enterprise
application vendors, resellers and distributors generally take the form of
either (i) fixed price arrangements in which the contracting entity has the
right to the unlimited usage and resale of the licensed software for a
specified term and pursuant to which license fee revenue is deferred and
recognized on a straight-line basis over the term of the license agreement or
(ii) arrangements pursuant to which a royalty is paid to the Company, which
the Company recognizes as revenue based on the enterprise application vendor's
sell-through of the Company's product.

Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting fees. Revenue from maintenance agreements
is deferred and recognized on a straight-line basis as service revenue over
the term of the related agreement, which is typically one year. Service
revenues from training and consulting services are recognized upon completion
of the work to be performed.

20
<PAGE>

Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public
Accountants and amended by Statement of Position 98-4 ("SOP 98-4"). The
Company adopted SOP 97-2 effective January 1, 1998. Based upon its reading and
interpretation of SOP 97-2 and SOP 98-4, the Company believes its current
revenue recognition policies and practices are materially consistent with SOP
97-2 and SOP 98-4. However, full implementation guidelines for this standard
have not yet been issued. Once available, such implementation guidance could
lead to unanticipated changes in the Company's current revenue accounting
practices, and such changes could materially adversely affect the Company's
future revenue and earnings. Such implementation guidance may necessitate
significant changes in the Company's business practices in order for the
Company to continue to recognize license fee revenue upon delivery of its
software products. Such changes may have a material adverse effect on the
Company's business, operating results and financial condition.

The Company to date has sold its products internationally primarily through
distributors located in the United Kingdom, France, Germany, Japan, the
Philippines, Singapore, South Africa and the Netherlands. During 1996, 1997
and the three months ended March 31, 1998, the Company derived 6%, 2% and 3%
of its total revenues, respectively, from sales outside the United States. The
Company's ability to achieve revenue growth in the future will depend in large
part on its success in increasing revenues from international sales. Although
the Company intends to continue to invest significant resources to expand its
sales and support operations outside the United States and to enter additional
international markets, there can be no assurance that such efforts will be
successful. In order to successfully expand international sales, the Company
must establish additional foreign operations, expand its international channel
management and support organizations, hire additional personnel, recruit
additional international distributors and increase the productivity of
existing international distributors. To the extent that the Company is unable
to do so in a timely and cost-effective manner, the Company's business,
operating results and financial condition could be materially adversely
affected. The Company is a party to agreements with its Japanese distributor
and the parent company of its French, German and United Kingdom distributors,
under which the Company is likely to (and under certain circumstances, would
bear substantial financial penalties if it did not) acquire such International
Distributors at some point in the future. In connection with any such
acquisition, the Company would be required to pay a purchase price (equal to
at least such distributor's last twelve months' revenues as of the date of
such acquisition) in registered shares of the Company's Common Stock or in
cash, which may have the effect of diluting existing stockholders, adversely
affecting the price of the Company's Common Stock or reducing the available
cash for working capital and other purposes. At present, the Company is unable
to predict the accounting treatment of any such acquisitions, in part because
it is unclear what accounting regulations, conventions or interpretations may
prevail in the future. If any such acquisition is accounted for by the Company
as a "purchase" transaction (as opposed to a pooling of interests), it could
cause the Company to recognize substantial goodwill and other intangible asset
amortization charges in the quarters and fiscal years immediately following
the date on which such an acquisition is effected, depending upon the purchase
price paid by the Company for such acquisition. As a result, if the
acquisition is accounted for as a "purchase" transaction, it could have a
material adverse effect on reported earnings per share during these periods in
which the Company records the amortization of intangible assets acquired.
Finally, any such acquisition would require substantial management attention,
impose costs on the Company associated with integrating the acquired entities,
require the Company to coordinate sales and marketing efforts with the
acquired companies and subject the Company to additional, and potentially
substantial, regulation as an owner of foreign subsidiaries, any of which
could have a material adverse effect on the business, operating results and
financial condition of the Company. See "Certain Transactions".

The Company's limited operating history makes the prediction of future
operating results difficult and unreliable. In addition, given its limited
operating history and recent rapid growth, historical growth rates in the
Company's revenues should not be considered indicative of future revenue
growth rates or operating results. There can be no assurance that any of the
Company's business strategies will be

21
<PAGE>

successful or that the Company will be able to achieve profitability on a
quarterly or annual basis. See "Risk Factors--Limited Operating History; Lack
of Profitability" and "--Fluctuations in Quarterly Operating Results".

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated (The statement of
operations data as a percentage of total revenue is not included for the
period ended December 31, 1995 because revenues in 1995 were negligible and
therefore the Company believes such data is not meaningful):

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------- ------------------
1996 1997 1997 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenues:
License fees............................ 53 % 79 % 79 % 79 %
Services................................ 47 21 21 21
------ ----- ------- -------
Total revenues........................ 100 100 100 100
------ ----- ------- -------
Cost of revenues:
License fees............................ 26 7 8 7
Services................................ 47 13 14 18
------ ----- ------- -------
Total cost of revenues................ 73 20 22 25
------ ----- ------- -------
Gross profit.............................. 27 80 78 75
------ ----- ------- -------
Operating expenses:
Sales and marketing..................... 455 78 76 67
Research and development................ 420 65 67 41
General and administrative.............. 93 14 10 14
------ ----- ------- -------
Total operating expenses.............. 968 157 153 122
------ ----- ------- -------
Loss from operations...................... (941) (77) (75) (47)
Equity in losses of affilate and write
down of loans to affiliate............... (4) (1) -- --
Interest and other income (expense), net.. 14 1 -- 1
------ ----- ------- -------
Net loss.................................. (931)% (77)% (75)% (46)%
====== ===== ======= =======
</TABLE>

THREE MONTHS ENDED MARCH 31, 1997 AND 1998

REVENUES

Total revenues increased 195% from $1.4 million for the three months ended
March 31, 1997 to $4.1 million for the three months ended March 31, 1998.

LICENSE FEES. Revenues from license fees increased 191% from $1.1 million
for the three months ended March 31, 1997 to $3.2 million for the three months
ended March 31, 1998. The increase was the result of increased sales to new
customers and increased follow-on sales to existing customers primarily as a
result of the release of Version 3.0 of the Actuate Reporting System in the
fourth quarter of 1997 and to a lesser extent increases in average selling
prices for the Company's products. Revenues from license fees from the
Company's indirect channel partners, including enterprise application vendors,
resellers and distributors, accounted for 36% and 39% of total revenues from
license fees for the three months ended March 31, 1997 and 1998, respectively.

SERVICES. Services revenues increased 207% from $284,000 for the three
months ended March 31, 1997 to $873,000 for the three months ended March 31,
1998. The increase was primarily due to increases in maintenance and support
contracts associated with higher license fee revenues

22
<PAGE>

and, to a lesser extent, increases in training and consulting revenues related
to increases in the Company's installed customer base.

COST OF REVENUES

LICENSE FEES. Cost of revenues from license fees consists primarily of
personnel and related costs, and product packaging, documentation and
production costs. Cost of revenues from license fees increased from $103,000,
or 9.4% of revenues from license fees, for the three months ended March 31,
1997 to $280,000, or 8.8% of revenues from license fees, for the three months
ended March 31, 1998. The increase in absolute dollars was primarily due to
the increase in the number of licenses sold. The decrease in cost of revenues
as a percentage of revenues from license fees was due to improved leverage in
personnel and production costs.

SERVICES. Cost of services revenues consists primarily of personnel and
related costs, facilities costs incurred in providing software maintenance and
support, training and consulting services, as well as third-party costs
incurred in providing training and consulting services. Cost of services
revenues increased from $195,000, or 69% of services revenues, for the three
months ended March 31, 1997 to $730,000, or 84% of services revenues, for the
three months ended March 31, 1998. The increase in absolute dollars and as a
percentage of services revenues was primarily due to the increase in the
number of personnel resulting from the Company's expansion of its support
services as well as an increase in third party training and consulting
services.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
promotional expenses, travel and entertainment and facility expenses. Sales
and marketing expenses increased from $1.0 million, or 76% of total revenues,
for the three months ended March 31, 1997 to $2.7 million, or 67% of total
revenues, for the three months ended March 31, 1998. The increase in absolute
dollars was primarily due to the hiring of additional sales and marketing
personnel, higher sales commissions associated with increased revenues and
increased marketing program expenses. The decrease as a percentage of total
revenues was primarily due to increased productivity of the Company's sales
force. The Company expects that sales and marketing expenses will continue to
increase in absolute dollars in future periods as the Company continues to
hire additional sales and marketing personnel, establish additional U.S. sales
offices, expand international distribution channels and increase promotional
activities.

RESEARCH AND DEVELOPMENT. Research and development expenses are expensed as
incurred and consist primarily of personnel and related costs associated with
the development of new products, the enhancement of existing products, quality
assurance and testing. Research and development expenses increased from
$926,000, or 67% of total revenues, for the three months ended March 31, 1997
to $1.7 million, or 41% of total revenues, for the three months ended March
31, 1998. The increase in absolute dollars was primarily due to increased
personnel and related costs associated with the development of new products,
third party consulting fees, the enhancement of existing products, quality
assurance and testing, depreciation of capital expenditures and facilities
costs. The decrease as a percentage of total revenues was due primarily to
increased product sales. The Company believes that a significant level of
investment for research and development is essential to maintain product and
technical leadership and anticipates that it will continue to devote
substantial resources to research and development and that these expenses will
increase in absolute dollars in future periods.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related costs for finance, human resources,
information systems and general management, as well as legal and accounting
expenses. General and administrative expenses increased from $140,000, or 10%
of total revenues, for the three months ended March 31, 1997 to $556,000, or
14% of total revenues, for the three months ended March 31, 1998. The
increases in

23
<PAGE>

absolute dollars and as a percentage of total revenues were primarily due to
increased personnel and related costs and professional fees necessary to
manage and support the Company's growth and facilities expansion. The Company
believes that its general and administrative expenses will increase in
absolute dollars in future periods as the Company expands its staffing to
support continued growth and expanded operations and assumes the reporting
responsibilities of a public company.

DEFERRED COMPENSATION. The Company recorded deferred compensation of
approximately $197,000 and $127,000 during 1997 and the three months ended
March 31, 1998, respectively, and the Company recorded amortization expense of
approximately $90,000 and $25,000, respectively, during these periods. These
amounts represent the difference between the exercise price of certain stock
option grants and the deemed fair value of the Company's Common Stock at the
time of such grants. All such deferred compensation expense has been included
in general and administrative expenses. Additional grants in April 1998 have
resulted in additional deferred compensation of $229,000. The remaining
amounts will be amortized over the corresponding vesting period, generally
five years, of each respective option.

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, is comprised primarily of interest
income earned by the Company on its cash and short-term investments. Interest
and other income (expense), net increased from a net expense of $2,000 for the
three months ended March 31, 1997 to net income of $22,000 for the three
months ended March 31, 1998. The increase was primarily due to the investment
of the proceeds from the Company's sale of preferred stock in April 1997 and
the interest on such proceeds.

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

REVENUES

The Company's total revenues increased from $22,000 in 1995 to $651,000 in
1996 and to $9.5 million in 1997.

LICENSE FEES. Revenues from license fees increased from $343,000 in 1996 to
$7.5 million in 1997, primarily due to increased sales to new customers and
increased follow-on sales to existing customers and, to a lesser extent,
increases in average selling prices for the Company's products. Revenues from
license fees from the Company's indirect channel partners, including
enterprise application vendors, resellers and distributors, accounted for 50%
and 38% of total revenues from license fees for 1996 and 1997, respectively.

SERVICES. Services revenues increased from $22,000 in 1995 to $308,000 in
1996 and to $2.0 million in 1997, primarily due to increases in maintenance
and support and, to a lesser extent, increases in training and consulting
revenues related to increases in the Company's installed customer base.

COST OF REVENUES

LICENSE FEES. Cost of revenues from license fees increased from $171,000, or
50% of revenues from license fees, in 1996 to $647,000, or 9% of revenues from
license fees, in 1997. The increase in absolute dollars was primarily due to
the increase in the number of licenses sold. The decrease in cost of revenues
as a percentage of revenues from license fees was due to improved leverage in
personnel and production costs.

SERVICES. Cost of services revenues increased from $53,000 in 1995 to
$305,000, or 99% of services revenues, in 1996 and to $1.3 million, or 64% of
services revenues, in 1997. The year to year increase in absolute dollars was
primarily due to increases in the number of personnel resulting from

24
<PAGE>

the Company's expansion of its support services as well as increases in third
party training and consulting services. The decrease in cost of services
revenues in 1997 as a percentage of services revenues was primarily due to a
significant increase in services revenues.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses increased by 250% from
$847,000 in 1995 to $3.0 million in 1996 and by 148% to $7.4 million in 1997
primarily due to the hiring of additional sales and marketing personnel,
higher sales commissions associated with increased revenues and increased
marketing activities.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by 45%
from $1.9 million in 1995 to $2.7 million in 1996 and by 127% to $6.2 million
in 1997 primarily due to increased personnel and related costs associated with
the development of new products, the enhancement of existing products, quality
assurance and testing, depreciation of capital expenditures and facilities
costs.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
151% from $240,000 in 1995 to $603,000 in 1996 and by 118% to $1.3 million in
1997 primarily due to increases in personnel and related costs and
professional fees necessary to manage and support the Company's growth and
facilities expansion.

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, decreased from $166,000 in 1995 to
$90,000 in 1996 and to $82,000 in 1997 primarily due to decreases in cash
balances to support continuing operations.

EQUITY IN LOSSES OF AFFILIATE AND WRITE DOWN OF LOANS TO AFFILIATE

Equity in losses of affiliate and write down of loans to affiliate totalled
$25,000 and $142,000 during 1996 and 1997, respectively. In 1996, the Company
made an equity investment of approximately $95,000 in a Japanese company
("Actuate Japan"), which represents approximately 8.3% of the outstanding
voting stock of Actuate Japan. This investment is accounted for on the equity
basis due to the Company's ability to exercise significant influence over
Actuate Japan. During 1996 and 1997 the Company loaned a total of $260,000 to
Actuate Japan. The equity investment and remaining outstanding loans were
fully written down as of December 31, 1997 due to impairment indicators. See
Notes 1 and 2 of Notes to Financial Statements.

PROVISION FOR INCOME TAXES

As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $14.8 million. The Company also had federal
research and development tax credit carryforwards of approximately $300,000 as
of December 31, 1997. The net operating loss and credit carryforwards will
expire beginning in 2008 through 2012, if not utilized.

Utilization of the net operating loss carryforwards and research and
development tax credit carryforwards may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization. See
Note 9 of Notes to Financial Statements.

25
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited statement of operations
data for the five quarters ended March 31, 1998, as well as such data
expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited financial statements
that, in the opinion of management, include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of such
information when read in conjunction with the Financial Statements and Notes
thereto.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees................ $ 1,095 $ 1,734 $ 2,203 $ 2,510 $ 3,190
Services.................... 284 332 548 812 873
------- ------- ------- ------- -------
Total revenues.............. 1,379 2,066 2,751 3,322 4,063
------- ------- ------- ------- -------
Cost of revenues:
License fees................ 103 104 113 327 280
Services.................... 195 186 338 544 730
------- ------- ------- ------- -------
Total cost of revenues...... 298 290 451 871 1,010
------- ------- ------- ------- -------
Gross profit................. 1,081 1,776 2,300 2,451 3,053
Operating expenses:
Sales and marketing......... 1,043 1,871 1,988 2,464 2,715
Research and development.... 926 1,578 2,102 1,607 1,674
General and administrative.. 140 273 411 493 556
------- ------- ------- ------- -------
Total operating expenses.... 2,109 3,722 4,501 4,564 4,945
------- ------- ------- ------- -------
Loss from operations......... (1,028) (1,946) (2,201) (2,113) (1,892)
Equity losses in affiliate
and write down of loans to
affiliate................... -- -- -- (142) --
Interest and other income
(expense), net.............. (2) 32 57 (5) 22
------- ------- ------- ------- -------
Net loss..................... $(1,030) $(1,914) $(2,144) $(2,260) $(1,870)
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License fees.................... 79 % 84 % 80 % 76 % 79 %
Services........................ 21 16 20 24 21
--- --- --- --- ---
Total revenues.................. 100 100 100 100 100
--- --- --- --- ---
Costs of revenues:
License fees.................... 7 5 4 10 7
Services........................ 15 9 12 16 18
--- --- --- --- ---
Total cost of revenues.......... 22 14 16 26 25
--- --- --- --- ---
Gross profit..................... 78 86 84 74 75
Operating expenses:
Sales and marketing............. 76 91 72 74 67
Research and development........ 67 76 77 48 41
General and administrative...... 10 13 15 16 14
--- --- --- --- ---
Total operating expenses........ 153 180 164 138 122
--- --- --- --- ---
Loss from operations............. (75) (94) (80) (64) (47)
Equity losses in affiliate and
write down of loans to affilate. -- -- -- (4) --
Interest and other income
(expense), net.................. -- 1 2 -- 1
--- --- --- --- ---
Net loss......................... (75)% (93)% (78)% (68)% (46)%
=== === === === ===
</TABLE>

26
<PAGE>

The Company's revenues have increased each consecutive quarter during the
five quarters ended March 31, 1998. Revenues from license fees increased
quarter-to-quarter primarily due to increased sales of new and existing
products to new customers and increased follow-on sales to existing customers.
Service revenues have generally increased quarter-to-quarter along with
increases in the Company's installed customer base. Cost of revenues from
license fees increased quarter to quarter with the increase in revenues from
license fees through the quarter ended September 30, 1997 and increased
substantially in absolute dollars and as a percentage of total revenues in the
quarter ended December 31, 1997, primarily due to the costs associated with
upgrading the Company's installed customer base with the release of Version
3.0 of the Actuate Reporting System. Cost of service revenues generally
increased in absolute dollars and as a percentage of total revenues quarter to
quarter primarily due to increases in customer support requirements.

Sales and marketing expenses generally increased in absolute dollars quarter
to quarter primarily due to the hiring of additional sales and marketing
personnel, higher sales commissions associated with increased revenues and
increased marketing expenses. Sales and marketing expenses increased
significantly in absolute dollars and as a percentage of total revenues in the
quarter ended June 30, 1997 and in absolute dollars in the quarter ended
December 31, 1997 primarily due to increases in commissions earned in
connection with the closing of a number of large product orders in such
periods. Research and development expenses have generally increased in
absolute dollars quarter to quarter primarily due to increased personnel and
related costs associated with the development of new products, the enhancement
of existing products, quality assurance and testing. Research and development
expenses increased significantly in absolute dollars in the quarter ended
September 30, 1997 primarily due to increased third party consulting expenses
related to the release of Version 3.0 of the Actuate Reporting System in the
quarter ended December 31, 1997. General and administrative expenses increased
in absolute dollars quarter to quarter primarily due to increased personnel
and related costs and professional fees necessary to manage and support the
Company's growth and facilities expansion.

27
<PAGE>

adversely affected. Because its software products are typically shipped
shortly after orders are received, revenues in any quarter are substantially
dependent on orders booked and shipped throughout that quarter. Accordingly,
revenues for any future quarter are difficult to predict. Revenues from
license fees are also difficult to forecast because the market for enterprise
reporting is rapidly evolving, and because the sales cycle for the Company's
products varies substantially from customer to customer and by distribution
channel and may increase in the future. The Company's expense levels and plans
for expansion, including its plan to significantly increase its sales and
marketing and research and development efforts, are based in significant part
on the Company's expectations of future revenues and are relatively fixed in
the short-term. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Consequently, if
total revenue levels are below expectations, the Company's business, operating
results and financial condition are likely to be adversely and
disproportionately affected.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. As a result, in
less than two years, computer systems and/or software used by many companies
will need to be upgraded to comply with "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. Although the Company believes that its
products are Year 2000 compliant, there can be no assurance that Year 2000
errors or defects will not be discovered in the Company's current and future
products. In addition, the Company believes that the purchasing patterns of
customers and potential customers may be impacted by Year 2000 issues.
Further, many companies are expending significant resources to correct or
patch their current software systems. These expenditures of funds may result
in reduced funds available to purchase software products such as those offered
by the Company. The occurrence of any of such events could have a material
adverse effect on the Company's business, results of operations or financial
condition. Additionally, to the extent the Company's products are embedded
with other companies' products that are not Year 2000 compliant, the Company's
reputation in the marketplace and indirect sales of its products by the
Company's indirect channel partners could be adversely affected, both of which
could result in a material adverse effect on the Company's business, operating
results and financial condition. The Company has conducted a preliminary
review of its internal computer systems to identify the systems that could be
affected by the Year 2000 issue and to develop a plan to resolve the issue.
Based on this preliminary review, the Company currently has no reason to
believe that its software systems are not Year 2000 compliant. However, there
can be no assurance that Year 2000 errors or defects will not be discovered in
its internal software systems and, if such errors or defects are discovered,
there can be no assurance that the costs of making such systems Year 2000
compliant will not have a material adverse effect on the Company's business,
operating results and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has funded its operations primarily through
cash from operations and approximately $14.3 million in net proceeds from the
private sales of preferred stock. Net cash

28
<PAGE>

used in operating activities was approximately $3.9 million, $2.8 million and
$580,000 in 1996, 1997 and the three months ended March 31, 1998,
respectively.

As of March 31, 1998, the Company had cash and cash equivalents of $2.4
million. In addition, in May 1998, the Company obtained a bank line of credit
which provides for up to $5.0 million in borrowings. The Company can borrow up
to 80% of eligible accounts receivable against the line of credit. The
interest rate on borrowed amounts is the prime rate plus 2.25%. This line of
credit requires the Company to comply with various financial covenants, is
prohibited from paying dividends and the Company must deposit $3.0 million of
the proceeds of this offering with the lender through May 25, 1999, the
maturity date of the line of credit. The line of credit expires in May 1999.
The Company currently has no borrowings under the line of credit. See Note 10
of Notes to Financial Statements.

Net cash used in investing activities was $379,000 and $1.3 million in 1996
and 1997, respectively, and primarily consisted of purchases of equipment. Net
cash provided by investing activities was $80,000 for the three months ended
March 31, 1998 and consisted primarily of proceeds from the maturity of short-
term investments. The Company expects that its capital expenditures will
continue to increase as the Company's employee base grows.

Net cash provided by financing activities was approximately $4.1 million and
$6.0 million in 1996 and 1997, respectively, consisting primarily of net
proceeds from private sales of preferred stock and interest earned on such
proceeds. Net cash used in financing activities was $15,000 for the three
months ended March 31, 1998.

The Company believes that the net proceeds from the offering, any cash
generated from operating activities and its existing cash and cash equivalents
will be adequate to meet its cash needs for at least the next 12 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 the Company will not require additional
funds prior to the expiration of such twelve month period or that additional
financing will be available when needed by the Company or at all or that, if
available, such financing will be obtainable on terms favorable to the Company
or will not be dilutive.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 of Notes to Financial Statements for recently adopted and
recently issued accounting standards.

29
<PAGE>

BUSINESS

The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
the results discussed in the forward-looking statements as a result of certain
of the factors set forth in "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

The Actuate Reporting System is a scalable, dynamic reporting platform which
is designed to allow organizations to replace traditional paper-based and on-
line reports with Live Report Documents. Live Report Documents feature rich
interactive capabilities, including hyperlinks, context-sensitive help, a
dynamic table of contents, and a report query feature. Architected
specifically to leverage the functionality of the Internet, the Actuate
Reporting System is designed to make reports accessible to an organization's
employees, customers and suppliers via corporate intranets and the Internet.
Actuate's ReportCast technology can be integrated with Internet or intranet
web sites, making it easier for organizations to notify users when corporate
information is available. The Actuate Reporting System also facilitates off-
line analysis of reports.

The Actuate Reporting System's server-centric architecture provides the
building blocks for an enterprise reporting environment of any size. Actuate's
open environment allows developers to create reports from virtually any data
source and in virtually any format required by end-users. The Actuate Report
Encyclopedia acts as a repository for reports and report components. Actuate's
Virtual Report Distribution technology reduces network traffic by minimizing
the movement of large reports and data sets. The Actuate Developer Workbench
is designed to give developers a complete visual environment for designing,
compiling, viewing and debugging sophisticated report designs. The Company
began shipping its Actuate Reporting System in January 1996, and the Company's
most recent version of the Actuate Reporting System, Version 3.1, began
shipping in May 1998.

Actuate's products have been adopted in a wide variety of industries,
including financial services, telecommunications, technology, health care and
others. The Company's customers include companies such as Chase Manhattan
Corp., Concert Communications Company, Inc., Manpower International, Merck &
Co, Inc. and Toyota Motor Sales, USA, Inc. The Company has also established
strategic relationships with a number of enterprise application vendors,
including PeopleSoft, Inc. ("PeopleSoft), Siebel Systems Corp. ("Siebel"), and
The Vantive Corp. ("Vantive"), all of which embed the Company's products as
part of, or as their entire standard reporting solution.

INDUSTRY BACKGROUND

To succeed in today's increasingly competitive markets, businesses must
accelerate the rate at which they identify and respond to changing business
conditions. An organization's success is, to a large extent, dependent upon
its ability to rapidly collect, organize and distribute information to make
effective business decisions. Reports are the primary means in virtually all
organizations by which critical business information is distributed and used
by employees, customers and suppliers. Examples of such reports include income
statements, budgets, sales forecasts, invoices, inventory listings, payroll
reports, portfolio statements and packing slips. Other products such as OLAP
and query tools generally serve as supplements to core reporting systems and
are only utilized by a small number of users for very distinct and specialized
data analysis.

30
<PAGE>

Historically, most reports have been paper-based, designed using legacy
computer languages such as COBOL and typically delivered to users through
physical means such as hand carts, inter-office mail and the postal service.
However, over the past decade, there has been a dramatic migration of critical
corporate information from mainframe computer systems to distributed computing
environments. This shift has been driven largely by the widespread emergence
and adoption of enterprise software applications, data warehouses, corporate
intranets and the Internet. As a result, organizations have had to reconsider
the way they generate and distribute reports.

One of the most significant computing trends of the 1990's has been the
migration of enterprise applications from legacy mainframe systems to
distributed computing environments. IDC estimates that organizations will have
spent over $28 billion between 1995 and 1998 on the purchase of such
enterprise applications from vendors such as SAP, PeopleSoft, and Baan Company
N.V. ("Baan") in addition to corporate expenditures on the internal
development and implementation of specialized client/server applications.
Also, the rapid adoption of new applications for enterprise resource planning,
sales force automation and supply chain management is giving rise to new and
valuable types of enterprise data, and is enabling new classes of users, such
as sales and customer service representatives, to access such data. While many
of these purchased applications include basic reporting functionality, they
generally do not adequately satisfy an enterprise's reporting needs, causing
the vendors of these applications to develop or license new enterprise
reporting functionality. Additionally, internally developed applications
require organizations to either develop or purchase enterprise reporting
functionality.

Organizations are also increasingly extracting information from mainframe
and other data stores and moving the information into new, high performance
data warehouses and data marts in order to improve information access and
distribution. In order to capitalize on the collection of this information and
enable users to make better business decisions, enterprises require reporting
applications that draw from these new data stores and distribute the
information flexibly and efficiently to a large number of users.

The growth in the use of the Internet and corporate intranets is changing
the way organizations generate and distribute reports. Organizations can now
distribute information electronically to multiple end users both within and
outside an organization, thereby increasing efficiency and reducing the need
for paper-based reports. In order to accomplish this, many organizations are
creating entirely new reporting applications which enable distribution of
reports using the World Wide Web. In addition, the emergence of the Internet
and corporate intranets has given rise to a new information viewing paradigm
characterized by searchable, browsable, interactive content.

Due to this fundamental shift in the way corporations store and manage data,
IT departments are now faced with the challenge of providing users with secure
access to business information residing in a broad range of distributed and
fragmented systems. The Company believes traditional reporting methods have
not kept pace with the technological advancements in application software and
relational databases. As a result, it has been extremely difficult for
businesses to report information from these systems efficiently, uniformly and
securely across a single platform to users within and outside of the
organization.

To date, large organizations have generally used two types of reporting
solutions to meet their needs in a distributed computing environment:
production reporting and desktop reporting. Production reporting systems are
used to produce high-volume operational reports such as sales bookings,
inventory level analysis, invoices and financial information. These systems
typically produce static paper-based reports that are cumbersome and
inflexible in that they provide information to end

31
<PAGE>

users in a predetermined format. Additionally, these production reporting
systems are generally based on programming languages that are outdated and
difficult for developers to work with. Desktop reporting products are used for
the ad hoc creation of individual reports such as sorted listings, simple
graphs and summaries for small workgroups of end users. These tools enable end
users to analyze data and produce certain customized reports, but are limited
in their ability to access the full breadth of an organization's operational
information, are unsuited to producing high-volume operational reports and
require extensive end user training. Furthermore, production and desktop
reporting tools generally lack administration capabilities such as scheduling
and distribution management, which forces corporate IT departments to use
their limited resources to create solutions for these needs.

Due to the shortcomings of traditional reporting methods, the Company
believes that there is a need for a reporting solution that allows
organizations to use a single reporting infrastructure to systematically
extract, publish and disseminate information from distributed computing
environments. IDC estimates the market for enterprise reporting solutions such
as those offered by the Company will grow to over $900 million by the year
2002.

THE ACTUATE SOLUTION

The Actuate Reporting System is a scalable, dynamic enterprise reporting
solution which is designed to allow organizations to effectively develop,
generate and distribute reports throughout the enterprise in both
client/server and Internet-enabled environments. The Company's products are
designed to be easily and rapidly implemented, to generate and distribute
thousands of reports to thousands of users via networks or the Internet, and
to enable the Company's customers to leverage their existing hardware and
software investments. The Company believes the Actuate Reporting System
provides the following key advantages:

LIVE REPORT DOCUMENTS. The Actuate Reporting System enables organizations to
replace traditional paper-based and on-line reports with Live Report
Documents. Live Report Documents feature rich interactive capabilities
including: (i) hyperlinks, which permit the user to drill-down to detailed
information within the report or link to other reports, (ii) context-sensitive
help, which allows the user to access information about the report itself,
including field definitions and data sources, (iii) a dynamic, self-
documenting table of contents, which automatically reflects changes in the
document and enables one-click access to particular pages within large
reports, and (iv) a report query feature, which allows users to extract data
from the report and transfer it to other applications for further analysis or
formatting. The Actuate Reporting System also facilitates mobile, off-line
analysis of reports.

ADAPTABLE ENVIRONMENT. The Actuate Reporting System is based on an object-
oriented architecture that is designed to give developers a complete visual
environment for structuring, compiling, viewing and debugging sophisticated
report designs. Actuate's open environment allows developers to create reports
from virtually any data source and in virtually any format required by users.
Actuate's component-based architecture enables developers to build reports by
dragging and dropping standard components that can be customized and stored in
libraries for reuse.

SCALABLE ENVIRONMENT. The Actuate Reporting System's server-centric
architecture provides the building blocks for an enterprise architecture of
any size. The Actuate Report Encyclopedia acts as a repository for reports and
report components. Actuate's Virtual Report Distribution technology reduces
the need to transmit large reports and data sets by storing reports on the
servers themselves and sending one or more pages to the client over a network
or the Internet as demanded. This

32
<PAGE>

distribution scheme is designed to minimize the stress on an enterprise's
computer network, while providing a responsive viewing environment. The
Actuate Reporting System is also scalable to meet customers' enterprise
reporting needs as their organizations and user populations grow. The Actuate
Report Server also enables administrators to centrally control and schedule
the distribution of both electronic and printed reports and maintain security
access privileges.

INTERNET ARCHITECTURE. Architected specifically to leverage the
functionality of the Internet, the Actuate Reporting System is designed to
make reports accessible to an enterprise's employees, customers and suppliers
via corporate intranets and the Internet. Actuate's ReportCast technology can
be integrated with Internet or intranet web sites, making it easier for
enterprises to notify users via the World Wide Web when corporate information
becomes available. Using a Web browser, users can subscribe to ReportCast
channels that contain the specific categories of reports which are of interest
to them. Notices about new reports are pushed to the channel and customizable
headlines identify the subject matter of the report.

STRATEGY

The Company's strategy is to be the leading provider of enterprise reporting
solutions. Key elements of the Company's strategy include:

EXPAND MARKET LEADERSHIP POSITION THROUGH STRATEGIC RELATIONSHIPS. The
Company believes that it has established a leading position in the emerging
market for enterprise reporting solutions. To accelerate the adoption of the
Actuate Reporting System as the standard enterprise reporting solution and to
facilitate enterprise-wide acceptance of the Company's products, the Company
has established strategic relationships with enterprise application vendors,
consulting firms, systems integrators and development partners. The Company's
strategic technology and distribution partners include Ascend Communications,
Inc., Brio Technology, Inc., Cambridge Technology Partners, Inc., Netscape
Communications Corp., PeopleSoft, PointCast, Inc., Siebel and Vantive. The
Company believes that brand recognition is significant to its business
success, and virtually all of its application partners and resellers use the
Actuate brand name in conjunction with their applications. The Company intends
to further develop its existing strategic relationships and enter into new
partnerships to expand its market presence and brand recognition.

EXTEND TECHNOLOGY LEADERSHIP. Since inception, the Company has focused its
research and development efforts on developing core technologies that address
the requirements of enterprise reporting, such as the ability to generate and
run thousands of reports containing large amounts of data. The Company's
products integrate a number of advanced technologies, including a patented
method of storing report objects, a multi-tier architecture and Web access and
delivery technology. In addition, the Company has in the past rapidly
incorporated new technology into its product offerings. For example, the
Company anticipates releasing advanced viewing technology incorporating Java,
DHTML and XML in early 1999. The Company believes it is a leader in enterprise
reporting technology and intends to extend this leadership position by
continuing to devote significant resources to research and development
efforts, and by acquiring and integrating complementary technologies.

BROADEN DISTRIBUTION CHANNELS. To date, the Company has sold through its
direct sales force located in the United States and has sold worldwide through
enterprise application vendors, resellers and distributors. The Company
intends to expand its direct sales force and tele-sales capability. In
addition, the Company intends to continue to leverage and grow its existing
network of enterprise application vendors, resellers and distributors and
expand its indirect distribution channel worldwide.

INCREASE INTERNATIONAL PRESENCE. While to date its international sales have
been limited, the Company plans to increase its international presence.
Outside the United States, the Company has established distributor
relationships in the France, Germany, Japan, the Netherlands, the Philippines,
Singapore, South Africa and the United Kingdom, and has localized versions of
its products in French,

33
<PAGE>

German, and Japanese. The Company intends to expand its international sales
capabilities by expanding its distribution channels in Europe, Asia/Pacific
and Latin America and by continuing the localization of its products in
selected markets.

PRODUCTS AND TECHNOLOGY

The Actuate Reporting System is a fully integrated, enterprise reporting
software system that provides an organization with a single reporting
infrastructure across distributed computing environments and the Internet. The
Actuate Reporting System is comprised of a suite of products that are licensed
by customers in a typical configuration consisting of a report server, web
agent, administrator desktop, developer workbench, viewer and live report
extension. In the case of direct sales to end user customers, the Company's
client products are typically priced on a per user basis, the report server is
priced on a per CPU basis and number of users basis and the web agent is
priced on a per server basis. Indirect sales are usually either fixed price,
unlimited usage arrangements or arrangements where royalties are paid to the
Company based on sell through to end-users. The Company's enterprise reporting
solution includes the following server, client and web products which allow
organizations to bring together all their business information into one
resource that can report such information to users across the enterprise.

The following table sets forth the suite of products that comprise the
Actuate Reporting System:

<TABLE>
<CAPTION>
ACTUATE
SERVER
PRODUCTS PRODUCT DESCRIPTION PLATFORMS
- -------- ------------------------------------------------ --------------------
<S> <C> <C>
Actuate Highly scalable server application used for Windows NT 3.51, 4.0
Report generating, distributing and managing Live Solaris 2.4, 2.5
Server Report Documents HP-UX 10.1, 10.2
AIX 4.1, 4.2
<CAPTION>
ACTUATE
CLIENT
PRODUCTS
- --------
<S> <C> <C>
Actuate Visual object-oriented development tool utilized Windows NT 3.51, 4.0
Developer by developers to provide an open development Windows 95
Workbench environment for designing, compiling, viewing
and debugging report designs

Actuate End Client application which gives business users Windows 3.X
User the ability to schedule, request, generate, view Windows NT 3.51, 4.0
Desktop and print Live Report Documents Windows 95

Actuate Client application which allows administrators Windows NT 3.51, 4.0
Administrator to manage and control one or more Actuate Report Windows 95
Desktop Servers

Actuate Client interface which allows users to view and Windows 3.X
Viewer print Live Report Documents on LAN attached Windows NT 3.51, 4.0
clients Windows 95
Actuate A toolkit for developers which contains Actuate Windows NT 3.51, 4.0
Software Viewer Active X Control and the Actuate End User Windows 95
Development Desktop Active X controls as well as various
Kit Actuate API's for use with programming
environments such as Visual Basic and C++
applications
<CAPTION>
ACTUATE WEB
PRODUCTS
- -----------
<S> <C> <C>
Actuate Web Server software which enables the Actuate Report Windows NT 4.0
Agent Server to provide secure web access to Live Solaris 2.4, 2.5
Report Documents and integrate with other web HP-UX 10.1, 10.2
sites AIX 4.1, 4.2

Actuate Live Browser extension which allows users to view and Windows NT 4.0
Report print Live Report Documents through Netscape Windows 95
Extension Navigator and Microsoft Internet Explorer
</TABLE>

34
<PAGE>

The Company's products provide native and ODBC connectivity to a number of
data sources, including relational database management systems from Oracle,
IBM, Microsoft, Sybase, Informix and Progress.

CUSTOMERS

The following is a representative list of the Company's end-user customers,
enterprise application vendors and resellers that have purchased more than
$100,000 in license and services fees from the Company since January 1996:

FINANCIAL SERVICES OTHER
American International Group Cargill Incorporated
BankAmerica Corp. Commonwealth of Massachusetts,
Chase Manhattan Corp. Department of Transitional Assistance
Freddie Mac FirstEnergy Corporation
The Goldman Sachs Group, L.P. Manpower International
J&H Marsh & McLennan, Limited Merck & Co., Inc.
NationsBanc Montgomery Securities LLC Sterling Commerce, Inc.
Northern Trust Company Toyota Motor Sales, USA, Inc.

TELECOMMUNICATIONS ENTERPRISE APPLICATION
Ascend Communications, Inc. VENDORS/RESELLERS
Concert Communications Company, Inc. Agile Software, Inc.
Glenayre Electronics, Inc. Ariba Technologies, Inc.
LCI International, Inc. Clarify, Inc.
US West, Inc. Deltanet, Inc.
INEA Corporation
Netscape Communications Corp.
PeopleSoft, Inc.
Portal Information Network, Inc.
Prism Solutions, Inc.
Progress Software Corp.
Siebel Systems Corp.
The Vantive Corp.

35
<PAGE>

CASE STUDIES

The following case studies illustrate how the Actuate Reporting System has
been utilized by certain of the Company's end user customer and enterprise
application vendors.

CONCERT

Concert Communications Company, Inc., ("Concert"), the combined company
resulting from the merger of British Telecom and MCI, provides advanced
communication services worldwide. As a result of the joint venture, Concert
was required to integrate data from more than 30 distinct data sources
existing between the two companies and their distributors. In addition,
Concert needed to offer over 40 international distributors and its nearly
3,900 customers located in over 50 countries efficient and timely access to
information concerning Concert's products and services. Concert chose the
Actuate Reporting System because of its scalable architecture for report
creation and distribution, and its ability to integrate data from multiple
sources into active, intelligent reports. The flexibility of the Actuate
Reporting System has enabled it to be seamlessly integrated into Concert's
existing architecture while providing the scalability required to meet the
extremely demanding reporting requirements of this global telecommunications
company and its distributors. Concert relies on the Actuate Reporting System
to generate hundreds of reports a day from a large and complex data warehouse
and distribute this information globally to distributors and customers in over
40 countries. In addition, Actuate's products assist Concert in meeting its
distributors' reporting needs, including timely access to mission critical
reports on service management, traffic performance and revenue. With minimal
training required on the part of Concert distributors, Actuate's web-based
reports can easily be fully utilized by all participating distributors around
the world.

GLENAYRE

Glenayre Electronics, Inc. ("Glenayre"), a leading worldwide supplier of
personal telecommunications equipment and software, required a fast and
efficient solution for managing customer information. Before it purchased the
Actuate Reporting System, Glenayre generated nearly 5,000 reports a year, with
two employees spending several days each month manually formatting the data
for inclusion in reports. Glenayre chose the Actuate Reporting System because
of its highly scalable enterprise reporting capabilities, formatting
flexibility and adaptable report capabilities. The Actuate Reporting System
enables users ranging from Glenayre's executives to customer service managers
to extract required data such as call duration and call closure rates, as well
as run ad-hoc reports with limited assistance from Glenayre's IS group. The
Actuate Reporting System's flexibility has significantly reduced the number of
reports that are maintained by Glenayre's IS group. In addition, reports are
now automatically generated and Glenayre employees and customers receive more
information specifically targeted to their individual needs.

J&H MARSH & MCLENNAN

J&H Marsh & McLennan, Limited ("J&H Marsh & McLennan"), a leading provider
of risk and insurance services, selected the Actuate Reporting System to
implement operational reports for various aspects of its business, including
client/prospect management, back office financials, insurance placement and
claims processing. Users can view either pre-scheduled or on-demand reports
through both client/server and web-based clients. The functionality of the
Actuate Reporting System has been extended to meet J&H Marsh & McLennan's
specific requirements, including a customized report scheduler and a Java
applet which provides an enhanced user interface for users who request reports
over the Web.

36
<PAGE>

PEOPLESOFT

PeopleSoft, a leading provider of enterprise software supporting human
resources, financial and manufacturing applications, required an enterprise
reporting application to enable its customers to efficiently and securely
distribute reports via the Internet. PeopleSoft chose the Actuate Reporting
System for, among a number of other reasons, its Virtual Report Distribution
architecture, which gives users viewing reports a rapid response regardless of
the length of the report or how much data it summarizes. PeopleSoft also chose
the Actuate Reporting System for its extensible development environment that
enables reports to be built from libraries of reusable objects. PeopleSoft
Performance Measurement is the first PeopleSoft application to take advantage
of Actuate's reporting capabilities.

SIEBEL

Siebel, a leading supplier of enterprise-class sales, marketing, and
customer service information systems, sought an enterprise reporting
application that would provide its customers with an interactive, easy-to-use,
and highly scalable enterprise reporting solution. Siebel chose the Actuate
Reporting System because it can be fully customized to conform with Siebel
98's user interface. The Actuate Reporting System functions essentially as an
extension of Siebel 98, thus creating a seamless solution to the end user.
Since Actuate is tightly integrated with Siebel, all security and application
logic built into Siebel is automatically leveraged and utilized by Actuate. In
addition, corporate modification of the Siebel data model is automatically
propagated to the Actuate Reporting System, enabling Siebel customers to
readily create reports that reflect their individual business environments.
Over 80 pre-built Actuate business reports are included with Siebel 98,
offering customers immediate access to sales, marketing and customer
information.

SALES, MARKETING AND SERVICES

SALES

The direct sales process involves the generation of sales leads through
direct mail, seminars and telemarketing. The Company's field sales force
typically conducts demonstrations and presentations of the Company's products
to developers and management at customer sites as part of the direct sales
effort.

The Company has a separate sales force which addresses the enterprise
application vendor market including such vendors as PeopleSoft, Siebel and
Vantive. These vendors integrate the Company's products with their
applications and either embed them into their standard products or resell them
to their customers. The enterprise application vendor's end user customer is
licensed to use the Company's products solely in conjunction with the vendor's
application with which the Actuate Reporting System is integrated. The Company
offers an upgrade license to end user customers, which permits them to create
reports outside the scope of the particular vendor application. In all of its
current relationships, the Company's products are identified by brand name to
the end customer. Enterprise application vendors provide the first level of
post-sales support to customers. The Company has also utilized a limited
number of resellers which re-market the Company's products to their customer
base. Resellers are offered discounts on the Company's products and sell a
full use license of the product. The Company's resellers do not provide post-
sales support. The Company's ability to achieve revenue growth in the future
will depend in large part on its success in expanding its direct sales force
and in further establishing and maintaining relationships with enterprise
application vendors, resellers and distributors. See "Risk Factors--Expanding
Distribution Channels and Reliance on Third Parties".

37
<PAGE>

Sales cycles for direct sales of the Company's software products to end-user
customers have historically been between three and six months. Large-scale
deployment of the Company's products generally extends for six to nine months
following the successful completion of an initial implementation. Sales cycles
for sales of the Company's products to enterprise application vendors range
from 6 to 24 months or more (not including the sales and implementation cycles
of such vendors' own products, which cycles may be significantly longer than
the Company's sales and implementation cycles). There can be no assurance the
Company or its indirect channel partners will not experience longer sales
cycles in the future. See "Risk Factors--Lengthy and Variable Sales Cycles".

MARKETING

The Company is focused on building market awareness and acceptance of the
Company and its products as well as on developing strategic marketing and
distribution relationships. The Company has a comprehensive marketing strategy
with several key components: image and awareness building, direct marketing to
both prospective and existing customers, a strong Web presence, as well as
broad-scale marketing programs in conjunction with key partners. The Company's
corporate marketing strategy includes extensive public relations activities,
trade shows and user group meetings, as well as programs to work closely with
analysts and other influential third parties. The Company's direct marketing
activities include participation in selected trade shows and conferences and
targeted ongoing direct mail efforts to existing and prospective customers.
The Company also offers seminars to educate prospective customers about the
Company's enterprise reporting solution. The Company has effectively used Web-
based marketing to generate new leads for the Company's direct sales force.
Finally, the Company has invested in building a partner and channel marketing
function to conduct cooperative marketing programs with the Company's
technology partners.

SERVICES

The Company actively recruits and trains third party consulting firms to
provide training and implementation services for the Company's products. Some
of these consulting firms include Cambridge Technology Partners, Inc.,
Enterprise Reporting Group, Compuware Corporation, NetBase Computing,
Benchmark Technical Services and Open Software Technology. The Company's
internal expert services group provides high value "technology transfer"
consulting services to customers developing and deploying an enterprise
reporting solution with the Company's products. These services include
methodology, training, application integration and performance evaluation. Due
to the critical nature of enterprise reporting, the Company believes that its
expert services group and relationships with its consulting partners play a
key role in facilitating initial license sales and enabling customers to
successfully develop and deploy the Actuate Reporting System.

INTERNATIONAL DISTRIBUTORS

The Company also sells its products world-wide through distributors located
in France, Germany, Japan, the Netherlands, the Philippines, Singapore, South
Africa and the United Kingdom. The Company's distributors perform some or all
of the following functions: sales and marketing, systems integration, software
development, and ongoing consulting training and customer support. In exchange
for providing such services, the Company offers its distributors discounts on
products. The Company has an agreement with the parent company of its
international distributors located in France, Germany and the United Kingdom
that could result in the Company acquiring such distributors. Under the terms
of the agreement, the Company has the right of first refusal with respect to
the proposed sale of the capital stock of such distributors. In the event the
Company does not exercise its right of first refusal the distributors would
obtain, in addition to other rights, an exclusive, royalty free license to
sell the Company's products in their respective territories. Also under the
terms of the agreement, the Company has the right to increase the royalty it
receives for Actuate product sales from these European distributors to 100%.
In such event, the distributors' parent company would have the right to

38
<PAGE>

sell its capital stock to the Company. Under either scenario, the price the
Company would be required to pay for such capital stock is set forth in the
agreement. In addition, the Company also has an agreement with its Japanese
distributor that could result in the Company acquiring such distributor. Under
the terms of this agreement, the Company has the right to acquire from the
stockholders of the Japanese distributor and such stockholders have the right
to have the Company acquire from them, the outstanding capital stock of the
Japanese distributor. The price to be paid by the Company for such stock is
set forth in the agreement. In the event the Company acquires any of the
distributors upon the conditions described above, there can be no assurance
that such acquisition will be successful. If such acquisition is not
successful, the Company's business, operating results and financial condition
could be materially adversely affected. There are certain risks associated
with international sales, including, but not limited to, costs of localizing
products for foreign countries, trade laws and business practices favoring
local competition, dependence on local vendors, compliance with multiple,
conflicting and changing government laws and regulations, longer sales and
payment cycles, import and export restrictions and tariffs, difficulties in
staffing and managing foreign operations, greater difficulty or delay in
accounts receivable collection, foreign currency exchange rate fluctuations,
multiple and conflicting tax laws and regulations and political and economic
instability, including recent economic conditions in Asia. There are also
certain risks associated with the Company's potential acquisition of certain
distributors, including diversion of management attention, integration costs,
the coordination of sales and marketing efforts, regulation by foreign
government and adverse accounting treatment of such acquisitions. See "Risk
Factors--Failure to Expand and Risks Associated with International Sales and
Operations", "--Risks Associated with Potential Acquisitions of Certain
International Distributors" and "Certain Transactions".

CUSTOMER AND TECHNICAL SUPPORT

The Company believes that providing superior customer service is critical to
the successful sale and marketing of its products. Maintenance and support
contracts, which are typically for 12 months, are offered with the initial
license, may be renewed annually and are typically set at a percentage of the
total license fees. Substantially all of the Company's direct sales to
customers have maintenance and support contracts that entitle the customer to
software patches, updates and upgrades at no additional cost and technical
phone support when available . Customers purchasing maintenance are able to
access support, via email and telephone during normal business hours. The
Company supplements its telephone support with Web-based support services,
including access to FAQs, on line web forums and a software patch download
area. To improve access to its explanatory materials, the Company provides on-
line documentation with all of its products. In addition, the Company offers,
primarily through certified training partners, classes and training programs
for its products.

RESEARCH AND DEVELOPMENT

The Company's research and development organization is divided into teams
consisting of development engineers, product managers, quality assurance
engineers and technical writers. The research and development organization
uses a phase-oriented development process which includes monitoring of
quality, schedule and functionality. Product development is based on a
consolidation of the requirements from existing customers, technical support
and product managers. The development group infrastructure provides a full
suite of documentation, quality assurance, delivery and support capabilities
(in addition to its design and implementation functions) for the Company's
products. Research and development expenses were $6.2 million for the 12
months ended December 31, 1997 and $1.7 million for the three months ended
March 31, 1998. The Company intends to continue to make substantial
investments in research and development and related activities to maintain and
enhance its product lines. The Company believes that its future success will
depend in large part on its ability to support current and future releases of
popular operating systems, databases and enterprise software applications, to
maintain and improve its current product line and to timely develop new
products that achieve market acceptance. Any failure by the Company to do so
would have a

39
<PAGE>

material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Rapid Technological Change and
Dependence on Product Development".

COMPETITION

The market in which the Company competes is intensely competitive and
characterized by rapidly changing technology and evolving standards.
Competition for the Company's products comes in four principal forms: (i)
direct competition from current or future vendors of reporting solutions such
as Seagate Software, Inc. (a division of Seagate Technology, Inc.) and SQRIBE
Technologies, Inc.; (ii) indirect competition from vendors of OLAP and query
tools such as Arbor Software Corp., Business Objects S.A., Cognos, Inc. and
Microsoft that integrate reporting functionality with such tools; (iii)
indirect competition from enterprise application vendors such as SAP and
Oracle, to the extent they include reporting functionality in their
applications, and (iv) competition from the information systems departments of
current or potential customers that may develop reporting solutions internally
which may be cheaper and more customized. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing and other resources than the Company. Such competitors may be able
to respond more quickly to new or emerging technologies and changes in
customer requirements or devote greater resources to the development,
promotion and sales of their products than the Company. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to leverage significant installed
customer bases. These companies could integrate competing enterprise reporting
software with their widely accepted products which would result in a loss of
market share for the Company. The Company expects additional competition as
other established and emerging companies enter into the enterprise reporting
software market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins, longer sales cycles and loss of market share, any of which
would materially adversely affect the Company's business, operating results
and financial condition.

Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the needs of the Company's
prospective customers. The Company's current or future enterprise application
vendors and other indirect channel partners have in the past, or may in the
future, establish cooperative relationships with current or potential
competitors of the Company, thereby limiting the Company's ability to sell its
products through particular distribution channels. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain revenues from license fees
from new or existing customers, and service revenues from existing customers
on terms favorable to the Company. Further, competitive pressures may require
the Company to reduce the price of its software. In either case, the Company's
business, financial condition, and operating results would be materially
adversely affected. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure
to do so would have a material adverse effect upon the Company's business,
operating results and financial condition.

INTELLECTUAL PROPERTY RIGHTS

40
<PAGE>

property, including requiring those persons with access to the Company's
proprietary information to execute confidentiality agreements with the Company
and restricting access to the Company's source code. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection.

EMPLOYEES

As of March 31, 1998, the Company had 114 full-time employees, including 45
in sales and marketing, 44 in research and development, 16 in services and
support, and 9 in general and administrative functions. The Company believes
its employee relations are good. The Company believes that its future success
will depend in large part upon its continuing ability to attract and retain
highly skilled managerial, sales, marketing, customer support and research and
development personnel and, in particular, its executive officers. See "Risk
Factors--Management of Growth; Dependence on and Need for Additional Qualified
Personnel".

FACILITIES

The Company's principal executive offices are located in San Mateo,
California where the Company leases approximately 16,400 square feet under
leases that expire at various times through May 2002. The Company also leases
space (typically less than 2,000 square feet) in other geographic locations
throughout the United States for sales personnel.

41
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of June 1, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nicolas C. Nierenberg........... 41 President, Chief Executive Officer and
Chairman of the Board of Directors
Peter I. Cittadini.............. 42 Executive Vice President
Daniel A. Gaudreau.............. 50 Vice President, Finance and Chief Financial
Officer
Hamid Bahadori.................. 44 Vice President, Engineering
Albert R. Campa................. 36 Vice President, Marketing
James Breyer(1)................. 36 Director
Arthur Patterson(2)............. 53 Director
Nancy Schoendorf(2)............. 43 Director
Steven Whiteman(1).............. 46 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

NICOLAS C. NIERENBERG is a co-founder of the Company and has been its
President, Chief Executive Officer and Chairman of the Board of Directors
since November 1993. Prior to founding the Company, from April 1993 to
November 1993, Mr. Nierenberg worked as a consultant for Accel Partners, a
venture capital firm, evaluating investment opportunities in the enterprise
software market. Prior to that, in 1980 Mr. Nierenberg co-founded Unify
Corporation, which develops and markets relational database development tools.
Mr. Nierenberg held a number of positions at Unify, including Chairman of the
Board of Directors, Chief Executive Officer, President, Vice President,
Engineering and Chief Technical Officer. Mr. Nierenberg is a director of
Cloudscape, Inc., a privately held Java database management system software
company. Mr. Nierenberg attended the University of California, Los Angeles and
the University of California, San Diego where he studied computer science and
economics.

PETER I. CITTADINI joined the Company in January 1995 as Executive Vice
President. From 1992 to January 1995, Mr. Cittadini held a number of positions
at Interleaf, Inc. an enterprise software publishing company, including Senior
Vice President of Worldwide Operations responsible for worldwide sales,
marketing, customer support and services. From 1985 to 1991, Mr. Cittadini
held a number of positions at Oracle Corporation, including Vice President,
Northeast Division. Mr. Cittadini holds a B.A. in Liberal Arts from Boston
College.

DANIEL A. GAUDREAU joined the Company in February 1997 as Vice President,
Finance and Chief Financial Officer. From January 1994 to February 1997, Mr.
Gaudreau served as Vice President, Finance and Chief Financial Officer of
Plantronics, Inc., a publicly traded telephone headset manufacturing company,
where he was responsible for all financial and administrative operations. From
January 1990 to January 1994, Mr. Gaudreau was Vice President, Finance and
Chief Financial Officer at Ready Systems, a real-time operating systems
software company. Prior to that, Mr. Gaudreau spent two years at Apple
Computer as the Controller of Fremont Manufacturing Operations, prior to which
he spent 18 years at General Electric where he held various financial
management positions. Mr. Gaudreau holds a B.S. in Industrial Management from
Clarkson University.

42
<PAGE>

HAMID BAHADORI joined the Company in May 1998 as Vice President,
Engineering. From January 1996 to May 1998, Mr. Bahadori served as Vice
President, Engineering for Envive Corp., a privately held applications
software company. Prior to that, Mr. Bahadori was a Senior Director of
Software Products Development for Oracle from 1989 to 1996. Mr. Bahadori holds
a B.S. in Applied Math and Electrical Engineering/Computer Science from Purdue
University and an M.S. and Ph.D. in Computer Sciences from the University of
California, Berkeley.

ALBERT R. CAMPA joined the Company in November 1995 as Vice President,
Marketing. From February 1990 to October 1995, Mr. Campa held a number of
positions at Sybase, Inc., a database software company, including Group
Director of Worldwide Field Marketing where he was responsible for lead
generation, vertical marketing, regional marketing and a variety of other
sales and marketing activities. From September 1987 to February 1990, Mr.
Campa held a number of product and marketing management positions at Sun
Microsystems, Inc. From September 1983 to March 1985, Mr. Campa was a design
engineer in IBM's mainframe development group. Mr. Campa holds a B.S. in
Mechanical Engineering from Stanford University and an M.B.A. from Harvard
University.

JAMES BREYER has been a director of the Company since November 1993. Mr.
Breyer has been a general partner of Accel Partners, a venture capital firm,
since 1990, and the Managing Partner since 1997. At Accel, Mr. Breyer has been
responsible for the firm's involvement in over a dozen companies that have
completed public offerings or successful mergers. Prior to joining Accel, Mr.
Breyer worked as a management consultant at McKinsey and Company, and held
product management and marketing positions at Apple Computer and Hewlett
Packard. Mr. Breyer currently serves as a director of RealNetworks, Inc. and
several privately held companies. Mr. Breyer holds a B.S. in Computer Science
and Economics from Stanford University and an M.B.A. from Harvard University,
where he was named a Baker Scholar.

ARTHUR PATTERSON has been a director of the Company since November 1993. Mr.
Patterson founded Accel in 1983. Mr. Patterson currently serves as a director
of AIM Funds, PageMart Wireless, Inc., Unify Corporation, Viasoft, Inc. and
several privately held enterprise software and communications companies. Mr.
Patterson holds an A.B. and an M.B.A. from Harvard University.

NANCY SCHOENDORF has been a director of the Company since September 1994.
Since June 1994, Ms. Schoendorf has been a general partner of Mohr, Davidow
Ventures, a venture capital firm. Prior to joining Mohr, Davidow, Ms.
Schoendorf served as Director of Systems Software Development at Sun
Microsystems, Inc. Ms. Schoendorf currently serves as a director of several
privately held companies. Ms. Schoendorf holds a B.S. in Math and Computer
Science from Iowa State University and an M.B.A. from Santa Clara University.

STEVEN WHITEMAN has been a director of the Company since April 1998. Since
April 1993, Mr. Whiteman has served as President of Viasoft, Inc., a publicly
traded software application and services company and has served as Chief
Executive Officer and Director since January 1994 and Chairman of the Board of
Directors since April 1997. Mr. Whiteman currently serves as a director of
Unify Corporation. Mr. Whiteman holds a B.A. in Business Administration from
Taylor University and an M.B.A. from the University of Cincinnati.

AUDIT COMMITTEE

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

43
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee consists of Messrs. Breyer and Whiteman. The
Compensation Committee makes recommendations regarding the Company's stock
plans and makes decisions concerning salaries and incentive compensation for
the Company's executive officers.

None of the members of the Compensation Committee is currently or has been,
at any time since the formation of the Company, an officer or employee of the
Company. 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
or Compensation Committee.

DIRECTOR COMPENSATION

Directors currently do not receive any cash compensation from the Company
for their services as members of the Board of Directors, although members are
reimbursed for certain expenses in connection with attendance at Board of
Directors and Committee meetings. Directors are eligible to participate in the
Company's stock plans, and beginning in 1998, employee directors will also be
able to participate in the Company's 1998 Equity Incentive Plan and non-
employee directors will receive periodic option grants under the Company's
1998 Non-Employee Directors Option Plan. In April 1998, Mr. Whiteman was
granted an option to purchase 30,000 shares of the Company's Common Stock
under the Company's 1994 Stock Option Plan at an exercise price of $5.00 per
share subject to a five year vesting schedule in connection with his
appointment to the Board. See "Management--1998 Equity Incentive Plan" and "--
1998 Non-Employee Directors Option Plan".

EXECUTIVE COMPENSATION

The following table sets forth information with respect to compensation for
the fiscal year ended December 31, 1997 paid by the Company for services to
the Company by the Company's Chief Executive Officer and the Company's four
other highest paid executive officers whose total salary and bonus for such
fiscal year exceeded $100,000 (collectively, the "Named Executive Officers"):

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
SUMMARY COMPENSATION
ANNUAL COMPENSATION TABLE AWARDS
--------------------- --------------------
NUMBER OF SECURITIES
SALARY($) BONUS($) UNDERLYING OPTIONS
---------- --------- --------------------
<S> <C> <C> <C>
Nicolas C. Nierenberg............. 174,350 40,064 150,000
President and Chief Executive
Officer
Peter I. Cittadini................ 180,000 63,000 40,000
Executive Vice President
Daniel A. Gaudreau(1)............. 142,320 36,045 125,000
Vice President, Finance and Chief
Financial Officer
Edward M. Sesek(2)................ 111,590 29,230 150,000
Vice President, Engineering
Albert R. Campa................... 115,000 26,683 15,000
Vice President, Marketing
</TABLE>
- --------
(1) Mr. Gaudreau's employment started on February 24, 1997 at an annual base
salary of $170,000.
(2) Mr. Sesek's employment started on April 21, 1997 at an annual base salary
of $160,000. Mr. Sesek resigned as Vice President, Engineering effective
May 26, 1998. Hamid Bahadori was appointed to the position of Vice
President, Engineering, effective May 27, 1998.

44
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1997 to each of the Named Executive Officers. No stock
appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
---------------------------------------------------- --------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
GRANTED(1) FISCAL 1997 (2) ($/SHARE) (3) DATE 5% 10%
---------- ---------------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nicolas C. Nierenberg... 150,000 13.1% 0.62 08/26/07 $ 58,487 $ 148,218
Peter I. Cittadini...... 40,000 3.5 0.34 01/15/07 8,553 21,675
Daniel A. Gaudreau...... 125,000 10.9 0.34 03/05/07 26,728 67,734
Edward M. Sesek......... 150,000 13.1 0.34 04/16/07 32,074 81,281
Albert R. Campa......... 7,000 * 0.34 03/05/07 1,497 3,793
8,000 * 2.10 12/03/07 10,565 23,428
</TABLE>
- --------
* Less than one percent
(1) With respect to the options granted to Messrs. Nierenberg, Cittadini,
Sesek, and Campa, 1/5 of the shares vest on the first anniversary of the
vesting commencement date and 1/60 of the shares vest on each monthly
anniversary of the vesting commencement date thereafter. With respect to
Mr. Gaudreau's option, 1/4 of the shares vest on the first anniversary of
the vesting commencement date and 1/48 of the shares vest on each monthly
anniversary of the vesting commencement date thereafter. Each of the
options has a ten year term, subject to earlier termination in the event
of the optionee's cessation of service with the Company. See "Employment
Agreements and Change of Control and Severance Arrangements".
(2) Based on an aggregate of 1,146,350 options granted to employees of the
Company under the Company's 1994 Stock Option Plan during 1997.
(3) The exercise price is equal to the deemed fair market value of the
Company's Common Stock as estimated by the Board of Directors on the date
of grant.
(4) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years). Stock price appreciation and
potential realizable values at 5% and 10% appreciation are calculated in
accordance with Section 402 of Regulation S-K under the Securities Act of
1933, as amended, and do not represent the Company's prediction of its
stock price performance.

45
<PAGE>

OPTION VALUES

The following table sets forth for each of the Named Executive Officers
options exercised during fiscal 1997 and the number and value of securities
underlying unexercised options that are held by the Named Executive Officers
as of December 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1997(2) DECEMBER 31, 1997 $(3)
ACQUIRED REALIZED ------------------------- -------------------------
NAME ON EXERCISE $(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nicolas C. Nierenberg... -- -- 150,000 -- 222,000 --
Peter I. Cittadini...... 60,000 20,600 -- -- -- --
Daniel A. Gaudreau...... 125,000 -- -- -- -- --
Edward M. Sesek......... 75,000 21,000 75,000 -- 132,000 --
Albert R. Campa......... 74,500 12,825 8,000 -- -- --
</TABLE>
- --------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) With respect to the options granted to Messrs. Nierenberg, Cittadini,
Sesek, and Campa, 1/5 of the shares vest on the first anniversary of the
vesting commencement date and 1/60 of the shares vest on each monthly
anniversary of the vesting commencement date thereafter. With respect to
Mr. Gaudreau's option, 1/4 of the shares vest on the first anniversary of
the vesting commencement date and 1/48 of the shares vest on each monthly
anniversary of the vesting commencement date thereafter. Each of the
options has a ten year term, subject to earlier termination in the event
of the optionee's cessation of service with the Company. As of December
31, 1997, the repurchase right had not lapsed as to any option shares for
Messrs. Nierenberg and Sesek.
(3) Based on the fair market value of the Company's Common Stock as of
December 31, 1997 ($2.10 per share), less the exercise price payable for
such shares.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS

Pursuant to an agreement entered into between the Company and Daniel A.
Gaudreau, the Company's Vice President, Finance and Chief Financial Officer,
upon a merger or acquisition Mr. Gaudreau will automatically vest in 50% of
his remaining unvested options to purchase shares of the Company's Common
Stock. Pursuant to an agreement entered into between the Company and Hamid
Bahadori, the Company's Vice President, Engineering, if Mr. Bahadori's
employment is terminated by the Company within the first 24 months following
May 27, 1998 other than for cause, he will automatically be vested in options
to purchase not less than 60,000 shares of the Company's Common Stock.

STOCK PLANS

1998 EQUITY INCENTIVE PLAN

The Company's 1998 Equity Incentive Plan (the "Plan") was adopted by the
Board on May 27, 1998, subject to stockholder approval. The number of shares
of Common Stock reserved for issuance under the Plan is equal to 1,300,000
shares, which includes the aggregate number of shares remaining available for
grant under the Company's 1994 Stock Option Plan (the "Predecessor Plan"),
plus an additional number of shares equal to the number of shares reserved for
issuance under the Predecessor Plan against options outstanding under the
Predecessor Plan as of the date of this offering. As of March 31, 1998, there
were options to purchase 905,450 shares outstanding under the Predecessor
Plan. The Plan serves as the successor to the Predecessor Plan and no option
grants will be made under the Predecessor Plan after this offering. Except as
otherwise noted, options outstanding under the Predecessor Plan are subject to
substantially the same terms as described

46
<PAGE>

below for option awards under the Plan. As of January 1 of each year,
commencing with the year 1999, the number of shares reserved for issuance
under the Plan will be increased automatically by the lesser of (i) 5% of the
total number of shares of Common Stock then outstanding or (ii) 700,000
shares.

Under the Plan, employees, members of the Board and consultants may be
awarded options to purchase shares of Common Stock, stock appreciation rights
("SARs"), restricted shares or stock units (collectively, the "Awards").
Currently no Awards have been granted under the Plan. Options under the Plan
may be incentive stock options designed to satisfy Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or nonstatutory stock options
not designed to meet such requirements. If restricted shares or shares issued
upon the exercise of options granted under the Plan or the Predecessor Plan
are forfeited, then such shares will again become available for awards under
the Plan. If stock units, options or SARs granted under the Plan or the
Predecessor Plan are forfeited or terminate for any other reason before being
exercised, then the corresponding shares will again become available for
awards under the Plan.

The Plan is administered by the Company's Compensation Committee (the
"Committee"). The Committee has the complete discretion to determine which
eligible individuals are to receive any award, determine the type, number,
vesting requirements and other features and conditions of such award,
interpret the Plan and make all other decisions relating to the operation of
the Plan.

The exercise price for nonstatutory and incentive stock options granted
under the Plan may not be less than 85% or 100%, respectively, of the fair
market value of the Common Stock on the option grant date and may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised
by using a cashless exercise method, a pledge of shares to a broker or
promissory note. The payment for the award of newly issued restricted shares
will be made in cash, by promissory note or the rendering of past or future
services.

The Committee has the authority to modify, extend or assume outstanding
options and SARs or may accept the cancellation of outstanding options or SARs
in return for the grant of new options or SARs for the same or a different
number of shares and at the same or a different exercise price.

Upon a Change in Control, an Award will become fully vested as to all shares
subject to such Award if such Award is not assumed by the surviving
corporation or its parent and the surviving corporation or its parent does not
substitute such Award with another award of substantially the same terms. In
the event of an involuntary termination of a participant within 12 months
following a Change in Control, the vesting of an Award will accelerate in
full. Options granted under the Predecessor Plan become fully vested upon a
Change in Control unless assumed or replaced with a comparable option by the
acquiring entity.

A Change in Control includes (i) a merger or consolidation of the Company
after which the Company's then current stockholders own less than 50% of the
surviving corporation, (ii) sale of all or substantially all of the assets of
the Company, (iii) a proxy contest that results in replacement of more than
one-third of the directors over a 24 month period or (iv) acquisition of 50%
or more of the Company's outstanding stock by a person other than a trustee of
any of the Company's employee benefit plans or a corporation owned by the
stockholders of the Company in substantially the same proportions as their
stock ownership in the Company. In the event of a merger or other
reorganization, outstanding options, SARs, restricted shares and stock units
will be subject to the agreement of merger or reorganization, which may
provide for the assumption of outstanding Awards by the surviving corporation
or its parent, for their continuation by the Company (if the Company is a
surviving corporation), for accelerated vesting and accelerated expiration,
for settlement in cash or for cancellation of the outstanding Awards.

The Board may amend or terminate the Plan at any time. Amendments may be
subject to stockholder approval to the extent required by applicable laws.

47
<PAGE>

1998 EMPLOYEE STOCK PURCHASE PLAN

The Board adopted the Company's 1998 Employee Stock Purchase Plan (the
"Purchase Plan") on May 27, 1998, subject to stockholder approval. A total of
250,000 shares of Common Stock have been reserved for issuance under the
Purchase Plan. As of January 1 of each year, the number of shares reserved for
issuance under the Purchase Plan will be automatically increased by 150,000
shares. The Purchase Plan is intended to qualify under Section 423 of the
Code. Each calendar year, two overlapping offering periods each with a
duration of 24 months will commence on February 1 and August 1 (except that
the first offering period will commence on the effective date of the offering
and end on July 31, 2000). Each offering period contains four six-month
accumulation periods, with purchases occurring at the end of each six-month
accumulation period. However, the initial accumulation period during the first
offering period will begin on the effective date of the offering and end on
January 31, 1999. The Purchase Plan will be administered by the Committee.
Each employee will be eligible to participate if he or she is employed by the
Company for at least 20 hours per week and for more than five months per year.
The Purchase Plan permits each eligible employee to purchase Common Stock
through payroll deductions, which may not exceed 15% of an employee's cash
compensation. No more than 1,000 shares may be purchased on any purchase date.
The price of each share of Common Stock purchased under the Purchase Plan will
be 85% of the lower of (i) the fair market value per share of Common Stock on
the date immediately prior to the first date of the applicable offering period
(except that in the case of the first offering period, the price per share
will be the price offered to the public in the offering) or (ii) the date at
the end of the applicable accumulation period. Employees may end their
participation in the Purchase Plan at any time during the accumulation period,
and participation ends automatically upon termination of employment with the
Company.

In the event of a Change in Control, all offering periods and accumulation
periods will terminate and each outstanding purchase right will be exercised.
The Board may amend or terminate the Purchase Plan at any time. However, the
Board may not, without stockholder approval, increase the number of shares of
Common Stock reserved for issuance under the Purchase Plan beyond the
automatic increases described above.

1998 NON-EMPLOYEE DIRECTORS OPTION PLAN

The Company's 1998 Non-Employee Directors Option Plan (the "Directors Option
Plan") was adopted by the Board of Directors on May 27, 1998, subject to
approval by the stockholders. Under the Directors Option Plan, non-employee
members of the Board of Directors will be eligible for automatic option
grants. For issuance under the Directors Option Plan, 200,000 shares of Common
Stock have been authorized. No shares have been issued under the Directors
Option Plan. The Directors Option Plan is self-administering but any
administrative determinations will be made by the Compensation Committee of
the Board. The exercise price for options granted under the Directors Option
Plan may be paid in cash or in outstanding shares of Common Stock. Options may
also be exercised on a cashless basis through the same-day sale of the
purchased shares.

Each individual who first joins the Board as a non-employee director after
the date of this Offering, whether through election or appointment will
receive at that time, an automatic option grant for 20,000 shares of Common
Stock. With respect to the initial automatic option grant, the option will
become exercisable as to 20% of the shares after one year of Board service and
in the balance of the shares in a series of 48 monthly installments over the
remaining period of optionee's Board service. In addition, at each annual
stockholders meeting, beginning in 1999, each non-employee director who was a
director on the date of this Offering and each nonemployee director who
becomes a director after the date of this Offering will automatically be
granted at that meeting, whether or not he or she is standing for re-election
at that particular meeting, a stock option to purchase 2,500 shares of Common
Stock, which will become fully exercisable on the first anniversary of such
meeting. Each option will

48
<PAGE>

have an exercise price equal to the fair market value of the Common Stock on
the automatic grant date and a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. However,
vesting will automatically accelerate in full upon (i) an acquisition of the
Company by merger, consolidation or asset sale, (ii) a tender offer for more
than 50% of the outstanding voting stock or proxy contest for Board membership
or (iii) the death or disability of the optionee while serving as a Board
member.

The Board may amend or modify the Directors Option Plan at any time. The
Directors Option Plan will terminate on May 27, 2008, unless sooner terminated
by the Board.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Pursuant to the provisions of the Delaware General Corporation Law
("Delaware Law"), the Company has adopted provisions in its Certificate of
Incorporation which provide that directors of the Company shall not be
personally liable for monetary damages to the Company or its stockholders for
a breach of fiduciary duty as a director, except for liability as a result of
(i) a breach of the directors' duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of
the Delaware Law; and (iv) transactions from which the director derived an
improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.

The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under the Delaware Law. The
Company, prior to the completion of this offering, will enter into separate
indemnification agreements with its directors which are, in some cases,
broader than the specific indemnification provisions contained in the Delaware
Law. The indemnification agreements require the Company, among other things,
to indemnify such directors against certain liabilities that may arise by
reason of their status or service as directors (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.

49
<PAGE>

CERTAIN TRANSACTIONS

Since January 1, 1995, the Company has issued, in private placement
transactions, shares of its Preferred Stock as follows: In January 1996, the
Company issued 1,176,471 shares of Series C Preferred Stock at a price of
$3.40 per share and in April 1997, the Company issued 939,927 shares of Series
D Preferred Stock at a price of $6.23 per share. The following table
summarizes the shares of Preferred Stock purchased by executive officers,
directors and 5% stockholders of the Company and persons associated with them:

<TABLE>
<CAPTION>
SERIES C SERIES D
INVESTOR PREFERRED STOCK PREFERRED STOCK
- -------- --------------- ---------------
<S> <C> <C>
Entities affiliated with Accel Partners(1)...... 478,054 286,684
Mohr, Davidow Ventures III(2)................... 177,392 105,720
Entities affiliated with Sequoia Capital(3)..... 521,025 40,983
Daniel A. Gaudreau.............................. -- 25,000
</TABLE>
- --------
(1) Includes shares purchased by Accel IV L.P., Accel Investors '93 L.P.,
Accel Keiretsu L.P., Ellmore C. Patterson Partners and Prosper Partners.
Messrs. Breyer and Patterson, directors of the Company, are general
partners of Accel Partners which is the general partner of the Accel IV
L.P., Accel Investors '93 L.P., Accel Keiretsu L.P., Ellmore C. Patterson
Partners and Prosper Partners.
(2) Ms. Schoendorf, a director of the Company, is a general partner of WLPJ
Partners, which is the general partner of Mohr, Davidow Ventures III.
(3) Includes shares purchased by Sequoia Capital IV, Sequoia Technology
Partners IV and Sequoia 1995.

In 1996, the Company made an equity investment of approximately $95,000 in
Actuate Japan. This represented approximately 8.3% of the outstanding voting
stock of Actuate Japan. This investment is accounted for on the equity basis
due to the Company's ability to exercise significant influence over Actuate
Japan. During 1996, the Company advanced a total of $160,000 to Actuate Japan.
An additional $100,000 was advanced in 1997. The equity investment and
remaining outstanding loans were fully written down as of December 31, 1997
due to impairment indicators.

Prior to the effective date of this offering, the Company intends to enter
into indemnification agreements with its directors containing provisions that
may require the Company, among other things, to indemnify such directors
against certain liabilities that may arise by reason of their status or
service as directors (other than liabilities arising from willful misconduct
of a culpable nature) and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified. The Company
intends to execute such agreements with its future directors. See
"Management--Limitation of Liability and Indemnification Matters".

The Company has entered into letter agreements with certain of its officers
that provide for the acceleration of vesting of shares held by them under
certain circumstances. See "Management--Employment Agreements and Change of
Control and Severance Arrangements".

The Company has entered into an agreement (the "BV Agreement") with Telephus
Vastgoed B.V. (the "BV"), pursuant to which the BV has established
subsidiaries in France, Germany and the United Kingdom (the "BV
Subsidiaries"). The Company has entered into agreements with each of the BV
Subsidiaries under which the BV Subsidiaries have the exclusive right (other
than with respect to value added resellers who have been or will be granted
worldwide distribution rights) to distribute the Company's products and use
the Company's name in Belgium, France, Germany, Switzerland and the United
Kingdom, in exchange for a 50% royalty on sales of the Company's products by
the BV Subsidiaries. Beginning six months after the effective date of the
Offering, the BV may force the Company to purchase its outstanding shares at a
price approximately equal to its last last twelve

50
<PAGE>

months' revenues. The purchase price may be paid, at the Company's option, in
cash, or in registered shares of the Company's Common Stock. The Company has a
right of first refusal on any transfer of ownership interest in the BV and,
beginning on July 1, 1999, the Company has the right to cause the shareholders
of the BV to sell all of the outstanding shares of the BV to the Company based
on the above pricing formula. In the event that the Company fails to purchase
the BV upon the request of the BV shareholders, or fails to exercise its right
of first refusal, the licenses held by the BV Subsidiaries will become
perpetual and royalty free. See "Risk Factors--Risks Associated With Potential
Acquisitions of Certain International Distributors" and "--Failure to Expand
and Risks Associated With International Sales and Operations".

The Company holds a minority equity interest in Actuate Japan. The Company
has also entered into an agreement with Actuate Japan pursuant to which
Actuate Japan has the exclusive right (other than with respect to value added
resellers who are or will be granted worldwide distribution rights) to
distribute the Company's Products and use the Company's name in Japan, in
exchange for a 50% royalty on sales of the Company products by Actuate Japan.
The Company has a right of first refusal on any transfer of the outstanding
shares of Actuate Japan. In addition, beginning nine months after the
effective date of this offering, Actuate Japan has the right to cause the
Company to buy all of its outstanding shares, and the Company has the right to
cause the other shareholders of Actuate Japan to sell their shares to the
Company, in each case pursuant to an pre-determined price formula, in exchange
for (at the election of the Company) cash, securities of the Company or
through a continuing royalty offset over a 30 month period. See "Risk
Factors--Risks Associated With Potential Acquisitions of Certain International
Distributors" and "--Failure to Expand and Risks Associated With International
Sales and Operations".

51
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
regarding beneficial ownership of its Common Stock as of March 31, 1998, and
as adjusted to reflect the sale of shares offered by this Prospectus, by (i)
each stockholder who is known by the Company to own beneficially more than
five percent of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers, (iv) all
executive officers and directors of the Company as a group and (v) other
Selling Stockholders.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) THE OFFERING(2)
-------------------- --------------------
NAME AND ADDRESS OF SHARES TO
BENEFICIAL OWNER NUMBER PERCENT(3) BE SOLD NUMBER PERCENT(3)
- ------------------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Accel Partners(4)......... 3,931,405 37.5% -- 3,931,405 29.4%
428 University Avenue
Palo Alto, CA 94301
Mohr, Davidow Ventures
III(5).................... 1,449,779 13.8 -- 1,449,779 10.8%
2775 Sand Hill Road, Suite
240
Menlo Park, CA 94025
Entities affiliated with
Sequoia Capital(6)........ 562,008 5.4 -- 562,008 4.2%
3000 Sand Hill Road, Suite
4-280
Menlo Park, CA 94025
Nicolas C. Nierenberg(7)... 1,650,000 15.5 -- 1,650,000 12.2%
c/o Actuate Software
Corporation
999 Baker Way, Suite 270
San Mateo, CA 94404
Peter I. Cittadini(8)...... 502,500 4.8 -- 502,500 3.8%
Daniel A. Gaudreau......... 150,000 1.4 -- 150,000 1.1%
Edward M. Sesek(9)......... 150,000 1.4 -- 150,000 1.1%
Albert R. Campa(10)........ 82,500 * -- 82,500 *
James Breyer(4)............ 3,931,405 37.5 -- 3,931,405 29.4%
c/o Accel Partners
428 University Avenue
Palo Alto, CA 94301
Arthur Patterson(4)........ 3,931,405 37.5 -- 3,931,405 29.4%
c/o Accel Partners
428 University Avenue
Palo Alto, CA 94301
Nancy Schoendorf(5)........ 1,449,779 13.8 -- 1,449,779 10.8%
c/o Mohr, Davidow Ventures
2775 Sand Hill Road, Suite
240
Menlo Park, CA 94025
Steven Whiteman(11)........ 30,000 * -- 30,000 *
John R. Dafoe.............. 300,000 2.8 30,000 270,000 2.0%
David B. Edwards........... 300,000 2.8 30,000 270,000 2.0%
William A. Osberg.......... 300,000 2.8 30,000 270,000 2.0%
Paul A. Rogers(12)......... 240,000 2.3 20,000 220,000 1.6%
All directors and executive
officers as a group (9
persons)(13).............. 7,946,184 72.5% -- 7,946,184 57.8%
</TABLE>

52
<PAGE>

- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment
power with respect to securities. To the Company's knowledge, except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock. The
number of shares of Common Stock beneficially owned includes shares
issuable pursuant to stock options that are exercisable within 60 days of
March 31, 1998.
(2) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriter's over-allotment option is exercised in full, Nicolas C.
Nierenberg and Peter I. Cittadini will sell an aggregate of 150,000 and
50,000 shares of Common Stock, respectively, and beneficially own
1,500,000 and 452,500 shares, or 11.0% and 3.3%, respectively, of the
Company's outstanding Common Stock, after completion of this offering.
See "Underwriting".
(3) Percentage of beneficial ownership is based on 10,486,017 shares of
Common Stock outstanding as of March 31, 1998 and 13,376,017 shares of
Common Stock to be outstanding after the closing of this offering. Shares
issuable pursuant to stock options exercisable within 60 days of March
31, 1998 are deemed outstanding for computing the percentage of the
person holding such options but are not deemed outstanding for computing
the percentage of any other person.
(4) Includes 3,601,168 shares held by Accel IV L.P., 145,462 shares held by
Accel Investors '93 L.P., 74,697 shares held by Accel Keiretsu L.P.,
86,490 shares held by Ellmore C. Patterson Partners and 23,588 shares
held by Prosper Partners. Messrs. Breyer and Patterson, directors of the
Company, are general partners of Accel Partners, the general partner of
each of Accel IV L.P., Accel Investors '93 L.P., Accel Keiretsu L.P.,
Ellmore C. Patterson Partners and Prosper Partners. Each of Messrs.
Breyer and Patterson disclaim beneficial ownership of such shares except
to the extent of his pecuniary interest therein.
(5) Ms. Schoendorf, a director of the Company, is a general partner of WLPJ
Partners, the general partner of Mohr, Davidow Ventures III. Ms.
Schoendorf disclaims beneficial ownership of such shares except to the
extent of her pecuniary interest therein.
(6) Includes 511,428 shares held by Sequoia Capital IV, 28,100 shares held by
Sequoia Technology Partners IV and 22,480 shares held by Sequoia 1995.
(7) Includes 150,000 shares of Common Stock issuable pursuant to stock
options which may be exercised within 60 days of March 31, 1998.
(8) Includes 40,000 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days of March 31, 1998.
(9) Includes 75,000 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days of March 31, 1998.
(10) Includes 8,000 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days of March 31, 1998.
(11) Includes 30,000 shares of Common Stock issuable pursuant to a stock
option granted to Mr. Whiteman, a director of the Company, on April 14,
1998, which may be exercised within 60 days of March 31, 1998.
(12) Includes 20,000 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days of March 31, 1998
(13) Includes 378,000 shares of Common Stock issuable pursuant to stock
options which may be exercised within 60 days after March 31, 1998,
including 180,000 shares of Common Stock issuable pursuant to stock
options granted to Mr. Whiteman and Mr. Bahadori, the Company's Vice
President, Engineering, subsequent to March 31, 1998.

53
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 35,000,000 shares of Common Stock, $0.001 par value,
and 5,000,000 shares of Preferred Stock, $0.001 par value.

COMMON STOCK

As of March 31, 1998, there were 10,486,017 shares of Common Stock
outstanding that were held of record by approximately 75 stockholders. There
will be 13,376,017 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and assuming no exercise after March
31, 1998 of outstanding options) after giving effect to the sale of the shares
of Common Stock to the public offered hereby.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy". In the event of the liquidation, dissolution,
or winding up of the Company, the holders of Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of Preferred Stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the shares of Common Stock to be issued upon completion of
this offering will be fully paid and nonassessable.

PREFERRED STOCK

The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and
other rights of the holders of Common Stock. The issuance of Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW

CERTIFICATE OF INCORPORATION AND BYLAWS

Effective upon the closing of this offering, the Certificate of
Incorporation will provide that all stockholder actions must be effected at a
duly called meeting and not by a consent in writing. This provision of the
Certificate of Incorporation could discourage potential acquisition proposals
and could delay or prevent a change in control of the Company. This provision
is intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an unsolicited acquisition of the Company. The provision also is
intended to discourage certain tactics that may be used in proxy fights.
However, such provision could have the effect of discouraging others from
making tender offers for the Company's shares. Such provision also may have
the effect of preventing changes in the management of the Company. See "Risk
Factors--Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law".

54
<PAGE>

DELAWARE TAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.

REGISTRATION RIGHTS

After this offering, the holders of approximately 6,489,732 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of the agreement between
the Company and the holders of such registrable securities, 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 to include their shares of such Common Stock therein.
Additionally, such holders are also entitled to certain demand registration
rights pursuant to which they may require the Company to file a registration
statement under the Securities Act at its expense with respect to their shares
of Common Stock, and the Company is required to use its best efforts to effect
such registration. Further, holders may require the Company to file additional
registration statements on Form S-3 at the Company's expense. All of these
registration 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 and such registration not taking place
prior to six months following the effective date of the offering.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is BankBoston, N.A.,
and its telephone number is (718) 595-2000.

55
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
13,376,017 shares of Common Stock (13,626,017 shares if the Underwriters'
over-allotment option is exercised in full), assuming no exercise of options
after March 31, 1998. Of these shares, the 3,000,000 shares offered hereby
(3,450,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction under the Securities Act,
unless they are held by "affiliates" of the Company as that term is used under
the Securities Act and the Regulations promulgated thereunder.

The remaining 10,376,017 outstanding shares are "restricted securities" as
that term is defined in Rule 144 under the Securities Act (assuming no
exercise of the Underwriters' over-allotment option) ("Restricted Shares").
All such Restricted Shares are subject to lock-up agreements pursuant to which
such holders have agreed not to sell any securities of the Company without the
prior consent of Goldman, Sachs & Co. for a period of 180 days from the date
of this Prospectus. Beginning 180 days after the date of this Prospectus,
approximately 10,376,017 Restricted Shares will become eligible for sale under
Rule 144 or Rule 701(assuming no exercise of the Underwriters' over-allotment
option), of which 8,616,337 shares will be subject to the volume and/or manner
of sale restrictions of Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year is entitled to sell within any three-month period commencing 90 days
after the date of this Prospectus a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 1,337,602 shares immediately after the offering) or (ii) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to the filing of a Form 144 with respect to such sale. A person
(or persons 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 who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates must always sell
pursuant to Rule 144, even after the applicable holding periods have been
satisfied.

Under Rule 701 as currently in effect, any employee, officer or director of
or consultant to the Company who purchased shares under the 1994 Stock Option
Plan or pursuant to a written compensatory plan or contract is entitled to
rely on the resale provisions of Rule 701, which permits nonaffiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. However, all Rule 701 shares are subject to lock-
up agreements with the Underwriters restricting their sale during the 180-day
period following this offering.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register 2,655,450 shares of Common Stock subject to
outstanding stock options or reserved for issuance under the 1994 Stock Option
Plan, the 1998 Plan, the Nonemployee Director Plan and the Purchase Plan
within 180 days after the date of this Prospectus; thus permitting the resale
of such shares by nonaffiliated in the public market without restriction under
the Securities Act.

In addition, after this offering, the holders of approximately 6,489,732
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
traceable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock--Registration Rights."

56
<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Venture Law Group, A Professional
Corporation, Menlo Park, California.

EXPERTS

The financial statements of the Company at December 31, 1996 and 1997 and
for each of the three years in the period ended December 31, 1997 appearing in
this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report,
given upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and such Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov.

57
<PAGE>

ACTUATE SOFTWARE CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998
(Unaudited)............................................................ F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 and for the Three Months Ended March 31, 1997 and 1998
(Unaudited)............................................................ F-4
Statement of Stockholders' Equity (Net Capital Deficiency) for the Years
Ended December 31, 1995, 1996 and 1997 and for the Three Months Ended
March 31, 1998 (Unaudited)............................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and for the Three Months Ended March 31, 1997 and 1998
(Unaudited)............................................................ F-6
Notes to Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders Actuate Software Corporation

We have audited the accompanying balance sheets of Actuate Software
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Actuate Software
Corporation at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.

Palo Alto, California Ernst & Young LLP
April 17, 1998, except for Note 10, as to which the date is , 1998

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

The foregoing report is in the form that we will sign upon the consummation
of the Delaware reincorporation described in Note 10 to the financial
statements.

Palo Alto, California /s/ Ernst & Young LLP
June 23, 1998

F-2
<PAGE>

ACTUATE SOFTWARE CORPORATION

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 1,040 $ 2,901 $ 2,386
Short-term investments........... -- 290 --
Accounts receivable, net of
allowance for doubtful accounts
of $82, $573 and $573 at
December 31, 1996 and 1997, and
March 31, 1998, respectively.... 1,873 2,984 2,958
Other current assets............. 165 66 140
------- -------- --------
Total current assets.............. 3,078 6,241 5,484
Property and equipment, net....... 495 1,096 1,123
Other assets...................... 91 144 178
------- -------- --------
$ 3,664 $ 7,481 $ 6,785
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable................. $ 296 $ 843 $ 1,076
Accrued compensation............. 368 997 763
Other accrued liabilities........ 340 1,679 2,608
Deferred revenue................. 3,509 6,021 6,257
Capital lease obligations........ 129 125 113
------- -------- --------
Total current liabilities......... 4,642 9,665 10,817
Capital lease obligations......... 213 124 102
Commitments
Stockholders' equity (net capital
deficiency):
Convertible preferred stock,
$0.001 par value, issuable in
series: 9,059,610 shares
authorized at December 31, 1996;
10,939,464 shares authorized at
December 31, 1997 and March 31,
1998 (5,000,000 pro forma);
5,549,805, 6,489,732 and
6,489,732 shares issued and
outstanding (none pro forma);
aggregate liquidation preference
of $8,520,002, $14,375,747 and
$14,375,747 at December 31, 1996
and 1997, and March 31, 1998,
respectively (none pro forma)... 5 6 6 $ --
Common stock, $0.001 par value,
20,000,000 shares authorized
(35,000,000 pro forma);
3,039,447, 3,976,285 and
3,996,285 shares issued and
outstanding at December 31, 1996
and 1997, and March 31, 1998,
respectively
(10,486,017 pro forma).......... 3 4 4 10
Additional paid-in capital....... 8,572 14,908 15,054 15,054
Note receivable from officer..... (40) (40) (40) (40)
Deferred stock compensation...... -- (107) (209) (209)
Accumulated deficit.............. (9,731) (17,079) (18,949) (18,949)
------- -------- -------- --------
Total stockholders' equity (net
capital deficiency).............. (1,191) (2,308) (4,134) $ (4,134)
------- -------- -------- ========
$ 3,664 $ 7,481 $ 6,785
======= ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

ACTUATE SOFTWARE CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.................... $ -- $ 343 $ 7,542 $ 1,095 $ 3,190
Services........................ 22 308 1,976 284 873
------- ------- ------- ------- -------
Total revenues.................... 22 651 9,518 1,379 4,063
------- ------- ------- ------- -------
Operating expenses:
Cost of license fees............ -- 171 647 103 280
Cost of services................ 53 305 1,263 195 730
Sales and marketing............. 847 2,965 7,366 1,043 2,715
Research and development........ 1,883 2,731 6,213 926 1,674
General and administrative...... 240 603 1,317 140 556
------- ------- ------- ------- -------
Total operating expenses.......... 3,023 6,775 16,806 2,407 5,955
------- ------- ------- ------- -------
Loss from operations.............. (3,001) (6,124) (7,288) (1,028) (1,892)
Equity in losses of affiliate and
write down of loans to affiliate. -- (25) (142) -- --
Interest and other income
(expense), net................... 166 90 82 (2) 22
------- ------- ------- ------- -------
Net loss.......................... $(2,835) $(6,059) $(7,348) $(1,030) $(1,870)
======= ======= ======= ======= =======
Basic and diluted net loss per
share............................ $ (1.09) $(2.21) $ (2.52) $ (0.38) $ (0.57)
======= ======= ======= ======= =======
Weighted average shares
outstanding used in per share
calculation...................... 2,591 2,741 2,920 2,723 3,296
======= ======= ======= ======= =======
Pro forma basic and diluted net
loss per share (unaudited)....... $ (0.82) $ (0.19)
======= =======
Shares used in computing pro forma
basic and diluted net loss per
share (unaudited)................ 8,940 9,786
======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE>

ACTUATE SOFTWARE CORPORATION

STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
TOTAL
CONVERTIBLE NOTE STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET
---------------- ----------------- PAID-IN FROM STOCK ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY)
--------- ------ --------- ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 4,373,334 $ 4 2,580,000 $ 3 $ 4,513 $ -- $ -- $ (837) $ 3,683
Issuance of common stock
for services........... -- -- 6,667 -- 1 -- -- -- 1
Issuance of common stock
upon exercise of stock
options................ -- -- 427,500 -- 61 (40) -- -- 21
Net loss................ -- -- -- -- -- -- -- (2,835) (2,835)
--------- --- --------- --- ------- ----- ----- -------- -------
BALANCE AT DECEMBER 31,
1995................... 4,373,334 4 3,014,167 3 4,575 (40) -- (3,672) 870
Issuance of Series C
convertible preferred
stock, net of issuance
costs of $12........... 1,176,471 1 -- -- 3,987 -- -- -- 3,988
Issuance of common stock
for cash............... -- -- 18,530 -- 9 -- -- -- 9
Issuance of common stock
upon exercise of stock
options................ -- -- 6,750 -- 1 -- -- -- 1
Net loss................ -- -- -- -- -- -- -- (6,059) (6,059)
--------- --- --------- --- ------- ----- ----- -------- -------
BALANCE AT DECEMBER 31,
1996................... 5,549,805 5 3,039,447 3 8,572 (40) -- (9,731) (1,191)
Issuance of Series D
convertible preferred
stock, net of issuance
costs of $26........... 939,927 1 -- -- 5,828 -- -- -- 5,829
Issuance of common stock
for services........... -- -- 1,605 -- 1 -- -- -- 1
Issuance of common stock
upon exercise of stock
options................ -- -- 817,733 1 236 -- -- -- 237
Repurchase of common
stock.................. -- -- (7,500) -- (3) -- -- -- (3)
Issuance of common stock
for acquisition of
intellectual property.. -- -- 125,000 -- 77 -- -- -- 77
Deferred compensation
related to grant of
stock options.......... -- -- -- -- 197 -- (197) -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 90 -- 90
Net loss................ -- -- -- -- -- -- -- (7,348) (7,348)
--------- --- --------- --- ------- ----- ----- -------- -------
BALANCE AT DECEMBER 31,
1997................... 6,489,732 6 3,976,285 4 14,908 (40) (107) (17,079) (2,308)
Issuance of common stock
upon exercise of stock
options (unaudited).... -- -- 20,000 -- 19 -- -- -- 19
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- -- 127 -- (127) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- -- -- 25 -- 25
Net loss (unaudited).... -- -- -- -- -- -- -- (1,870) (1,870)
--------- --- --------- --- ------- ----- ----- -------- -------
BALANCE AT MARCH 31,
1998 (unaudited)....... 6,489,732 $ 6 3,996,285 $ 4 $15,054 $ (40) $(209) $(18,949) $(4,134)
========= === ========= === ======= ===== ===== ======== =======
</TABLE>

See accompanying notes.

F-5
<PAGE>

ACTUATE SOFTWARE CORPORATION

STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................... $(2,835) $(6,059) $(7,348) $(1,030) $(1,870)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Amortization of deferred
compensation.................. -- -- 90 -- 25
Depreciation................... 51 170 402 67 149
Issuance of common stock for
services and intellectual
property...................... 1 -- 78 -- --
Changes in operating assets and
liabilities:
Accounts receivable........... (6) (1,868) (1,111) 785 26
Other current assets.......... (71) (89) 99 (59) (74)
Accounts payable.............. 86 200 547 92 233
Accrued compensation.......... 118 250 629 (112) (234)
Other accrued liabilities..... 49 291 1,339 540 929
Deferred revenue.............. 350 3,160 2,512 (457) 236
------- ------- ------- ------- -------
Net cash used in operating
activities...................... (2,257) (3,945) (2,763) (174) (580)
------- ------- ------- ------- -------
INVESTING ACTIVITIES
Purchases of property and
equipment....................... (286) (335) (1,003) (207) (176)
Purchases of short-term
investments..................... -- -- (290) -- --
Proceeds from maturity of short-
term investments................ 3,547 -- -- -- 290
Increase in other assets......... (23) (44) (53) (11) (34)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities............ 3,238 (379) (1,346) (218) 80
------- ------- ------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of common
stock........................... 21 9 234 11 19
Payments on capital lease
obligations..................... (41) (114) (93) (37) (34)
Proceeds from issuance of
preferred stock................. -- 3,988 5,829 -- --
Proceeds from sale and leaseback
of equipment.................... 232 229 -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............ 212 4,112 5,970 (26) (15)
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............ 1,193 (212) 1,861 (418) (515)
Cash and cash equivalents at
beginning of year............... 59 1,252 1,040 1,040 2,901
------- ------- ------- ------- -------
Cash and cash equivalents at end
of year......................... $ 1,252 $ 1,040 $ 2,901 $ 622 $ 2,386
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES
Issuance of common stock for note
receivable...................... $ 40 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid.................... $ 12 $ 36 $ 81 $ 10 $ 10
======= ======= ======= ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS

The Company has incurred operating losses to date and incurred a net loss of
$7.3 million for the year ended December 31, 1997 and $1.9 million for the
three months ended March 31, 1998. At December 31, 1997 and March 31, 1998,
the Company had a working capital deficiency of $3.4 million and $5.3 million,
respectively. The Company anticipates additional debt or equity funding may be
needed to finance expected operations in the fiscal year ending December 31,
1998 and for existing obligations. If such additional funding is not
available, management believes, based on anticipated obligations, that
available resources will be sufficient to enable the Company to meet its
obligations through at least December 31, 1998. If anticipated operations are
not achieved, management has the intent and believes it has the ability to
delay or reduce expenditures so as not to require additional financial
resources if such resources were not available (see Note 10--Bank Line of
Credit).

INTERIM FINANCIAL INFORMATION

The financial information as of March 31, 1998, and for the three months
ended March 31, 1997 and 1998 are unaudited but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and
the operating results and cash flows for those periods. Results for the three
months ended March 31, 1998 are not necessarily indicative of results to be
expected for the entire year.

INVESTMENT IN AFFILIATE

In 1996, the Company made an equity investment of approximately $95,000 in
Actuate Japan Company Ltd. ("Actuate Japan"). This represented approximately
8.3% of the outstanding voting stock of Actuate Japan. This investment is
accounted for on the equity basis due to the Company's ability to exercise
significant influence. During 1996, the Company loaned a total of $160,000 in
the form of loans. An additional $100,000 was advanced in 1997. The equity
investment and remaining outstanding loans were fully written down as of
December 31, 1997 due to impairment indicators.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ materially from these
estimates.

NET REVENUE

The Company recognizes revenue from license fees when a non-cancelable
license agreement has been signed with an end user customer or indirect
channel partner, the software product covered by the license agreement has
been shipped, there are no uncertainties surrounding product acceptance, the
license fees are fixed and determinable, and collection of the license fee is
considered probable. The Company's products do not require significant
customization.

Revenue from license fees from sales of software products directly to end-
users is recognized as revenue after execution of a license agreement or
receipt of a definitive purchase order, and shipment of the product, if no
significant vendor obligations remain and collection of the resulting
receivables is

F-7
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

deemed probable. The majority of end user license revenues are derived from
end user customer orders for specific individual products. These types of
transactions are recognized as revenue upon shipment of product. Advance
payments from end-users, in arrangements in which the end user customer has
the right to future unspecified products, are deferred and recognized as
revenue ratably over the estimated term of the period, typically one year,
during which the end-user is entitled to receive the products.

License arrangements with enterprise application vendors, resellers and
distributors generally take the form of either (a) fixed price arrangements in
which the contracting entity has the right to the unlimited usage and resale
of the licensed software for a specified term and pursuant to which license
fee revenue is deferred and recognized on a straight-line basis over the term
of the license agreement or (b) arrangements pursuant to which a royalty is
paid to the Company, which the Company recognizes as revenue based on the
enterprise application vendor's sell-through.

Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting fees. Revenue from maintenance agreements
is deferred and recognized on a straight-line basis as service revenue over
the life of the related agreement, which is typically one year. Service
revenues from training and consulting are recognized upon completion of the
work to be performed.

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-
2"). Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements such as software products, upgrades, enhancements, postcontract
customer support, installation and training to be allocated to each element
based on the relative fair values of the elements. The fair value of an
element must be based on evidence which is specific to the vendor. The revenue
allocated to software products, including specified upgrades or enhancements,
generally is recognized upon delivery of the products. The revenue allocated
to unspecified upgrades and updates and postcontract customer support
generally is recognized as the services are performed. If evidence of the fair
value for all elements of the arrangement does not exist, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. There was no material change to the Company's accounting for
revenues as a result of the adoption of SOP 97-2.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash and cash equivalents consist of cash deposited with banks and highly
liquid high quality debt securities with original maturities of 90 days or
less. All short-term investments are classified as available-for-sale, are
carried at amortized cost, which approximates fair value, and consist of high
quality debt securities with original maturities between 90 days and one year.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of marketable investments and accounts
receivable. The Company places its investments with high-credit-quality
multiple issuers. The Company sells to a diverse customer base primarily to
customers in the United States. No single customer accounts for more than 10%
of the Company's sales. The Company does not require collateral on sales with
credit terms. During the years ended

F-8
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

December 31, 1996 and 1997, respectively, the Company added approximately
$82,000 and $630,000 to its bad debt reserves. Total write-offs of
uncollectible amounts were zero and approximately $139,000 in these years,
respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values for marketable debt securities are based on quoted market
prices. The carrying value of these securities approximate their fair value.

The fair value of notes is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. The carrying
value of the note receivable from officer approximates the fair value.

The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to the Company for debt
instruments with similar terms, degree of risk and remaining maturities. The
carrying value of these obligations approximates their respective fair values.

RESEARCH AND DEVELOPMENT

Research and development expenditures are expensed to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have been insignificant. Through December 31, 1997, all research and
development costs have been expensed.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets which range from three to five years.
Assets held under capital leases are amortized over the shorter of the asset
life or the remaining lease term. The related amortization expense is included
in depreciation expense.

STOCK-BASED COMPENSATION

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees" and related
interpretations and to adopt the pro forma disclosure alternative as described
in SFAS 123 in accounting for its employee stock option plan (see Note 8).

NET LOSS PER SHARE

Net loss per share is presented under Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic earnings (loss) per share and diluted earnings (loss)
per share, if more dilutive, for all periods presented. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock
issued for nominal

F-9
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

consideration, prior to the anticipated effective date of the IPO are included
in the calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.

In accordance with SFAS 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period. Basic pro forma net loss per share as presented in the statement
of operations has been computed as described above and also gives effect,
under Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock that will automatically convert upon completion of
the Company's proposed initial public offering (using the if-converted method)
from the original date of issuance. If the offering contemplated by this
Prospectus is consummated, all of the convertible preferred stock outstanding
as of March 31, 1998 will automatically be converted into an aggregate of
6,489,732 shares of common stock, based on the shares of convertible preferred
stock outstanding as of March 31, 1998. Unaudited pro forma shareholders'
equity at March 31, 1998, as adjusted for the conversion of convertible
preferred stock, is disclosed on the balance sheet.

A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss...................... $(2,835) $(6,059) $(7,348) $(1,030) $(1,870)
Basic and diluted:
Weighted-average shares of
common stock outstanding... 2,728 3,033 3,578 3,060 3,981
Weighted-average shares
subject to repurchase...... (137) (292) (658) (337) (685)
------- ------- ------- ------- -------
Shares used in computing basic
and diluted net loss per
share........................ 2,591 2,741 2,920 2,723 3,296
======= ======= ======= ======= =======
Basic and diluted net loss per
share........................ $ (1.09) $ (2.21) $ (2.52) $ (0.38) $ (0.57)
======= ======= ======= ======= =======
Pro forma:
Shares used above
Adjusted to reflect the
weighted effect of the
assumed conversion of
convertible
preferred stock............ 6,020 6,490
------- -------
Shares used in computing pro
forma basic and diluted net
loss per share............. 8,940 9,786
======= =======
Pro forma basic and diluted
net loss per share
(unaudited)................ $ (0.82) $ (0.19)
======= =======
</TABLE>

Had the Company been in a net income position, diluted earnings per share
for fiscal year 1997 and the three months ended March 31, 1998 would have
included the shares used in the computation of pro forma basic net loss per
share as well as the dilutive effect of 229,270 and 479,193 shares,
respectively, related to outstanding options, calculated using the treasury
method.

F-10
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130") which will be required to be adopted by the Company in
the year ended December 31, 1998. The Company adopted SFAS 130 in the three
months ended March 31, 1998. There was no impact to the Company as a result of
the adoption of SFAS 130, as there is no difference between the Company's
reported net loss and the comprehensive net loss under SFAS 130 for the
periods presented.

SEGMENTS

In June 1997, the FASB issued SFAS 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS 131 is effective for the fiscal year
ended December 31, 1998 and establishes standards for disclosures about
products, geographies and major customers. The Company expects that
implementation of this standard will not have a material effect on its
financial statement disclosures.

2. INVESTMENT IN AFFILIATE

In March 1996, the Company established a joint venture company in Japan with
six other corporate partners, receiving approximately 8.3% of the equity
ownership of the venture known as Actuate Japan. For the year ended December
31, 1997 and the three months ended March 31, 1998, royalties received from
sales made by Actuate Japan were approximately $56,000 and $8,000,
respectively.

The Company has a call option for all of the shares issued to the other
investors. The price to purchase the remaining (approximately 92%) of Actuate
Japan at December 31, 1997 would have been a maximum of 220,000,000 yen
(approximately $1,680,000).

In March 1999, or nine months following a public offering of the Company,
the other corporate partners have the right to cause the Company to buy all of
their outstanding shares, at a specified price, for securities of the Company,
cash or through the reduction of a future royalty stream.

3. SHARE PURCHASE AGREEMENT

Under a share purchase agreement dated March 1996, and related agreements,
the Company agreed to grant a license to a Dutch corporation, Actuate B.V.
This license permits Actuate B.V. to produce, commercialize, sell and support
the Company's products through wholly owned operating companies in France,
England and Germany. The Company has no equity ownership in Actuate B.V.

The Company has a right of first refusal to purchase the shares of Actuate
B.V., which may be tendered to the Company by Actuate B.V. shareholders at any
stage at a specified price, dependent upon timing and company status.

F-11
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

4. SHORT-TERM INVESTMENTS

The following table summarizes the amortized cost, which approximates the
fair value of the Company's investments and their contractual maturities (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Corporate debt obligations...................................... $2,073
======
Included in cash and cash equivalents........................... $1,783
Included in short-term investments.............................. 290
------
Due within one year............................................. $2,073
======
</TABLE>

Unrealized gains and losses at December 31, 1997 and realized gains and
losses for the year ended December 31, 1997 were not material.

5. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Furniture and fixtures........................................ $ 105 $ 282
Computers and purchased software.............................. 624 1,450
----- ------
729 1,732
Less accumulated depreciation................................. (234) (636)
----- ------
Property and equipment, net................................... $ 495 $1,096
===== ======
</TABLE>

Property and equipment includes certain furniture, computers and equipment
financed under capital leases. The cost and accumulated depreciation of such
assets under capital leases was approximately $564,000 and $213,000 at
December 31, 1996 and $564,000 and $381,000 at December 31, 1997,
respectively.

6. NOTE RECEIVABLE

As of December 31, 1996 and 1997, the Company had outstanding a note
receivable under full recourse terms from an officer of the Company in the
amount of $40,375, for the issuance of 269,167 shares of common stock upon
exercise of the shareholders stock options. Interest accrues at the rate of
6.28% per annum. The entire principal balance, together with all accrued
interest, becomes due and payable in one lump sum on September 22, 2000.

7. COMMITMENTS

OPERATING LEASE COMMITMENTS

The Company leases its facilities under noncancelable operating leases
expiring in May 2000 and May 2002. The Company also leases equipment under
operating lease agreements. Rent expense for facilities under operating leases
was approximately $96,000, $189,000 and $441,000 for the years

F-12
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

ended December 31, 1995, 1996 and 1997, respectively. Future minimal rental
commitments under operating leases are as follows (in thousands):

<TABLE>
<S> <C>
Fiscal year
1998................................................................. $ 781
1999................................................................. 767
2000................................................................. 689
2001................................................................. 633
2002................................................................. 345
------
$3,215
======
</TABLE>

CAPITAL LEASE OBLIGATIONS

The Company leases certain furniture, computers and equipment under
noncancelable capital leases resulting from sale and leaseback transactions.
Obligations under capital leases represent the present value of future
noncancelable rental payments under various lease agreements. Upon completion
of each lease, the Company has the option to renew the lease or purchase the
equipment for 15% of the original purchase price.

Future minimum lease payments under capital leases are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Fiscal year ended
1998........................................................... $ 158
1999........................................................... 102
2000........................................................... 36
-----
Total minimum lease payments.................................... 296
Less amount representing interest............................... (47)
-----
Present value of net minimum lease payments..................... 249
Less current portion............................................ (125)
-----
Long-term portion............................................... $ 124
=====
</TABLE>

8. SHAREHOLDERS EQUITY

CONVERTIBLE PREFERRED STOCK

A summary of convertible preferred stock is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1996 1997
---------------------------------- ----------------------------------
ISSUED AND LIQUIDATION ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE AUTHORIZED OUTSTANDING PREFERENCE
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 2,040,000 2,040,000 $1,020,000 2,040,000 2,040,000 $ 1,020,000
Series B................ 2,333,334 2,333,334 3,500,001 2,333,334 2,333,334 3,500,001
Series B1............... 2,333,334 -- -- 2,333,334 -- --
Series C................ 1,176,471 1,176,471 4,000,001 1,176,471 1,176,471 4,000,001
Series C1............... 1,176,471 -- -- 1,176,471 -- --
Series D................ -- -- -- 939,927 939,927 5,855,745
Series D1............... -- -- -- 939,927 -- --
--------- --------- ---------- ---------- --------- -----------
9,059,610 5,549,805 $8,520,002 10,939,464 6,489,732 $14,375,747
========= ========= ========== ========== ========= ===========
</TABLE>

F-13
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

Each share of Series A, B, B1, C, C1, D and D1 preferred stock is
convertible, at the option of the holder, into a share of common stock, on a
one-for-one basis, subject to certain adjustments for dilution, if any,
resulting from future stock issuances or stock splits or combinations.
Additionally, the preferred shares automatically convert into common stock
concurrent with the closing of an underwritten public offering of common stock
under the Securities Act of 1933 in which the Company receives at least
$10,000,000 in gross proceeds and the price per share is at least $9.00
(subject to adjustment for a recapitalization or certain other stock
adjustments). With the exception of certain protective voting provisions, the
Series A, B, B1, C, C1, D and D1 preferred shareholders have voting rights
equal to the common shares they would own upon conversion.

Series A, B, B1, C, C1, D and D1 preferred shareholders are entitled to
annual noncumulative dividends, before and in preference to any dividends paid
on common stock, when and as declared by the board of directors. No dividends
have been declared through December 31, 1997.

The Series A, B, B1, C, C1, D and D1 preferred shareholders are entitled to
receive, upon liquidation or merger, a distribution of $0.50, $1.50, $1.50,
$3.40, $3.40, $6.23 and $6.23 per share, respectively (subject to adjustment
for a recapitalization) plus all declared but unpaid dividends. Thereafter,
the remaining assets and funds, if any, shall be distributed ratably on a per-
share basis among the common shareholders and the Series A, B, B1, C, C1, D
and D1 preferred shareholders.

If, upon liquidation, the assets and funds distributed among the preferred
shareholders are insufficient to permit the entitled payment, the entire
assets and funds of the Company legally available for distribution shall be
distributed ratably among the holders of Series A, B, B1, C, C1, D and D1
preferred shares in proportion to the aggregate preferential amounts owed to
each such holder.

After the earlier of December 1, 1998 or three months after the effective
date of the first registration statement for a public offering of the
Company's securities, at least 30% of the preferred shareholders may request
the Company to file a registration statement for aggregate proceeds in excess
of $7,500,000, as defined in the agreement. No more than two such registration
statements may be requested and such request may be deferred for up to 120
days in the event that the CEO of the Company considers such filing to be
detrimental to the Company. The preferred shareholders also hold certain
additional registration rights.

The Company's Articles of Incorporation designate the rights, preferences
and privileges of Series B1, C1 and D1 preferred stock. Shares of Series B1,
C1 and D1 preferred stock are automatically issuable in the event that a
holder of the Company's Series B, C or D preferred stock does not purchase its
pro rata share of a dilutive equity financing of the Company. If a holder
chooses not to participate for its pro rata share of a dilutive equity
financing, each share of the Series B, C or D preferred stock, as applicable,
is automatically converted upon closing of the financing into one share of the
derivative series of preferred stock, either Series B1, C1 or D1 preferred
stock, as applicable. The Series B1, C1 and D1 preferred shares have the
identical rights as the original Series B, C and D preferred shares except
that the Series B1, C1 and D1 preferred stock have no price-based antidilution
protection.

COMMON STOCK

As of December 31, 1996 and 1997, the Company has reserved 5,549,805 and
6,489,732 shares of common stock, respectively, for issuance upon conversion
of its Series A, B and C preferred stock.

F-14
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

STOCK OPTION PLAN

In May 1994, the board of directors adopted the 1994 Stock Option Plan (the
"Option Plan") for issuance of common stock to employees, consultants and
nonemployee directors. There are 2,097,100 shares of common stock reserved for
issuance under this Plan as of December 31,1997.

Options granted may be either incentive stock options or nonstatutory stock
options. Incentive stock options may be granted to employees with exercise
prices of no less than the fair value and nonstatutory options may be granted
to eligible participants at exercise prices of no less than 85% of the fair
value of the common stock on the grant date as determined by the Plan
Administrator. Options are generally exercisable upon grant, subject to
repurchase rights by the Company until vested. Shares generally vest at the
rate of 20% after one year from the date of grant, with the remaining balance
vesting monthly over the next four years. However, the Company has the
discretion to accelerate the vesting at the time an option is granted or at
any time while the option remains outstanding. All options outstanding will
automatically vest at the time of an acquisition, unless the option is either
assumed by the successor corporation or the option is replaced with a cash
incentive program to preserve the spread existing between the fair value and
the exercise price.

At December 31, 1996 and 1997, 260,293 and 770,436 shares of common stock
issued under the Plan were subject to repurchase by the Company, respectively.
All outstanding repurchase rights under the Plan shall terminate automatically
upon the occurrence of any merger, consolidation, or disposition of all or
substantially all of the Company's assets, except to the extent the repurchase
rights are expressly assigned to the successor corporation.

Activity under the Plan was as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES ---------------------- WEIGHTED-
AVAILABLE NUMBER OF PRICE PER AVERAGE
FOR GRANT SHARES SHARE EXERCISE PRICE
---------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at December 31,
1994..................... 815,500 25,000 $ 0.03 $0.03
Options granted......... (815,500) 815,500 $ 0.15 $0.15
Options exercised....... -- (427,500) $0.03-$0.15 $0.14
---------- --------- ----------- -----
Balance at December 31,
1995..................... -- 413,000 $ 0.15 $0.15
Additional
authorization.......... 182,000 -- -- --
Options granted......... (159,500) 159,500 $0.15-$0.34 $0.29
Options exercised....... -- (6,750) $ 0.15 $0.15
Options forfeited....... 56,000 (56,000) $0.15-$0.34 $0.18
---------- --------- ----------- -----
Balance at December 31,
1996..................... 78,500 509,750 $0.15-$0.34 $0.19
Additional
authorization.......... 1,074,600 -- -- --
Options granted......... (1,146,350) 1,146,350 $0.34-$2.10 $0.81
Options exercised....... -- (817,733) $0.15-$1.25 $0.29
Options forfeited....... 36,417 (36,417) $0.15-$0.62 $0.34
Options repurchased..... 7,500 -- $ 0.34 $0.34
---------- --------- ----------- -----
Balance at December 31,
1997..................... 50,667 801,950 $0.15-$2.10 $0.97
Additional authorization
(unaudited)............ 678,250 -- -- --
Options granted
(unaudited)............ (158,900) 158,900 $2.10-$3.00 $2.60
Options exercised
(unaudited)............ -- (20,000) $0.15-$3.00 $0.90
Options forfeited
(unaudited)............ 35,400 (35,400) $0.34-$2.10 $1.10
---------- --------- ----------- -----
Balance at March 31,
1998 (unaudited)....... 605,417 905,450 $0.15-$3.00 $1.26
========== ========= =========== =====
</TABLE>

The weighted-average deemed fair value of stock options granted in fiscal
year 1996 and 1997 was $0.05 and $0.21, respectively.

F-15
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

The following table summarizes information concerning outstanding and
exercisable options:

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------------------------------------------
WEIGHTED-
AVERAGE
RANGE OF OPTIONS REMAINING WEIGHTED-
EXERCISE OUTSTANDING AND CONTRACTUAL AVERAGE
PRICES EXERCISABLE LIFE EXERCISE PRICE
-------- --------------- ----------- --------------
<S> <C> <C> <C>
$0.15-$0.62 489,450 9.3 years $0.46
$1.25-$2.10 312,500 9.8 years $1.77
-------
$0.15-$2.10 801,950 9.5 years $0.97
=======
</TABLE>

At December 31, 1996 and 1997, 117,099 and 26,037 outstanding options were
vested, respectively.

STOCK COMPENSATION

The Company recorded deferred compensation of approximately $197,000 and
$127,000 during the year ended December 31, 1997 and three months ended March
31, 1998, respectively. These amounts represent the difference between the
exercise price and the deemed fair value of the Company's common stock during
the periods in which such stock options were granted. The Company recorded
amortization of deferred compensation as an expense of approximately $90,000
and $25,000, respectively, during these periods. At March 31, 1998, the
Company has a total of approximately $209,000 remaining to be amortized over
the corresponding vesting period of each respective option, generally five
years (see Note 10--Option Grants).

PRO FORMA INFORMATION

The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.

Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions for
fiscal year 1995, 1996 and 1997: risk-free interest rate of approximately
6.6%, 6.0% and 6.0%, respectively; a weighted-average expected life of the
option of five years and a dividend yield of zero for all periods.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss (in thousands):
As reported................................. $ (2,835) $ (6,059) $ (7,348)
Pro forma................................... $ (2,840) $ (6,067) $ (7,376)
Basic and diluted net loss per share:
As reported................................. $ (1.09) $ (2.21) $ (2.52)
Pro forma................................... $ (1.10) $ (2.21) $ (2.52)
</TABLE>

F-16
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

9. INCOME TAXES

As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $14,800,000. The Company also had federal
research and development tax credit carryforwards of approximately $300,000 at
December 31, 1997. The net operating loss and credit carryforwards will expire
beginning in 2008 through 2012, if not utilized.

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 3,300 $ 5,200
Research credit carryforwards.............................. 200 500
Capitalized research and development....................... 200 300
Warranty reserve........................................... -- 400
Other, net................................................. 200 400
------- -------
Total deferred tax assets.................................. 3,900 6,800
Valuation allowance........................................ (3,900) (6,800)
------- -------
$ -- $ --
======= =======
</TABLE>

The net valuation allowance increased by $2,300,000 during the year ended
December 31, 1996.

10. SUBSEQUENT EVENTS

BANK LINE OF CREDIT

On May 26, 1998, the Company obtained a bank line of credit which provides
for up to $5.0 million in borrowings. The Company can borrow up to 80% of
eligible accounts receivable against the line of credit. The interest rate on
borrowed amounts is prime plus 2.25%. The Company is required to comply with
various financial covenants, is prohibited from paying dividends and the
Company must deposit $3.0 million of the proceeds of the proposed initial
public offering with the lender through May 25, 1999, the maturity date of the
line of credit.

OPTION GRANTS

In April 1998, the Company's Board of Directors authorized the grant of
options to acquire an aggregate of 115,000 shares of the Company's Common
Stock with a weighted average exercise price of $5.04 per share. The Company
will record deferred stock compensation of $229,000 in connection with these
options which it will recognize over the vesting period of the options.

F-17
<PAGE>

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)

REINCORPORATION, AMENDMENT TO THE ARTICLES OF INCORPORATION

During May 1998, the Company's Board of Directors authorized the
reincorporation, effective prior to the Company's initial public offering, of
the Company in the State of Delaware. Upon reincorporation, the Company will
be authorized to issue 35,000,000 shares of Common Stock, $0.001 par value and
5,000,000 shares of undesignated Preferred Stock, $0.001 par value.

1998 EQUITY INCENTIVE PLAN

On May 27, 1998, the Company's Board of Directors adopted the 1998 Equity
Incentive Plan (the "Plan"), subject to stockholder approval. A total of
1,300,000 shares were reserved for issuance under the Plan, including any
shares remaining available for grant under the 1994 Stock Option Plan. Each
year, the number of shares reserved for issuance under the Plan will be
increased by the lesser of 700,000 shares or 5% of the total number of shares
of Common Stock then outstanding.

1998 EMPLOYEE STOCK PURCHASE PLAN

On May 27, 1998, the Company's Board of Directors adopted the 1998 Employee
Stock Purchase Plan (the "Purchase Plan"), subject to stockholder approval. A
total of 250,000 shares of Common Stock have been reserved for issuance
thereunder with annual increases of 150,000 shares. The Purchase Plan permits
eligible employees to acquire shares of the Company's Common Stock through
periodic payroll deductions of up to 15% of base compensation. No more than
1,000 shares may be purchased on any purchase date per employee. Each offering
period will have a maximum duration of 24 months. The price at which the
Common Stock may be purchased is 85% of the lesser of the fair market value of
the Company's Common Stock on the first day of the applicable offering period
or on the last day of the respective purchase period. The initial offering
period will commence on the effectiveness of the initial public offering and
will end on July 31, 2000.

1998 NON-EMPLOYEE DIRECTORS OPTION PLAN

On May 27, 1998, the Company's Board of Directors adopted the 1998 Non-
Employee Directors Option Plan (the "Directors Option Plan"), subject to
approval by the stockholders. For issuance under the Directors Option Plan,
200,000 shares of Common Stock have been authorized. No shares have been
issued to date. Each individual who joins the Board as a non-employee director
on or after the effective date of the Directors Option Plan and after the date
of the initial public offering will receive at that time an automatic option
grant of 20,000 shares of Common Stock. The initial grant will vest over 5
years, with the first 20% of the grant vesting after one year. Additional
grants of 2,500 shares per annum will automatically be made at each annual
shareholder meeting to each non-employee director.

F-18
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co. and Credit Suisse First Boston Corporation are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company and the Selling Stockholders, the respective number of shares of
Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co. ..............................................
Credit Suisse First Boston Corporation.............................
---------
Total.......................................................... 3,000,000
=========
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.

The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 450,000 additional shares of Common Stock to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
3,000,000 shares of Common Stock offered.

The Company and Selling Stockholders have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of the Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to employee stock option plans existing, or on the conversion or
exchange of convertible or exchangeable securities outstanding, on the date of
this Prospectus) which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Common Stock without the prior written
consent of the representatives, except for the shares of Common Stock offered
in connection with the offering.

The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby determined through negotiations among the Company, the
Selling Stockholders and the Representatives. Among the factors to be
considered in determining the initial public offering price of the Common
Stock, in addition

U-1
<PAGE>

to prevailing market conditions, are the Company's historical performance,
estimates of the business potential and earning prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.

Application has been made for listing on the Nasdaq National Market under
the symbol "ACTU".

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.

In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase from the Company in the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in the offering for their account may be reclaimed by the
syndicate if such Common Stock are repurchased by the syndicate in stabilizing
or covering transactions. These activities may stabilize, maintain or
otherwise affect the market price of the Common stock, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market
or otherwise.

The Underwriters have reserved for sale, at the initial public offering
price, up to 10% of the Common Stock offered hereby for certain individuals
designated by the Company who have expressed an interest in purchasing such
shares of Common Stock in the offering. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the Underwriters to the general public on the same basis as other shares
offered hereby.

U-2
<PAGE>

ACTUATE PRODUCTS GRAPHIC

Description: Graphic illustration showing screenshots of certain Actuate
products, with captions, and pictures of various blank computer screens
surrounding a cloud at the center of the graphic. A brief description of the
Actuate Reporting System, and a list of its components and their functions, is
provided in a column at right.

Header: Meeting the Information Needs of the Enterprise

Caption: The Actuate Reporting System is designed to allow organizations to
replace traditional paper-based and on-line reports with Live Report
Documents, which feature rich interactive capabilities. Actuate's adaptable
environment allows developers to create reports from virtually any data source
and in virtually any format required by end users. Actuate's server-centric
architecture can scale to support large organizations and can distribute
reports to users all over the world via the Internet.

Actuate Report Server: Generate, store and print Live Report Documents and
HTML reports.

Actuate Web Agent: Access the Actuate Report Encyclopedia via the Internet;
Publish Live Report Documents via the Internet

Actuate Live Report Extension: View Live Report Documents from the Internet

Actuate Viewer: View and print Live Report Documents

Actuate End User Desktop: Request, generate, view and print Live Report
Documents

Actuate Administrator Desktop: Maintain security and set resource quotas;
Manage Report Server and schedule production.

Actuate Developer Workbench: Design, test and maintain Live Report Documents

Actuate Software Development Kit: Integrate Actuate Viewer and End User
Desktop Active X controls into virtually any application

Screenshot Captions

Developer Workbench
Caption: Actuate's Developer Workbench is a visual object-oriented
development environment for designing, compiling, viewing and debugging report
designs. Developers assemble reports by dragging and dropping components from
palettes and libraries to create client/server and HTML reports.

Live Report Extension
Caption: Actuate's Live Report Extensions allow users to view and print Live
Report Documents through browsers such as Netscape Navigator and Microsoft
Internet Explorer.
<PAGE>

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING 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. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER
THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.

----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 30
Management................................................................ 42
Certain Transactions...................................................... 50
Principal and Selling Stockholders........................................ 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 56
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 57
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>

----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

3,000,000 SHARES

ACTUATE SOFTWARE CORPORATION

COMMON STOCK
(PAR VALUE $0.001 PER SHARE)

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

[LOGO OF ACTUATE]

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

GOLDMAN, SACHS & CO.

CREDIT SUISSE FIRST BOSTON

REPRESENTATIVES OF THE UNDERWRITERS

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC registration fee............................................... $ 10,177
NASD fee........................................................... 3,950
Nasdaq National Market listing fee................................. 82,000
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 225,000
Accounting fees and expenses....................................... 225,000
Blue sky fees and expenses......................................... 5,000
Transfer agent fees................................................ 10,000
Miscellaneous fees and expenses.................................... 13,873
--------
Total............................................................ $725,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 7.6, of the
Registrant's Bylaws provides for mandatory indemnification of its directors
and officers and permissible indemnification of employees and other agents to
the maximum extent permitted by the Delaware General Corporation Law. The
Registrant's Certificate of Incorporation provides that, pursuant to Delaware
law, its directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company for acts
or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. Prior to the
effectiveness of the offering, the Registrant expects to enter into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit 10.1 hereto and incorporated herein by reference. The
Indemnification Agreements provide the Registrant's officers and directors
with further indemnification to the maximum extent permitted by the Delaware
General Corporation Law." Reference is made to Section 8 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of the Registrant against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following transactions reflect the issuance during the previous three
years of securities not registered under the Securities Act:

1. In January 1996, the Company issued 1,176,471 shares of Series C
Preferred Stock for an aggregate purchase price of approximately $4,000,000
to a group of 9 investors.

II-1
<PAGE>

2. In May 1996, the Company issued 18,530 shares of its Common Stock with
a value of $6,300 to a consultant.

3. In April 1997, the Company issued 939,927 shares of Series D Preferred
Stock for an aggregate purchase price of approximately $5,885,745 to a
group of 16 investors.

4. In June 1997, the Company issued 1,605 shares of its Common Stock with
a value of $995 to a consultant.

5. In August and September 1997, the Company issued an aggregate of
125,000 shares of its Common Stock with a value of $124,750 in connection
with the acquisition of certain assets from Netscheme Solutions, Inc.

6. As of March 31, 1998, the Company had issued and sold 1,264,483 shares
of its Common Stock to employees at prices of between $0.03 and $2.10 per
share pursuant to exercises of options under its 1994 Stock Option Plan.

The issuances described in Items 15(1)-(6) were exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. In addition, the recipients of
securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share Articles issued in such transactions. All recipients had adequate
access, through their relationships with the Registrant, to information about
the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
+3.1 Articles of Incorporation of the Registrant, as amended to date.
+3.2 Amended and Restated Certificate of Incorporation to be filed upon the
closing of the reincorporation of the Registrant in Delaware.
+3.3 Form of Certificate of Incorporation to be filed upon the closing of
the offering made hereby.
+3.4 Bylaws of the Registrant, as amended to date.
3.5 Form of Bylaws of the Registrant to be in effect upon the closing of
the reincorporation of the Registrant in Delaware.
+3.6 Amended and Restated Investor Rights Agreement.
+4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
+4.2 Specimen Common Stock Certificate.
*5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP.
+10.1 Form of Indemnification Agreement.
+10.2 1994 Stock Option Plan, as amended.
+10.3 1998 Equity Incentive Plan.
+10.4 1998 Employee Stock Purchase Plan.
+10.5 1998 Non-Employee Directors Option Plan.
+10.7 Promissory Note between the Company and Actuate Japan, Co., Ltd. dated
December 27, 1997.
10.8 Office Lease, as amended, between the Company and 999 BW Corporation
dated March 27, 1995.
+10.9 Sublease Agreement between the Company and Cisco Systems, Inc. dated
January 15, 1998.
+10.10 Share Purchase Agreement, as amended, between the Company and Schroder
Ventures French Enterprise Fund L.P.I., Schrader Ventures French
Enterprise Fund UKLP, SUK VFIV Nominees Limited, Michael Berman,
Pierre Braude, Patrick Chancerelle and Giles Vliegen, dated September
25, 1997.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
+10.11 Shareholders Agreement between the Company and Air Co., Ltd., Toshiba
Information Systems Corporation, Computer Institute of Japan, Ltd.,
Sumitomo Metal Industries and Masanori Harada, dated March 29, 1996.
+10.12 Business Loan Agreement between the Company and Silicon Valley Bank,
dated May 26, 1998.
+10.13 Offer Letter between the Company and Daniel A. Gaudreau dated May 7,
1997.
+10.14 Offer Letter between the Company and Hamid Bahadori dated May 20,
1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors dated June 23,
1998.
*23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP. Reference is made to Exhibit 5.1.
+24.1 Power of Attorney.
+27.1 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.

(B) FINANCIAL STATEMENT SCHEDULES

Schedules have been omitted because the information required to be set forth
therein is not applicable or is readily available in the financial statements
or notes thereto.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, Articles in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting
Agreement, or otherwise, the Registrant 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. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

The Registrant hereby undertakes that:

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

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

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF SAN MATEO, CALIFORNIA, ON THIS 6TH DAY OF JULY, 1998.

Actuate Software Corporation

/s/ Daniel A. Gaudreau
By: _________________________________
DANIEL A. GAUDREAU
CHIEF FINANCIAL OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Nicolas C. Nierenberg*
President, Chief July 6, 1998
- ------------------------------------- Executive Officer
NICOLAS C. NIERENBERG and Director
(Principal
Executive Officer)

/s/ Daniel A. Gaudreau Chief Financial July 6, 1998
- ------------------------------------- Officer, Vice
DANIEL A. GAUDREAU President Finance
(Principal
Financial and
Accounting Officer)

James Breyer* Director July 6, 1998
- -------------------------------------
JAMES BREYER

Arthur Patterson* Director July 6, 1998
- -------------------------------------
ARTHUR PATTERSON

Nancy Schoendorf* Director July 6, 1998
- -------------------------------------
NANCY SCHOENDORF

Steven Whiteman* Director July 6, 1998
- -------------------------------------
STEVEN WHITEMAN

*By: /s/ Daniel A. Gaudreau
----------------------------------
DANIEL A. GAUDREAU
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
+3.1 Articles of Incorporation of the Registrant, as amended to date.
+3.2 Amended and Restated Certificate of Incorporation to be filed upon
the closing of the reincorporation of the Registrant in Delaware.
+3.3 Form of Certificate of Incorporation to be filed upon the closing
of the offering made hereby.
+3.4 Bylaws of the Registrant, as amended to date.
3.5 Form of Bylaws of the Registrant to be in effect upon the closing
of the reincorporation of the Registrant in Delaware.
+3.6 Amended and Restated Investor Rights Agreement.
+4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
+4.2 Specimen Common Stock Certificate.
*5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
+10.1 Form of Indemnification Agreement.
+10.2 1994 Stock Option Plan, as amended.
+10.3 1998 Equity Incentive Plan.
+10.4 1998 Employee Stock Purchase Plan.
+10.5 1998 Non-Employee Directors Option Plan.
+10.7 Promissory Note between the Company and Actuate Japan, Co., Ltd.
dated December 27, 1997.
10.8 Office Lease, as amended, between the Company and 999 BW
Corporation dated March 27, 1995.
+10.9 Sublease Agreement between the Company and Cisco Systems, Inc.
dated January 15, 1998.
+10.10 Share Purchase Agreement, as amended, between the Company and
Schroder Ventures French Enterprise Fund L.P.I., Schrader Ventures
French Enterprise Fund UKLP, SUK VFIV Nominees Limited, Michael
Berman, Pierre Braude, Patrick Chancerelle and Giles Vliegen,
dated September 25, 1997.
+10.11 Shareholders Agreement between the Company and Air Co., Ltd.,
Toshiba Information Systems Corporation, Computer Institute of
Japan, Ltd., Sumitomo Metal Industries and Masanori Harada, dated
March 29, 1996.
+10.12 Business Loan Agreement between the Company and Silicon Valley
Bank, dated May 26, 1998.
+10.13 Offer Letter between the Company and Daniel A. Gaudreau dated May
7, 1997.
+10.14 Offer Letter between the Company and Hamid Bahadori dated May 20,
1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors dated June 23,
1998.
*23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP. Reference is made to Exhibit 5.1.
+24.1 Power of Attorney.
+27.1 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts' and to
the use of our report dated April 17, 1998 (except for Note 10, as to which the
date is , 1998), in Amendment No. 1 to the Registration Statement on Form
S-1 and related Prospectus of Actuate Software Corporation for the registration
of 3,450,000 shares of its common stock.

Palo Alto, California Ernst & Young LLP

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

The foregoing consent is in the form that will be signed upon the
consummation of the Delaware reincorporation described in Note 10 to the
financial statements.

/s/ Ernst & Young LLP
Palo Alto, California

July 6, 1998