TALARIAN CORP, 10-K405, 2000-12-27

TALARIAN CORP
10-K405, 2000-12-27
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-31011

TALARIAN CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE 33-0323810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

333 DISTEL CIRCLE
LOS ALTOS, CALIFORNIA 94022
(650) 965-8050
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

As of December 15, 2000, the aggregate market value of voting stock held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on such date) was approximately
$59,362,065.

As of December 15, 2000, there were 18,976,441 shares of the Registrant's $0.001
par value Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the Registrant's definitive Proxy Statement for the
Registrant's March 2001 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission pursuant to Registration 14A, are
incorporated by reference into Part III of this annual report on Form 10-K.

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TALARIAN CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2000

TABLE OF CONTENTS

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PAGE
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<S> <C> <C>
PART I
Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 9
Item 3. Legal Proceedings................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................................. 10
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters............... 11
Item 6. Selected Consolidated Financial Data................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 13
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.......................... 28
Item 8. Financial Statements and Supplementary Data......................................... 29
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure.......................................................................... 29
PART III
Item 10. Directors and Officers of the Registrant............................................ 30
Item 11. Executive Compensation.............................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 30
Item 13. Certain Relationships and Related Transactions...................................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 31
Signatures.......................................................................... 33
</TABLE>

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SmartSockets(R) is our registered trademark, and Talarian(TM), RMTP-II(TM),
SmartMulticast(TM), SmartPGM(TM), SmartTransfer(TM), RTmonitor(TM),
RTgateway(TM), MQadmin(TM), SmartMQ(TM), MQexpress(TM), MQadmin(TM),
GlobalCast(TM) and WhiteBarn(TM) are our trademarks. All other trademarks or
trade names appearing elsewhere in this annual report are the property of their
respective owners.

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PART I

This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements can generally
be identified by the use of words such as "may," "might," "will," "should,"
"could," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," the negative of these terms and other
comparable terminology. These forward-looking statements may include, among
other things, anticipated trends in our revenue and expenditures, expectations
regarding our products and customers, our anticipated growth strategies, and
anticipated trends in our business. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
risks and uncertainties, including those we discuss in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors
Affecting Future Results" and elsewhere in this annual report. You should
specifically consider the risks and uncertainties outlined here and in other
reports we file with the SEC. We do not assume any obligation to update any such
forward-looking statements.

ITEM 1. BUSINESS

OVERVIEW

We develop and market infrastructure software that enables businesses to
exchange information reliably and securely in real time, both internally and
with their partners, suppliers and customers. Our products and services allow
software applications to communicate across local or wide area networks,
including private networks and the Internet. Our flagship product, SmartSockets,
facilitates the real-time distribution of information across virtually any type
of network. SmartSockets also enables real-time, two-way communications between
distributed computer networks and mobile information devices such as hand-held
computers. SmartSockets uses both a publish-subscribe model of communication to
deliver information to those applications that need it automatically as it
becomes available, and a queuing model of communication to store information and
deliver it at a later time if the application cannot currently be reached.

Our products use Transmission Control Protocol/Internet Protocol, or TCP/IP,
the standard Internet protocol for one-to-one communication, or unicast, and
multicast protocols for one-to-many communication. Multicast allows information
requested by multiple applications to be sent only once, rather than as multiple
separate messages to each application. As a result, multicast can provide
information simultaneously to multiple applications and use the existing
capacity, or bandwidth, of the network more efficiently. Our product suite based
upon multicast protocols, SmartMulticast, also contains enhanced error recovery
mechanisms, known as "reliable multicast," for mission-critical environments.
Our products provide businesses with a robust and easy-to-use method of
distributing relevant, time-critical information that continues to operate
efficiently, or "scale," with networks as they grow. We also offer professional
services that assist our customers in systems planning, architecture and design,
custom development and systems integration for the rapid deployment of our
products.

Our products are designed for and implemented in demanding, mission-critical
environments with high volumes of users and data. Our products have been
deployed by over 300 companies in a variety of markets such as financial
services, networking, satellite communications, securities and energy exchanges,
telecommunications and transportation, as well as embedded in the products of
independent software vendors. Our end-user customers include 3Com, Credit Suisse
First Boston, D.E. Shaw, Lockheed Martin, MCI WorldCom, Raytheon Systems, and
SIAC (the New York Stock Exchange). We have also entered into agreements with
Aspect Telecommunications, BMC Software, Micromuse, Nortel Networks, Novell,
Platinum Technology (now part of Computer Associates), Terabridge, and Real
Networks that allow them to embed our infrastructure software in their product
offerings.

INDUSTRY BACKGROUND

Today's business environment, fueled by the growth of organization-wide
networks and the Internet, allows organizations to communicate and conduct
business more rapidly than ever before. In order to function and compete
effectively, organizations must exchange increasing volumes of information
continuously in real time, in an efficient and reliable manner. Real-time
communication among multiple producers and consumers of information occurs both
internally throughout an organization and externally between the organization
and its partners, suppliers and customers. The increased exchange of real-time
information enables organizations to accelerate their business cycles, improve
internal processes, create operational efficiencies, and facilitate closer
integration with partners. To provide real-time connectivity, organizations must
be able to distribute information residing in disparate sets of applications,
platforms, and networks. As businesses increasingly trust critical business
processes to these networks, a reliable and robust infrastructure is essential.

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Historically, organizations stored data on mainframe computers and accessed
this information through dumb terminals. The next wave of computing involved
storing information on centralized servers and in databases hosted on
centralized servers, and accessing this information through PCs and other
intelligent remote devices. More recently, organizations have begun to utilize
extensive internal and external networks, including the Internet, to access and
exchange information. Rather than keeping information only on centralized
servers or mainframes, organizations are now distributing information throughout
their organizations as well as with partners, suppliers, and customers.

This new computing paradigm is leading to global installation of the
networking equipment necessary to facilitate connectivity within and across
organizations. International Data Corporation forecasts that the market for data
networking equipment will increase from $15.6 billion in 1999 to $33.9 billion
in 2003, as service providers increase their network bandwidth and the
availability of public services. However, we believe the infrastructure software
needed to support this computing shift has not been developed rapidly enough to
meet market needs. Infrastructure software has traditionally been developed
in-house and is often inadequate for the performance and scalability demands of
today's business environment. This problem is exacerbated by rapidly growing
numbers of users and volumes of data; the proliferation of diverse computing
devices, such as mainframes, UNIX and NT servers, PCs, and handheld and wireless
devices; and increasingly stringent performance and reliability requirements. A
real-time infrastructure must connect applications running across a variety of
private and public networks, including the Internet. Most existing systems were
designed assuming a local area network or other small, well-controlled,
homogenous network. Today's applications need to operate in unpredictable and
heterogeneous wide area networks, including the Internet.

We believe that a market has developed for robust, comprehensive software
infrastructure products that interconnect disparate applications, platforms and
networks, so that they can distribute and share information in today's
real-time, Internet-driven business environment. We believe that this market is
demanding products and systems that address the following limitations:

- Poor Performance. Many existing systems do not adequately support the
required volume of "packets" of data, or messages, and the transmission
time for these messages is too long. For example, systems using a
request-reply model, which requires that specific requests be made
before information can be distributed, are slow because they must poll
regularly for new data, and must block the receipt of incoming data and
wait for a reply even if other data are arriving. In addition, most
products in the marketplace use a point-to-point communication model and
do not perform well in one-to-many or many-to-many communications.

- Limited Scalability. Many existing systems do not adequately scale in
terms of transaction volumes, numbers of users and geographic diversity,
often because they are based on either:

- A "brute force" method, in which information is "broadcast" to all
machines, whether or not they have requested the information, often
resulting in a flooding of information on the network; or

- An oversimplified "hub and spoke" model, in which all transactions
are forced through one central server.

- Difficult to Implement. Existing products are often difficult to
implement and configure. In addition, they frequently require
significant customization and system integration in order to meet
customer needs.

- Inefficient Network Utilization. Many products require a separate copy
of a given message to be sent to each recipient, resulting in increased
network utilization.

- Lack of Robustness and Reliability. Existing systems were generally not
designed to run in environments that operate 24 hours a day, seven days
a week. Most systems can be shut down by the failure of a single network
or computer. In addition, changes or upgrades to a system often require
it to be restarted.

- A Passive Model of Information Distribution. Traditional systems employ
a request-reply model of information dissemination. This means an
application cannot ask for the information unless it knows that the
information exists and where it is located.

We believe that traditional database, queuing and middleware vendors, as
well as application integration vendors and business-to-business suppliers, have
failed to address these limitations adequately. We believe that there is a
significant market opportunity for infrastructure products that addresses all
these limitations and enable companies to distribute and share information in
today's real-time, Internet-driven business environment.

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OUR SOLUTION

We deliver infrastructure software products that allow our customers to
distribute and share information in real time within and across organizations.
Our products enable distributed computer applications to communicate quickly,
reliably, and securely across virtually any type of network, including the
Internet. Our flagship product, SmartSockets, is able to run on a wide variety
of platforms and systems including Windows, UNIX, Linux, OpenVMS, IBM mainframes
(MVS), and real-time operating systems (VxWorks). SmartSockets also offers
programming interfaces for most major programming models, including C, C++,
Java, and ActiveX (Microsoft). Our SmartMQ product (formerly MQexpress)
integrates queuing capability with SmartSockets real-time middleware solutions.
SmartMulticast, which includes SmartPGM and SmartTransfer, is an effective way
to transmit large amounts of data to a group of receivers simultaneously from a
single point of origin. It provides a simplified application program interface,
or API, for multicast applications and provides file transfer over Internet
Protocol multicast capable networks. SmartMulticast permits the distribution of
rich content including XML, video, audio, software executables, and graphics
files to multiple sites in a highly efficient manner. Our products provide our
customers with all the following benefits:

- High Performance. We believe that we offer one of the highest performing
infrastructure software products available, as measured by the volume of
messages, or packets of data, delivered and the time taken to distribute
each message. For example, SmartSockets is capable of delivering over
20,000 200-byte messages per second and is currently deployed in
environments where the distribution of thousands of messages per second
is essential.

- High Scalability. Our infrastructure products are scalable in terms of
transaction volumes, numbers of users and geographic locations of users
and applications. They enable businesses to add new clients, servers,
and applications easily without having to rewrite software. By using
many of the techniques that have made the Internet scalable, including
the recent development of reliable multicast, we provide our customers
with a software infrastructure that allows them to take advantage of the
rapid expansion of distributed networks.

- Ease of Use and Implementation. Our product family is relatively easy to
use and can be quickly deployed by businesses without extensive use of
system integrators. We believe that our products' ease of use reduces
the overall cost to our customers of implementing their software
infrastructure. Furthermore, we offer modular products that can be
deployed on a limited basis and expanded in the future. This enables our
customers to benefit from our products without a large up-front
investment and without requiring them to overhaul their existing
information technology systems.

- Efficient Network Utilization. Our technology allows our products to
make efficient use of available network bandwidth while growing with the
expanding capabilities of the network. Our products achieve greater
bandwidth efficiency through an efficient implementation of
publish-subscribe architecture and are capable of even greater
efficiency using multicast technology. This enables multiple subscribers
to receive the content they need simultaneously with a single message,
reducing the complexity and cost of distributing information across the
network.

- Reliability and Fault Tolerance. Our SmartSockets software is built upon
technology that we initially developed for use in demanding high
performance environments that place a premium upon reliability and fault
tolerance. Examples include satellite operations, launch control systems
and other command and control applications in the aerospace industry.
Our infrastructure software has now also been deployed by large
e-commerce sites, financial exchanges, telecommunications companies,
large-scale transportation systems, and energy companies.

- An Active Model of Information Distribution. SmartSockets uses a
publish-subscribe model of communication to deliver data automatically
as it becomes available only to "subscribers," those applications that
have previously expressed an interest in receiving that information when
it is "published."

PRODUCTS AND SERVICES

Our messaging technology was originally created more than a decade ago and
has been further developed over the past ten years. It originally served as the
real-time infrastructure for a number of demanding, high-performance aerospace
applications, including network management, satellite operations, launch control
systems, large-scale integration and test, and other command and control
applications. Almost all of these systems were mission- or life-critical,
requiring the highest levels of performance and reliability.

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Today, our technology is used in a variety of demanding, high-performance
environments, including financial exchanges, telecommunications, and e-commerce
applications.

Our infrastructure software enables organizations to communicate and deliver
mission-critical information reliably across extended computer networks in real
time. Using software "engines," or small, efficient software processes that can
be embedded on computers, our infrastructure software can be used to create what
is known in the industry as a "virtual cloud," or network of computers embedded
with our software engines. Any application operating within a virtual cloud is
able to deliver information quickly, reliably, and efficiently to any other
application within this cloud. Our software engines are designed to route and
deliver information automatically to any application within a cloud that has
subscribed to this information, even if the application, or subscriber,
requesting the information uses a different platform or protocol than the
application sending the information. In the event of a system or network
failure, our software engines are designed to route information dynamically
around failures or blocked paths, minimizing service interruptions or delays. If
an application is unable to receive requested information when it is initially
delivered, our engines are able to store the requested information and deliver
it at a later time. Furthermore, our infrastructure software is highly scalable
because it is built upon an architecture and global naming scheme similar to
that used by the Internet. Our software automatically partitions workload among
the various engines that are present in a cloud and allows organizations to
expand an existing cloud simply by adding additional engines. In addition, our
software can be used to connect multiple clouds and form larger clouds,
facilitating reliable, real-time information exchange across local area networks
and wide area networks, including the Internet.

Our technology resides in the following three layers of software.

Messaging. Our messaging software enables reliable, real-time delivery of
information between applications on a network. Our messaging technology is the
core of our infrastructure software and the layer most visible to customers. It
enables organizations to integrate diverse computer applications by connecting
each application to a network through a single interface, instead of directly
linking each application to all other applications. Applications operating
within a network of that type communicate by exchanging messages, or "packets"
of data, which can contain many different forms of information, including audio,
video, file, HTML, XML, database records, text, numbers and structures. Our
messaging technology also supports a wide range of communication models used in
organizations for delivery of messages, including:

- Publish-subscribe, where information is automatically delivered to
applications that have previously expressed an interest in that type of
information when it becomes available;

- Queuing, where information is placed in persistent storage until an
application, or another queue, is ready to accept the information;

- Peer-to-peer, where a message is passed directly between two
applications; and

- Request-reply, where information is requested and a result is returned.

Protocols. A network protocol determines how applications communicate with
each other across a computer network. The performance of a computer network
depends in part upon the protocols used by the network. We use TCP/IP, the
standard Internet protocol for one-to-one, or unicast, communication. We also
provide reliable multicast protocols that enable networks to manage and use
existing bandwidth more efficiently. Multicast allows information requested by
several applications to be sent only once, rather than as separate messages to
each application, reducing the complexity and cost of information distribution
within an organization. In addition, our multicast protocols can improve
reliability of the multicast capabilities embedded in substantially all network
routers and switches manufactured in the last several years.

Monitoring and Management. Using intuitive graphical user interfaces, our
technology can be configured to monitor system and application parameters in
local or wide area networks, including the Internet. This technology enables
users to monitor, configure, administer, and operate large-scale systems built
upon our infrastructure software and ensure reliable operation.

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Our three layers of technology are embodied in our software products, which
include the following.

Messaging Infrastructure Products

We currently offer two messaging infrastructure products.

- SmartSockets, our flagship product, facilitates selective information
delivery by enabling messages to be delivered automatically only to
interested applications, also called "subscribers." SmartSockets supports
publish-subscribe, request-reply, and peer-to-peer messaging.
SmartSockets uses both the networking protocols of the Internet and
reliable multicast to provide highly efficient one-to-one, one-to-many,
and many-to-many communications. SmartSockets can operate over virtually
any network type, including the Internet and wireless networks. This
product also offers a variety of services that complement the messaging
function, such as fault tolerance, guaranteed message delivery, data
encryption, authentication, load balancing, and data translation.
SmartSockets provides efficient networking and high scalability, and can
be embedded in the products of independent software vendors as well as an
organization's existing information system. We also offer the following
two optional add-on modules to SmartSockets that extend its
functionality:

- SmartSockets SSL provides private, secure connections between
SmartSockets processes. Using the industry-standard Secure
Sockets Layer (SSL) protocol, SmartSockets SSL enables the
highly secure transfer and exchange of information over
intranets, extranets and the Internet -- without any
reprogramming of existing SmartSockets applications.

- RTgateway extends the messaging functionality of SmartSockets in
several key areas. Using RTgateway, organizations can connect
diverse message sources and systems, enhance the scalability of
their overall messaging infrastructure, implement content-based
message routing and filtering schemes, and enjoy greater message
routing flexibility with a choice of publish-subscribe or
request-reply models.

- SmartMQ (formerly MQexpress) is a message queuing product that provides
complementary functionality to SmartSockets. SmartMQ enables a system to
store messages and facilitates backup and audit capabilities. This
product is designed for use in applications where transactions, in
addition to being processed in real time, must be available to be
processed if a system fails, and be subject to verification and audit.
SmartMQ is tightly integrated with SmartSockets and thus facilitates a
seamless integration of the queuing and publish-subscribe communication
models. It can also interoperate with IBM's MQSeries message queuing
product, allowing companies to leverage their investment in legacy
systems.

Both of these products also include development functionality that our
customers use to permit our products to interface with their software
applications.

Our messaging infrastructure products use both unicast and multicast
protocols. Our messaging products can be accessed through a variety of
platforms, programming interfaces such as C, C++, Java and ActiveX, and
operating systems such as Windows, UNIX, Linux, MVS, OpenVMS, VxWorks and IBM
mainframes. This cross platform support allows for intercommunication among all
of these platforms, programming interfaces and operating systems. For example,
the following three processes would be able to communicate directly: a Java
process on Linux, an ActiveX process on Windows NT, and an MVS process written
in C.

Protocols

We currently offer a suite of reliable multicast products called
SmartMulticast, which includes the following:

- SmartPGM is our implementation of a real-time, reliable multicast
protocol known as Pragmatic General Multicast, or PGM, that was
originally specified by Cisco Systems. SmartPGM reliably and efficiently
sends data from a few senders to large groups of simultaneous recipients.
It can be deployed in a wide range of network types, including satellite,
wireless, and Internet and enterprise networks. SmartPGM is an
automatically configuring protocol that provides flexibility in changing
recipient group members. SmartPGM can also support networks that aren't
PGM enabled through its SmartPGM network elements. SmartPGM is designed
as a service, or daemon, that communicates using a simplified API with
applications requiring reliable multicast service. SmartPGM is supported
by multiple vendors.

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- SmartTransfer provides a simple, easy to use command line interface and
graphical user interface as well as a powerful set of utilities to
simplify the setup and management of file transfers from a single sender
to multiple receivers over an IP multicast and PGM capable network. It
permits the distribution of any data files including: HTML, video,
audio, graphic and data files to multiple sites in a highly efficient
manner. SmartTransfer is built on top of SmartPGM, and accordingly
allows a file to be efficiently delivered to a large number of
recipients.

Another of our multicast technologies is RMTP-II, the Reliable Multicast
Transport Protocol II, a real-time, reliable multicast protocol derived from
work initially done at Bell Laboratories and later refined by GlobalCast
Communications, which we acquired in September 1999. Similar to the Transmission
Control Protocol, RMTP-II provides real-time, scalable, streaming delivery of
information from a few senders to large groups of simultaneous recipients, with
confirmation when the information has been delivered. We are currently focusing
our multicast protocol development and sales efforts on the SmartMulticast
suite, and are not currently shipping a commercial version of RMTP-II.

We are active participants in the standards initiative of the Internet
Engineering Task Force, or IETF, for reliable Internet Protocol multicast, and
we are working with the IETF on standards for IP multicast.

Monitoring and Management Tools

We offer two different products to monitor and manage networked applications
utilizing our messaging infrastructure products.

- RTmonitor facilitates the monitoring and management of applications
utilizing SmartSockets. Through an easy-to-use graphical interface,
RTmonitor can be configured to monitor system and application parameters
across both local and wide area networks. System events are viewed
through a display application that can operate anywhere on the network
and in multiple locations simultaneously without any change in system
configuration.

- MQadmin is a Web-based graphical tool for administering and managing
SmartMQ. MQadmin allows users to observe and manage all the deployed
message queues from a centralized location. Users can create, browse,
configure, back up, and restore queues from any machine in the network
capable of running a Web browser.

MAINTENANCE AND SUPPORT

We offer an array of software maintenance and support services to our
customers. Our support organization provides services 24 hours a day, seven days
a week. We have a worldwide support organization with key operations centers in
Los Altos, California, Warrenville, Illinois and London, England. These centers
provide the infrastructure for our around-the-clock call centers and hotline
support. As of November 30, 2000, we had eight employees involved in our
maintenance and support services.

We offer a range of maintenance support packages that allow our customers to
choose the level of support that fits their needs and budgets. Our maintenance
programs entitle our customers to receive updates and new versions of our
software, as well as to on-site support that is charged on a time and materials
basis. In addition, customers are able to receive support online over the
Internet, including entering and tracking inquiries, downloading new versions of
our software and accessing our online knowledge base.

PROFESSIONAL SERVICES AND TRAINING

Our professional services organization offers a wide range of consulting
services, including systems planning, architecture and design, custom
development and systems integration for the rapid deployment of our products. We
offer professional services with the initial deployment of our products, as well
as on an ongoing basis to address the continuing needs of our customers. Our
professional services staff is located in several offices in the United States
and an office in London, England, enabling us to perform installations and
respond to customer demands rapidly across the Americas and Europe. As of
November 30, 2000, our professional services group consisted of ten employees.
These individuals have expertise in the e-business, financial services and
telecommunications industries. Many of our professional service employees have
advanced degrees and/or substantial industry expertise in network architecture
and design, as well as in networking protocols, including TCP/IP and reliable
multicast.

We provide training for customer personnel at our main office as well as at
customer locations. We also develop custom education programs to address the
specific needs of individual customers and partners.

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ACQUISITIONS

We have made two strategic acquisitions that have augmented our technology
and provided us with additional consulting and development personnel in the
reliable multicast area:

GLOBALCAST COMMUNICATIONS. We acquired substantially all of the assets of
GlobalCast Communications, Inc., a Fremont, California-based company, in
September 1999. GlobalCast was a provider of reliable multicast technology, and
prior to our acquisition of GlobalCast, we had licensed a significant portion of
GlobalCast's technology and had embedded it in our SmartSockets product.
GlobalCast's primary product was based on RMTP-II technology. RMTP-II adds
reliability and scalability to multicast. RMTP-II was developed by GlobalCast
over a three-year period in conjunction with Lucent Technologies and academic
experts, and was first sold by GlobalCast in 1998. GlobalCast had licensed some
of the core algorithms of RMTP-II from Lucent, which has a patent on the
technology. The license was assigned to us as a part of the acquisition of
GlobalCast and is non-exclusive.

WHITEBARN. We acquired WhiteBarn, Inc., a Warrenville, Illinois-based
company, in March 2000. WhiteBarn was a software consulting and development
company focused on reliable multicast and network protocols. The principals of
WhiteBarn had been involved in the design and development of large scale trading
systems and real-time data distribution since 1985. Prior to the acquisition,
WhiteBarn was primarily engaged in consulting activities related to the
implementation of reliable multicast. WhiteBarn had also developed a commercial
implementation of PGM. We maintain WhiteBarn's facility in Illinois, and 13
WhiteBarn employees joined us in connection with the acquisition. We are using
former WhiteBarn personnel primarily in consulting and product development
activities related to reliable multicast, and have embedded an enhanced version
of WhiteBarn's PGM implementation in our SmartSockets product.

SALES AND MARKETING

We promote and license our software and sell our services primarily through
a direct sales organization, and also indirectly through system integrators,
foreign distributors, original equipment manufacturers and other resellers. As
of November 30, 2000, we employed 42 sales and marketing personnel located in
several U.S. cities and in the United Kingdom and Japan. We plan to aggressively
expand the size of our sales and marketing organizations, adding personnel
focused on both direct and indirect sales channels.

Our sales strategy targets industries, and organizations within those
industries, that require high-speed, highly scalable messaging infrastructure
for internal use or to integrate efficiently with their customers' and business
partners' applications. Our sales team, which typically includes sales people,
technical sales engineers and professional services personnel, works together
with our customers' personnel to understand the needs and goals of the
customer's particular application and its development and deployment
environments. Customers are allowed to use a full working copy of our products
on a limited-time basis in order to evaluate our products in their environment.
The level of customer analysis, both technically and financially, results in a
sales cycle that typically ranges between three and nine months. For larger
opportunities with new customers, these cycles can be longer.

We focus our marketing efforts on programs intended to attract potential
customers and to increase awareness of and promote Talarian and its products and
the benefits they provide. We use a variety of targeted marketing vehicles
including industry analyst updates and communications, market data research,
print advertising, trade shows and speaking engagements targeted toward the
industries we serve, press relations, electronic customer newsletters and our
Web site. We have developed collateral material for use by our direct and
indirect sales organizations, including white papers, data sheets, customer case
studies, and press releases and coverage.

RESEARCH AND DEVELOPMENT

The computer software industry is characterized by rapid technological
change and is highly competitive in regard to timely product innovation.
Accordingly, we believe that our future success depends on our ability to
enhance current products that meet a wide range of customer needs and to develop
new products rapidly to attract new customers and provide additional products to
existing customers. In particular, we believe we must continue to respond
quickly to users' needs for high-speed, scalable, easy-to-implement
infrastructure software to meet the increasing demands of applications being
deployed in business-to-business e-commerce systems.

We address the needs of current users through regularly scheduled
maintenance and enhancement releases. Our product development organization is
focused on enhancing the scalability, performance and ease-of-use of our
products. The majority of the

7
<PAGE> 10

work performed by our research and development organization consists of adding
new functionality and enhanced performance capabilities to our existing product
line.

In addition to our internal proprietary research and development, from time
to time we license technologies from third parties to embed into our technology.
Additionally, we are active participants in the IETF standards initiative for
reliable Internet Protocol multicast. We are also contributing members of the
International Middleware Association, Object Management Group, Securities
Industry Middleware Council, Internet Protocol Multicast Initiative, and
Business Quality Messaging Forum.

We have made, and will continue to make, substantial investments in research
and development. Research and development expenses were$5.7 million, $3.2
million, and $2.4 million in fiscal 2000, 1999, and 1998. As of November 30,
2000, we had 39 employees divided into five groups: client, server, security and
other service, quality assurance and documentation. We plan to continue
increasing our investment in research and development for the foreseeable
future. All of our software development costs have been expensed as incurred.
While we have licensed externally developed technology for integration into our
products, most of our products and enhancements to those products have been
developed internally. Additionally, we have in the past augmented our research
and development efforts through the acquisitions of GlobalCast and WhiteBarn.

COMPETITION

The market for our products is intensely competitive, relatively new,
rapidly evolving, and subject to rapid technological change. We believe that
competition will become more intense in the future and may cause price
reductions, reduced gross margins, and loss of market share, any one of which
could significantly reduce our future revenue. We most often compete against
Tibco Software, a provider of infrastructure software products and services.
Other current and potential competitors also include:

EAI Vendors. We currently face competition from various enterprise
application integration, or EAI, vendors, that offer some of the features of our
products in their technology. These EAI vendors include webMethods and Vitria.

Infrastructure Software Providers. We face potential competition from
various infrastructure software providers including IBM, Microsoft, and BEA.
Currently, their products do not generally offer the performance and scalability
of our infrastructure software and therefore do not directly compete with our
products. In the future, infrastructure software providers may add functionality
to their products that would enable them to compete directly with us.

Operating System Software Vendors. Vendors of widely used operating system
software, including Microsoft and Sun Microsystems, may integrate real-time
infrastructure functionality into future versions of their operating system
software or introduce directly competing infrastructure functionality. Microsoft
has announced its intention to introduce products that may compete with some
aspects of our product. If Microsoft or other vendors are able to incorporate
infrastructure functionality successfully into future versions of their
operating system software or introduce competing products, we may not be able to
compete effectively and may not be able to obtain or may lose market share.

IT Departments. We currently face competition from the information
technology departments of potential customers, which have developed or may
develop systems that provide for some or all of the functionality of our
SmartSockets software and related products. It is often difficult for us to sell
our product to a potential customer that has already invested heavily in a
system that our products are intended to replace.

We believe that customers in our industry make purchasing decisions
primarily based on their perception of product performance, perception of the
vendor and product price. We believe, based on discussions with customers and
potential customers, and the results of testing, that the performance of our
product is a significant competitive advantage for us. However, some of our
competitors' products offer some features, such as a greater number of
"adaptors" that facilitate connecting their products with third-party
applications, and "business logic" that facilitates the routing and delivery of
information in a manner different than is used by our products, that provides
them with an advantage with some customers. We also believe that perception of
the vendor is currently often a significant advantage for our competitors, as
they are generally larger with substantially more resources and name
recognition.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

Our success is highly dependent upon our proprietary software technology,
our trademarks, and brand names, and the goodwill associated them. We rely
primarily on a combination of copyright, trademark, patent and trade secret
laws, contractual provisions, confidentiality agreements with employees and
third parties, and other similar measures to protect our proprietary information
and

8
<PAGE> 11

intellectual property. We have registered "SmartSockets" as our trademark in the
United States, and have applied to register "SmartSockets" in the European
Community, Canada, and Japan. We acquired the registered trademark "Propagator"
through our acquisition of GlobalCast. We have applied to register "Talarian"
and the Talarian logo in the United States, the European Community, Canada, and
Japan.. We claim as common law trademarks the terms "Talarian," "GlobalCast,"
and "WhiteBarn," "the world works in real time," the Talarian logo, and our
product names "SmartRMTP-II," "SmartMulticast," "SmartPGM," "SmartTransfer,"
"RTmonitor," "RTgateway," "MQadmin" and "SmartMQ." As of the date of this annual
report, we do not own any issued patents, although we have four patent
applications pending before the U.S. Patent and Trademark Office involving
message transfer. We cannot predict when or whether we will receive any patents
with respect to any of these applications.

We enter into confidentiality agreements with our employees, consultants,
distributors, partners and customers, and limit access to our software,
documentation and other proprietary information. Additionally each customer,
partner and/or distributor enters into a license agreement, in the form of a
signed license agreement or a shrink-wrap form of agreement embedded within our
software, with respect to our software, documentation and other intellectual
property. A small number of our license agreements contain provisions allowing
access to our source code under limited circumstances. Despite our efforts to
protect our intellectual property, unauthorized third parties may attempt to
copy or obtain the use of our technology. The unauthorized reproduction or
misappropriation of our intellectual property could allow third parties to
benefit from our technology without remuneration to us. In addition, as we
intend to expand our operations internationally, effective copyright and trade
secret protection may not be available, or may be limited, in some foreign
countries. If we fail to protect our intellectual property and other proprietary
rights, our business could be adversely affected.

We do not believe that our products, trademarks, or other proprietary rights
infringe the proprietary rights of third parties. However, from time to time, we
receive notices from third parties asserting that we have infringed their
patents or other intellectual property rights. In addition, we may initiate
claims or litigation against third parties for infringement of our proprietary
rights or to establish the validity of our proprietary rights. Any claims of
these types could be time-consuming, result in costly litigation, cause product
shipment delays, or lead us to enter into royalty or licensing agreements rather
than disputing the merits of these claims. As the number of software products in
the industry increases and the functionality of these products further overlaps,
we believe that software developers may become increasingly subject to
infringement claims. Any claims of these types, with or without merit, could be
time-consuming and expensive to defend. An adverse outcome in litigation or
similar proceedings could subject us to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others, or require us to
cease the marketing or use of the infringing products, any of which could have a
material adverse effect on our business, operating results and financial
condition.

In 1989, we licensed technology from Lockheed that serves as the basis for
many of our products. This license is fully paid and irrevocable.

EMPLOYEES

As of November 30, 2000, we employed 120 people in Los Altos, California, in
several cities across the United States, and in London, England and Tokyo,
Japan. Of these employees:

- 39 were engaged in research and development;

- 42 in sales and marketing;

- 18 in professional services and technical support; and

- 21 in finance and other administrative departments.

Five of our employees are located in London, England and one in Tokyo,
Japan. None of our employees is subject to any collective bargaining agreements.
We believe our employee relations are good.

ITEM 2. PROPERTIES

We lease approximately 16,000 square feet in a single office building
located in Los Altos, California under a lease that expires in May 2005. In
December 2000 we leased an additional 13,000 square feet in a single office
building located in Los Altos, California under a lease that expires in December
2005. We lease a total of approximately 13,000 square feet in a single office
building in Warrenville, Illinois under a lease that expires in December 2005.
We also lease office space in London, England and in various cities

9
<PAGE> 12

in the United States and internationally to support our sales and marketing
personnel worldwide. These facilities are generally leased on a month-to-month
basis or have terms that end in 12 months or less. We intend to expand our
operations significantly and therefore may require additional facilities in the
future.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we have been subject to legal proceedings and claims in
the ordinary course of business. We are not currently involved in any material
legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to holders of our securities during the quarter
ended September 30, 2000.

10
<PAGE> 13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Common Stock of our Company began trading on the Nasdaq National Market
on July 21, 2000, under the symbol "TALR." Prior to that, there was no public
market for our stock. The following table sets forth the high and low sales
prices for the Company's Common Stock as reported on the Nasdaq National Market
for the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 2000:
Fourth Quarter (from July 21, 2000) $27.00 $11.50
</TABLE>

As of December 15, 2000, there were approximately 230 stockholders of
record of our Company's common stock.

We have never paid dividends on our capital stock. We currently intend to
retain any future earnings for use in our business and do not anticipate paying
any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

In September 2000, we issued 16,447 shares of common stock to Silicon Valley
Bancshares upon a net exercise of a warrant to purchase such stock. The sale and
issuance of these securities to Silicon Valley Bancshares was determined to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
of the Securities Act, as a transaction not involving a public offering. Silicon
Valley Bancshares represented that it was an accredited investor and intended to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution. Appropriate legends were affixed to the share
certificates issued in this transaction. Silicon Valley Bancshares also
represented that it had adequate access to information about the Company in
connection with this transaction.

USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES

Our Registration Statement on Form S-1 (File No. 333-34694) related to our
initial public offering was declared effective by the SEC on July 20, 2000. A
total of 4,200,000 shares of our common stock was registered with the SEC with
an aggregate registered offering price of $67.2 million, all of which shares
were registered on our behalf. The offering commenced on July 21, 2000 and all
shares of common stock being offered were sold for the aggregate registered
offering price through a syndicate of underwriters managed by Lehman Brothers,
Inc., SG Cowen Securities Corporation, Wit SoundView Corporation and Fidelity
Capital Markets, a division of National Financial Services Corporation.

We paid to the underwriters underwriting discounts and commissions totaling
$4.7 million in connection with the offering. In addition, we reasonably
estimate that we incurred additional expenses of approximately $2.5 million in
connection with the offering, which when added to the underwriting discounts and
commissions paid by us amounts to total estimated expenses of $7.2 million. Thus
the net offering proceeds to us (after deducting underwriting discounts and
commissions and offering expenses) were approximately $60 million. From the
effective date of the registration statement through September 30, 2000, the
proceeds from the offering have been used to fund working capital and general
corporate needs. In addition, we applied $26.2 million of the proceeds towards
short-term investments, and $244,000 of the proceeds towards purchase and
installation of machinery and equipment. As of September 30, 2000, $35.1 million
remained in cash and cash equivalents. No offering expenses were paid directly
or indirectly to any of our directors or officers (or their associates), or
persons owning ten percent (10%) or more of any class of our equity securities
or to any other affiliates.

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<PAGE> 14

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this annual report.

The consolidated statement of operations data for the years ended September
30, 2000, 1999 and 1998 and the consolidated balance sheet data as of September
30, 2000 and 1999 are derived from our consolidated financial statements that
have been audited by KPMG LLP, independent auditors, which are included
elsewhere in this form 10-K. The consolidated statement of operations data for
the years ended September 30, 1997 and 1996 and the consolidated balance sheet
data as of September 30, 1997 and 1996 are derived from audited financials
statements that are not included in this form 10-K.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Licenses ................................. $ 10,553 $ 5,912 $ 5,100 $ 4,209 $ 3,560
Maintenance .............................. 3,094 2,488 1,873 1,426 1,255
Professional services .................... 2,204 640 540 807 733
-------- -------- -------- -------- --------
Total revenue .......................... 15,851 9,040 7,513 6,442 5,548
Gross profit ............................... 12,447 7,872 6,448 5,230 5,148
Income (loss) from operations .............. (15,999) (3,522) (1,718) (889) 48
Net income (loss) .......................... $(15,040) $ (3,539) $ (1,728) $ (894) $ 118
Basic and diluted net loss per
share attributable to common
stockholders ............................. $ (3.08) $ (1.30) $ (0.80) $ (0.57) $ (0.18)
Basic and diluted common shares
used in computation ...................... 7,005 3,099 2,781 2,434 2,139
</TABLE>

12
<PAGE> 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto and other financial information appearing
elsewhere in this prospectus.

OVERVIEW

We develop and market infrastructure software products that allow our
customers to distribute and share information in real time within and across
organizations. Our products enable distributed computer applications to
communicate quickly, reliably, and securely across virtually any type of
network, including the Internet.

We were incorporated in November 1988. From inception through 1996, we
derived a substantial majority of our revenue from a suite of software products
used primarily in connection with mission-critical command and control
operations in industries such as aerospace. In 1997, leveraging our technology
developed for mission-critical command and control operations, we refocused our
business strategy to provide infrastructure software for applications relying
heavily upon the use of real-time, distributed systems. Our operating activities
during 1997 and 1998 related primarily to developing our SmartSockets messaging
infrastructure product line and directing our sales and marketing efforts to
increase market awareness of our SmartSockets product in industries such as
finance, telecommunications and computer hardware and services. In 1999, we
launched SmartMQ, a message queuing product that provides complementary storage,
backup, and audit capabilities to SmartSockets. We also added Internet-related
applications and industries, such as business-to-business e-commerce, to our
sales and marketing focus and began a concerted effort to market our product to
third-party partners such as original equipment manufacturers and value-added
resellers. Additionally in 1999, we began incorporating reliable multicast
capabilities into our SmartSockets product line. As part of our overall
multicast initiative, we acquired substantially all of the assets of GlobalCast
Communications, Inc. in September 1999, and acquired WhiteBarn, Inc. in March
2000. Later in 2000, we launched SmartMulticast, our IP multicast product suite
that includes SmartPGM and SmartTransfer. In 2000, we also launched two products
as add-on modules to SmartSockets, SmartSockets SSL and RTgateway.

Our revenue consists principally of license fees generated from our
SmartSockets product line and, to a lesser extent, revenue from maintenance,
support, and professional services related to our SmartSockets product line. We
license our products to end users to deploy in their networks and, to a lesser
extent, to software applications providers to embed in their products. For end
users, we typically ship products with a shrink-wrap license agreement and
recognize revenue from software license fees upon delivery of the software to
the customer, provided that the fees are fixed and determinable and that
collection is probable. Increasingly, we are entering into signed license
agreements with our end-user customers. All of our original equipment
manufacturer and value-added reseller customers enter into signed agreements
with us. For customers using a signed license agreement, revenue is recognized
after all conditions above have been met and we have received the signed
agreement. We recognize software license revenue ratably over the term of the
license if the license requires us to deliver unspecified additional software
products during its term.

Maintenance and support revenue consists of fees for providing software
updates and technical support for software products. Revenue from maintenance
and support fees is recognized ratably over the period of the maintenance and
support agreement, typically twelve months. Payments for maintenance and support
are typically paid in advance and are nonrefundable.

Professional services revenue consists of fees for services, including
product and application development, implementation and installation of software
products, integration of software, on-site support, consulting and training.
Revenue from professional services is generally recognized as the services are
performed.

Payments received in advance of revenue recognition are recorded as deferred
revenue. As of September 30, 2000, we had $4.5 million of deferred revenue. Of
this amount, $1.4 million was classified as long-term deferred revenue, relating
primarily to software licenses that require us to deliver software over an
extended period and, to a lesser extent, to maintenance and support agreements
that have a term in excess of one year.

We market our products primarily through our direct sales force and, to a
lesser extent, through indirect channels. Recently, we have begun to derive
increasing amounts of revenue through indirect channel relationships with
distributors, original equipment manufacturers, value-added resellers, and
systems integrators. Our third-party relationships have typically been with
companies that embed our product within their product, for which we receive a
license fee and, in some cases, future royalties based on our reseller's product
revenue. We expanded our international presence by opening a sales and support
office in London, England in 1998 and a sales office in Tokyo, Japan in
September 2000. Currently, our international revenue is primarily generated
through distributors. We

13
<PAGE> 16

plan to aggressively expand our sales force and the market awareness of our
company and our products. As a result, we expect to incur substantial
expenditures related to programs designed to achieve those goals.

In September 1999, we acquired substantially all of the assets of
GlobalCast, a provider of reliable multicast technology, for common stock with
an aggregate value of $3.6 million. The acquisition was accounted for using the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, and $300,000 of the purchase price was allocated to in-process
research and development and expensed at the time of the acquisition. Also, in
connection with the GlobalCast acquisition, we recorded intangible assets of
$2.9 million, which we are amortizing over a three to four year period.

In March 2000, we acquired WhiteBarn, a professional services and software
development company focused on reliable multicast and network protocols with
cash, stock and options to purchase our common stock that had an aggregate value
of $4.9 million. The transaction was accounted for as a purchase. In this
acquisition, the acquired technology included existing technology, but not
in-process research and development. For the year ended December 31, 1999,
WhiteBarn had revenue of $1.5 million, derived primarily from professional
services fees and, to a lesser extent, from hosting web sites and licensing
products, and net income of $47,000. We are maintaining WhiteBarn's facility in
Illinois and 13 WhiteBarn employees joined us in connection with the
acquisition. In connection with the WhiteBarn acquisition, we recorded
intangible assets of $4.4 million and are amortizing them over a two to three
year period.

We have a limited operating history since the implementation of our current
business strategy. We have incurred significant losses recently as we have spent
substantial amounts to develop and enhance our products and have invested
heavily in our sales and marketing organizations. We believe our success is
dependent upon our ability to rapidly expand our customer base and enhance our
technology. We intend to continue making significant investments in sales and
marketing and research and development, and expect to incur operating losses for
the foreseeable future.

In connection with the granting of stock options to our employees through
July 20, 2000, we recorded deferred stock compensation totaling approximately
$22.6 million. This amount represents the difference between the exercise price
and the deemed fair value of our common stock for accounting purposes on the
date these stock options were granted. This amount is included as a component of
stockholders' equity and is being amortized on an accelerated basis by charges
to operations over the vesting period of the options consistent with the method
described in Financial Accounting Standards Board Interpretation No. 28. The
stock options, or restricted stock purchased pursuant to these options,
generally vest at a rate of 12.5% upon the six-month anniversary of the option
grant date and 2.083% each month thereafter for the next 42 months. Amortization
of the September 30, 2000 balance of deferred stock compensation will result in
charges to operations of $7.1 million, $3.4 million, $1.3 million, and $123,000
for the fiscal years 2001, 2002, 2003, and the nine months ended June 30, 2004.

We have recorded no provision for federal or state income taxes for any
period since our inception as we have incurred losses in each period. As of
September 30, 2000, we had net operating loss carryforwards for federal income
tax purposes of approximately $7.2 million and for California income tax
purposes of approximately $2.4 million, available to offset income in future
years. The federal net operating loss carryforwards expire from 2007 through
2020. The California net operating loss carryforwards expire from 2000 through
2005.

14
<PAGE> 17

RESULTS OF OPERATIONS

The following table sets forth statement of operations data, expressed as a
percentage of total revenue, for the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue:
Licenses ............................................... 67% 65% 68%
Maintenance ............................................ 19 28 25
Professional services .................................. 14 7 7
---- ---- ----
Total revenue ....................................... 100 100 100
---- ---- ----
Cost of revenue:
Licenses ............................................... 2 2 1
Maintenance ............................................ 5 7 8
Professional services .................................. 7 4 5
Amortization of deferred stock compensation ............ 7 -- --
---- ---- ----
Total cost of revenue ............................... 21 13 14
---- ---- ----
Gross margin ............................................. 79 87 86
---- ---- ----
Operating expenses:
Sales and marketing .................................... 58 59 56
Research and development ............................... 36 36 32
General and administrative ............................. 15 18 21
Amortization of deferred stock compensation:
Sales and marketing ................................. 20 4 --
Research and development ............................ 20 3 --
General and administrative .......................... 20 3 --
Acquired in-process research and development ........... -- 3 --
Amortization of goodwill and intangible assets ......... 11 -- --
---- ---- ----
Total operating expenses ............................ 180 126 109
---- ---- ----
Loss from operations ..................................... (101) (39) (23)
Interest expense and other, net .......................... 6 -- --
---- ---- ----
Net loss ................................................. (95)% (39)% (23)%
==== ==== ====
</TABLE>

YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999

REVENUE

Total revenue increased by $6.8 million, or 75%, to $15.9 million for the
year ended September 30, 2000, from $9.0 million for the year ended September
30, 1999. Licenses and associated maintenance revenue was 86% and 93% of total
revenue in the years ended September 30, 2000 and 1999, respectively. The
increase in total revenue was due primarily to an increase in software licenses
and associated maintenance revenue to new and existing customers and, to a
lesser extent, an increase in professional services revenue. No customer
accounted for more than 10% of our total revenue in the year ended September 30,
2000. One customer accounted for 12% of our revenue during the year ended
September 30, 1999. International revenue increased by $500,000, or 21%, to $2.9
million for the year ended September 30, 2000, from $2.4 million from the year
ended September 30, 1999. International revenue was 18% and 26% of our total
revenue in the fiscal years ended September 30, 2000 and 1999, respectively.

License. License revenue increased by $4.6 million, or 79%, to $10.6 million
for the year ended September 30, 2000, from $5.9 million for the year ended
September 30, 1999. The increase in license revenue was due to an increase in
the number of software licenses to new and existing customers. This increase was
a result of the expansion of our sales force, a growing acceptance for our
infrastructure product line, and an increase in the average dollar amount of a
software license. As a percentage of total revenue, license revenue was 67% in
the year ended September 30, 2000 and 65% in the year ended September 30, 1999.

Maintenance. Maintenance revenue increased by $606,000, or 24%, to $3.1
million for the year ended September 30, 2000, from $2.5 million for the year
ended September 30, 1999. The increase in maintenance revenue was due to growth
associated with license agreements entered into in earlier periods. As a
percentage of total revenue, maintenance revenue was 19% in the year ended

15
<PAGE> 18

September 30, 2000 and 28% in the year ended September 30, 1999. The decrease in
maintenance revenue as a percentage of total revenue for the year ended
September 30, 2000 when compared to the year ended September 30, 1999, was the
result of license and professional services revenue increasing at a
significantly greater percentage rate than maintenance revenue.

Professional services. Professional services revenue increased by $1.6
million, or 244%, to $2.2 million for the year ended September 30, 2000, from
$640,000 for the year ended September 30, 1999. Approximately 44% of the
increase in professional services revenue was a result of new customers obtained
through our acquisition of WhiteBarn on March 13, 2000. The remainder of the
increase in professional services revenue was attributable to the increased
license activity discussed above and an increase in training and architectural
services associated with an increase in customer installations. In part, the
increase in professional services revenue was attributable to an increase in the
average rate per hour billed for our professional services technicians as they
were increasingly engaged in senior-level architectural design work as opposed
to implementation services and training. As a percentage of total revenue,
professional services revenue was 14% in the year ended September 30, 2000 and
7% in the year ended September 30, 1999.

COST OF REVENUE

Cost of revenue increased by $2.2 million, or 191%, to $3.4 million for the
year ended September 30, 2000, from $1.1 million for the year ended September
30, 1999. Approximately 46% of the increase in cost of revenue was a result of
an increase in amortization of deferred stock compensation for service-related
personnel. Approximately 25% of the increase in cost of revenue was a result of
increased professional services costs due to consulting personnel acquired in
our acquisition of WhiteBarn. The remainder of the increase in cost of revenue
was attributable to an increase in royalties to third parties and increased
costs related to our growing maintenance services and other
non-WhiteBarn-related professional services revenue. As a percentage of total
revenue, cost of revenue was 21% in the year ended September 30, 2000 and 13% in
the year ended September 30, 1999. Not including amortization of deferred stock
compensation, as a percentage of total revenue, cost of revenue was 14% in the
year ended September 30, 2000 and 12% in the year ended September 30, 1999. The
increase in cost of revenue as a percentage of total revenue was the result of
the increase in costs associated with personnel responsible for delivering
additional professional services revenue, which typically has a lower gross
margin than other types of revenue.

Licenses. Cost of license revenue includes royalties due for technology
licensed from third parties, product packaging, manuals and documentation, and
software media. Cost of license revenue increased by $76,000, or 46%, to
$240,000 for the year ended September 30, 2000, from $164,000 for the year ended
September 30, 1999. The increase in cost of license revenue was attributable to
increased royalties paid to a third party in connection with our licensing of
RMTP-II. We anticipate that the cost of license revenue will increase in
absolute dollars due to an anticipated increased use of third-party software
incorporated into our product line. As a percentage of license revenue, cost of
license revenue was 2% in the year ended September 30, 2000 and 3% in the year
ended September 30 1999.

Maintenance. Cost of maintenance revenue consists of compensation and
related expenses for our technical support organization. Cost of maintenance
revenue increased by $269,000, or 45%, to $864,000 for the year ended September
30, 2000, from $595,000 for the year ended September 30, 1999. The increase in
cost of maintenance revenue was due to increased personnel hired in order to
provide support to our growing installed base of customers. As a percentage of
maintenance revenue, cost of maintenance revenue was 28% in the year ended
September 30, 2000 and 24% in the year ended September 30, 1999. We anticipate
that our cost of maintenance revenue will continue to grow in absolute dollars
as we expect to expand our customer base and provide increasing levels of
support for our customers.

Professional services. Cost of professional services revenue consists of
compensation and related overhead expense for personnel and third-party
contractors we use in performing consulting, implementation, and training
services for our customers. Cost of professional services revenue increased by
$870,000, or 243%, to $1.2 million for the year ended September 30, 2000, from
$358,000 for the year ended September 30, 1999. Approximately 45% of the
increase in cost of professional services revenue was a result of consulting
personnel acquired in the acquisition of WhiteBarn. The remainder of the
increase in cost of professional services revenue was a result of additional
personnel deployed on our professional services engagements. The cost of
professional services revenue generally increased at the same rate as
professional services revenue. As a percentage of professional services revenue,
cost of professional services revenue was 56% in both the years ended September
30, 2000 and 1999. We anticipate that the cost of professional services revenue
will continue to increase in absolute dollars as we continue to expand our
service offerings.

Amortization of deferred stock compensation. Amortization of deferred stock
compensation in cost of revenues increased by $1 million, to $1.1 million for
the year ended September 30, 2000, from $51,000 for the year ended September 30,
1999.

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OPERATING EXPENSES

Sales and marketing. Sales and marketing expenses include costs of sales and
marketing personnel and related overhead, commissions, field office expenses,
advertising and promotion expenses, travel and entertainment expenses and other
selling and marketing costs. Sales and marketing expenses increased by $3.9
million, or 73%, to $9.2 million for the year ended September 30, 2000, from
$5.3 million for the year ended September 30, 1999. The increase in sales and
marketing expenses was due to expansion of our sales and marketing department
personnel and locations and, to a lesser extent, increased promotional programs.
As a percentage of total revenue, sales and marketing expenses were 58% in the
year ended September 30, 2000 and 59% in the year ended September 30, 1999. We
plan to aggressively expand our sales force and the market awareness of our
company and our products. As a result, we expect to incur substantial
expenditures related to programs designed to achieve those goals. Therefore, we
expect expenditures in sales and marketing to increase both in terms of absolute
dollars and as a percentage of total revenue for the foreseeable future.

Research and development. Research and development expenses consist of costs
of research and development personnel and associated overhead, and costs of
short-term independent contractors required in connection with development of
new products, enhancements to existing products, technical documentation, and
quality assurance. Costs incurred in research and development are expensed as
incurred until technological feasibility is established. We believe under our
current engineering processes that the establishment of technological
feasibility and general release substantially coincide. As a result, no software
development costs have been capitalized to date. Research and development
expenses increased by $2.5 million, or 78%, to $5.7 million for the year ended
September 30, 2000, from $3.2 million for the year ended September 30, 1999.
Approximately 32% of the increase in research and development was a result of
engineering personnel acquired in the acquisition of WhiteBarn. The remainder of
the increase in research and development expenses was due to an increase in
personnel and consultants in our software development, quality assurance, and
documentation departments. As a percentage of total revenue, research and
development expenses were 36% in the years ended September 30, 2000 and 1999. We
believe that our product development activities are critical to attaining our
strategic objectives and expect our investment in research and development to
increase both in terms of absolute dollars and as a percentage of total revenue
for the foreseeable future.

General and administrative. General and administrative expenses include
personnel costs for finance, administration, information systems and general
management, as well as professional fees, legal expenses and other general
corporate expenses. General and administrative expenses increased by $686,000,
or 41%, to $2.3 million for the year ended September 30, 2000, from $1.6 million
for the year ended September 30, 1999. The increase in general and
administrative expenses was due to increased personnel expenses in finance and
administration and in information systems. As a percentage of total revenue,
general and administrative expenses were 15% in the year ended September 30,
2000 and 18% in the year ended September 30, 1999. We expect general and
administrative expenses to increase in terms of absolute dollars for the
foreseeable future as we continue to build the necessary corporate
infrastructure associated with being a public company.

Amortization of deferred stock compensation. During the year ended September
30, 2000, we recorded approximately $9.4 million of amortization of deferred
stock compensation in operating expenses, representing $3.1 million of
additional sales and marketing expenses, $3.1 million of additional research and
development expenses and $3.2 million of additional general and administrative
expenses. During the year ended September 30, 1999, we recorded $902,000 of
amortization of deferred stock compensation.

Amortization of goodwill and intangible assets. Amortization of goodwill and
intangible assets was $1.8 million for the year ended September 30, 2000. This
amount represents the amortization of goodwill and other intangible assets
acquired in connection with our acquisition of GlobalCast in September 1999 and
WhiteBarn in March 2000. We had no similar expenses in any prior period.

INTEREST EXPENSE AND OTHER, NET

Interest expense and other, net consists of interest expense and losses on
foreign currency transactions, offset by interest income on our cash reserves.
Foreign currency differences are also included in other expenses. Interest
expense and other, net resulted in income of $959,000 for the year ended
September 30, 2000, compared to expense of $17,000 for the year ended September
30, 1999. The resulting change of $976,000 was attributable to higher interest
income and lower interest expense in the more recent periods following our
private equity funding in February 2000 and our initial public offering in July
2000. Our average cash reserves in interest-bearing accounts were thus
significantly higher, and the outstanding balance on our line of credit was
lower, during the year ended September 30, 2000 than in the prior year.

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<PAGE> 20

YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998

REVENUE

Total revenue increased by $1.5 million, or 20%, to $9.0 million for the
year ended September 30, 1999, from $7.5 million for the year ended September
30, 1998. Of this dollar increase, 93% was due to an increase in software
licenses to, and associated maintenance revenue from, new and existing
customers. Licenses and associated maintenance revenues were 93% of total
revenue in both fiscal years. One customer represented 12% and 13% of our total
revenue during fiscal 1999 and 1998. No other customer accounted for more than
10% of our total revenue during those years.

Licenses. License revenue increased by $812,000, or 16%, to $5.9 million for
the year ended September 30, 1999, from $5.1 million for the year ended
September 30, 1998. The increase in license revenue was due to additional
software licenses to existing customers and software licenses to new customers,
including a significant license with a software application provider, and to an
increase in the average dollar amount of a license. As a percentage of total
revenue, license revenue was 65% in the year ended September 30, 1999 and 68% in
the year ended September 30, 1998.

Maintenance. Maintenance revenue increased by $615,000, or 33%, to $2.5
million for the year ended September 30, 1999, from $1.9 million for the year
ended September 30, 1998. The increase in maintenance revenue was due to the
increase in license revenue for the period as well as to growth in our customer
base. As a percentage of total revenue, maintenance revenue was 28% in the year
ended September 30, 1999 and 25% in the year ended September 30, 1998.

Professional services. Professional services revenue increased by $100,000,
or 19%, to $640,000 for the year ended September 30, 1999, from $540,000 for the
year ended September 30, 1998. The increase in professional services revenue was
attributable to increased license activity, an increase in architectural
services associated with an increase in customer installations and higher
average billing rates for our professional services personnel. Additionally, as
a percentage of total revenue, professional services revenue was 7% in each of
the years ended September 30, 1999 and 1998.

COST OF REVENUE

Cost of revenue remained relatively constant at $1.1 million and $1.2
million for the fiscal years ended September 30, 1998 and 1999. As a percentage
of total revenue, cost of revenue was 13% in the year ended September 30, 1999
and 14% in the year ended September 30, 1998.

Licenses. Cost of license revenue increased by $105,000, or 178%, to
$164,000 for the year ended September 30, 1999, from $59,000 for the year ended
September 30, 1998. The increase in cost of license revenue was attributable to
an increase in the number of software licenses, resulting in increased costs
related to media, documentation, and third-party royalty expense. As a
percentage of license revenue, cost of license revenue was 3% in the year ended
September 30, 1999 and 1% in the year ended September 30, 1998.

Maintenance. Cost of maintenance revenue increased by $18,000, or 3%, to
$595,000 for the year ended September 30, 1999, from $577,000 for the year ended
September 30, 1998. The increase in cost of maintenance revenue was due to
increased personnel. As a percentage of maintenance revenue, the cost of
maintenance revenue was 24% in the year ended September 30, 1999 and 31% in the
year ended September 30, 1998. The cost of maintenance revenue as a percentage
of maintenance revenue decreased from 31% to 24% as a result of spreading the
cost of our maintenance personnel over a larger installed base.

Professional services. Cost of professional services revenue decreased by
$71,000, or 17%, to $358,000 for the year ended September 30, 1999, from
$429,000 for the year ended September 30, 1998. The decrease in cost of
professional services revenue was a result of a decrease in personnel deployed
on our professional services engagements. We restructured our consulting service
organization during 1998, which temporarily reduced the size of our staff. As a
percentage of professional services revenue, the cost of professional services
revenue was 56% in the year ended September 30, 1999 and 79% in the year ended
September 30, 1998.

Amortization of deferred stock compensation. During the year ended September
30, 1999, we recorded $51,000 of amortization of deferred stock compensation
representing additional cost of revenue.

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<PAGE> 21

OPERATING EXPENSES

Sales and marketing. Sales and marketing expenses increased by $1.1 million,
or 26%, to $5.3 million for the year ended September 30, 1999, from $4.2 million
for the year ended September 30, 1998. The increase in sales and marketing
expenses was due to expansion of our sales and marketing department personnel
and locations and, to a lesser extent, increased promotional programs. As a
percentage of total revenue, sales and marketing expenses were 59% in the year
ended September 30, 1999 and 56% in the year ended September 30, 1998.

Research and development. Research and development expenses increased by
$851,000, or 36%, to $3.2 million for the year ended September 30, 1999, from
$2.4 million for the year ended September 30, 1998. The increase in research and
development expenses was due to an increase in personnel and consultants in our
software development, quality assurance, and documentation departments. As a
percentage of total revenue, research and development expenses were 36% in the
year ended September 30, 1999 and 32% in the year ended September 30, 1998.

General and administrative. General and administrative expenses increased by
$91,000, or 6%, to $1.7 million for the year ended September 30, 1999, from $1.6
million for the year ended September 30, 1998. The increase in general and
administrative expenses was due to increased personnel expenses associated with
systems administration, or MIS, of approximately $300,000, partially offset by a
decrease in executive management bonuses of approximately $200,000. As a
percentage of total revenue, general and administrative expenses were 18% in the
year ended September 30, 1999 and 21% in the year ended September 30, 1998.

Acquired in-process research and development. As a result of the GlobalCast
acquisition, we recorded $300,000 of acquired in-process research and
development expenses. We had no similar expenses in any prior period.

Amortization of deferred stock compensation. During the year ended September
30, 1999, we recorded $902,000 of amortization of deferred stock compensation in
operating expenses, $303,000 of additional research and development expenses,
$365,000 of additional sales and marketing expenses and $234,000 of additional
general and administrative expenses. During the year ended September 30, 1998,
we recorded no amortization of deferred stock compensation.

INTEREST EXPENSE AND OTHER, NET

Interest expense and other, net increased by $7,000 due to a significant
increase in interest expense and a small increase in foreign currency losses,
largely offset by a substantial increase in interest income. Our average cash
reserves in interest-bearing accounts was less during the year ended September
30, 1999 than in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our initial public offering we funded our operations through
private sales of redeemable convertible preferred stock, internal operations,
and, to a lesser extent, through our credit facilities. In February 2000, we
raised $9.9 million through a private sale of redeemable convertible preferred
stock. On July 20, 2000, we completed an initial public offering of 4.2 million
shares of our common stock at $16.00 per share. Net proceeds from this offering
were $60 million, net of underwriters' commissions and estimated offering
expenses.

Net cash used in operating activities was $1.4 million and $2.2 million in
fiscal 2000 and 1999, respectively. Net cash provided by operating activities
was $2.7 million in fiscal 1998. For the year ended September 30, 2000,
substantially all of net cash used in operating activities was attributable to
our net loss of $15.0 million, which included $12.7 million in non-cash charges,
and an increase in accrued but unpaid liabilities of approximately $1.0 million.
For fiscal 1999, net cash used in operating activities was attributable to our
net loss of $3.5 million, which included $1.7 million in non-cash charges, and
an increase in accounts receivable of $1.7 million, offset in part by an
increase in deferred revenue of $1.3 million. For fiscal 1998, net cash provided
by operating activities was attributable to an increase in deferred revenue of
$2.7 million, which was largely attributable to a license agreement with a
software application provider, small increases in other current liabilities and
a decrease in accounts receivable of $867,000, offset in part by a net loss of
$1.7 million.

Net cash used in investing activities was $34.5 million in the year ended
September 30, 2000. Net cash used in investing activities this period
represented net purchases of $34.2 million of short-term investments, the
acquisition of WhiteBarn, net of cash, for $713,000 in cash, and the purchase of
$1.2 million of property and equipment. Net cash provided by investing
activities was $59,000 in fiscal 1999. The cash provided was attributable to
cash acquired in connection with the GlobalCast acquisition, largely offset by

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cash used to purchase property and equipment. Net cash used in investing
activities was $486,000 in fiscal 1998. Net cash used in investing activities
was entirely attributable to purchases of property and equipment in fiscal 1998.

Net cash provided by financing activities was $69.2 million in the year
ended September 30, 2000, $717,000 in fiscal 1999, and $41,000 in fiscal 1998.
For the year ended September 30, 2000, net cash provided by financing activities
was attributable to approximately $70 million in net proceeds from our initial
public offering and the sale of redeemable convertible preferred stock. In
fiscal 1999 and 1998, net cash provided by financing activities was attributable
to net proceeds from debt incurred plus small amounts from the sale of common
stock.

As of September 30, 2000, we had approximately $67.7 million in cash, cash
equivalents and short-term investments, and working capital of $65.0 million. As
of that date, we also had a line of credit under which we could borrow up to
$2.0 million with a revolving maturity date of February 22, 2001, at an interest
rate of prime plus 0.25%. Any borrowing will be collateralized by accounts
receivable and other assets of ours. For further information, please refer to
note 6 of notes to consolidated financial statements. We have no borrowings
under this line of credit and are in compliance with all required financial
ratios, net loss levels, and other financial covenants. Our commitments consist
primarily of amounts due under our operating leases. We have no material
commitments for capital expenditures, however, we expect that both capital
expenditures and operating lease commitments will increase as we expand our
operations and personnel worldwide. For the next twelve months, we expect our
capital expenditures to be approximately $4.0 million. We anticipate material
increases in operating expenses, particularly sales and marketing and research
and development expenses, in order to execute on our business plan and strategic
objectives. Additionally, we may use cash resources to fund acquisitions or
investments in complementary businesses or technologies. We believe that our
current cash, cash equivalents, and short-term investments will be sufficient to
meet our working capital and operating resource requirements for at least the
next 12 months.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting. In June 2000, the FASB issued SFAS 138, which
amends SFAS 133 with regards to specific hedging risks,
foreign-currency-dominated assets and liabilities, and intercompany derivatives.
In accordance with SFAS No. 137, issued by the FASB in June 1999 and which
deferred the implementation of SFAS No. 133, the Company has adopted SFAS No.
133 in the first quarter of fiscal 2001. To date the Company's investments in
derivative instruments have not been significant and the Company has not engaged
in any hedging activities. Accordingly, the Company has evaluated the effects of
adopting SFAS No. 133 and has determined that it will not have a material impact
on its financial statements, cash flows or results of operations.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A that delayed the
implementation date of SAB No. 101. In June 2000, the SEC issued SAB No. 101B
that further delayed the implementation date of SAB No. 101. The Company must
adopt SAB No. 101 no later than the fourth quarter of fiscal 2001. The Company
does not anticipate that the adoption of SAB 101 will have a significant impact
on the Company's financial statements, cash flows, or results of operations.

FACTORS AFFECTING FUTURE RESULTS

Our future operating results may differ materially from the results
discussed in, or implied by, forward-looking statements made by us. Factors that
may cause such differences include, but are not limited to, those discussed
below and elsewhere in this annual report.

WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NEVER ACHIEVE
OR MAINTAIN PROFITABILITY.

We have a history of losses, we expect future losses, and we do not expect to
achieve profitability in the near future. We incurred net losses of $1.7 million
in fiscal 1998, $3.5 million in fiscal 1999, and $15.0 million fiscal 2000. As
of September 30, 2000, we had an accumulated deficit of approximately $30.6
million. We cannot assure you that our revenue will grow or that we will achieve
or

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maintain profitability in the future. We intend to significantly increase our
future product development, sales and marketing, and administrative expenses.
Accordingly, we will need to increase our revenue substantially to achieve and
maintain profitability, which we may not be able to do.

OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY SINCE THE IMPLEMENTATION OF OUR CURRENT BUSINESS STRATEGY.

In 1997, we implemented a new business strategy and introduced our
SmartSockets real-time infrastructure software. Thus, we have only a limited
operating history with our current software product line and business strategy.
This limited history makes it difficult to evaluate our businesses.

Prior to 1997, we derived a substantial majority of our revenue from a suite
of software products used primarily in connection with mission-critical command
and control operations in industries such as aerospace. In 1997, we re-focused
our business strategy on providing infrastructure software for applications
relying heavily upon the use of real-time, distributed systems. In addition,
through our acquisition of substantially all the assets of GlobalCast
Communications, Inc. in 1999 and our acquisition of WhiteBarn, Inc. in 2000, we
added reliable multicast capabilities to our product line. We also expanded our
business strategy in 1999 to include providing software infrastructure products
to the market for Internet-related applications. If our current business
strategy is not successful, our revenue is unlikely to grow significantly, if at
all.

OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT IN ADVANCE AND MAY FLUCTUATE
SIGNIFICANTLY, AND A FAILURE TO MEET THE REVENUE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS MIGHT RESULT IN A DECLINE IF OUR STOCK PRICE.

Our future operating results may vary significantly. If our operating
results are below the expectations of securities analysts or investors, our
stock price is likely to decline.

Our revenue and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, we
have had little backlog and our revenue in any quarter has been substantially
dependent upon orders booked in that quarter. In addition, more than 50% of our
license revenue in a given quarter has often been recorded in the third month of
that quarter, with a concentration of this revenue in the last two weeks of the
third month. Furthermore, more than 50% of our license revenue for a given
quarter has often been derived from fewer than ten customers. For example, in
the fourth quarter ended September 30, 2000, nine customers represented 51% of
our revenue. We expect these trends to continue and, therefore, any failure or
delay in the closing of orders could have a material adverse effect on our
quarterly operating results. Additionally, since our operating expenses are
based on anticipated revenue and because a high percentage of these expenses are
relatively fixed, a shortfall in anticipated revenue could have a significant
negative impact on our operating results.

Other factors that may cause our revenue or operating results to fall short
of expectations include:

- the amount and timing of sales and marketing expenses and other
operating costs and capital expenditures relating to our business;

- changes in prices of, and the adoption of different pricing strategies
for, our products and those of our competitors;

- changes in the demand for our products due to the announcement or
introduction of new or enhanced products or services by us or our
competitors;

- the capital and expense budgeting decisions of our customers;

- changes in the demand for our products due to the fact that many of our
future customers are expected to be concentrated in early-stage
industries, such as the Internet industry, and these customers are often
capital constrained and have rapidly changing needs; and

- the impact of possible acquisitions both on our operations and on our
reported operating results due to associated accounting charges.

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VARIATIONS IN THE TIME IT TAKES US TO SELL OUR PRODUCTS MAY CAUSE FLUCTUATIONS
IN OUR OPERATING RESULTS.

Variations in the length of our sales cycles could cause our revenue to
fluctuate widely from period to period. The period between our initial contact
with a customer and the time when we recognize revenue from that customer varies
widely in length. Our sales cycles typically range from three to nine months.
For larger opportunities with new customers, these cycles can be longer.
Additionally, due to the mission-critical nature of many deployments of our
products, our customers may take a long time to evaluate our products, and many
individuals may be involved in the evaluation process. In addition, many of our
customers purchase our real-time infrastructure software as part of a
large-scale information technology project, which includes the purchase of many
products from a number of vendors. Changes in the scheduling of these projects,
or delays or problems caused by other vendors or their products, may cause
unexpected delays in our sales cycles.

THE REAL-TIME INFRASTRUCTURE SOFTWARE PRODUCTS MARKET IS IN AN EARLY STAGE OF
DEVELOPMENT, AND THESE PRODUCTS, INCLUDING OUR SMARTSOCKETS SOFTWARE AND RELATED
PRODUCTS, MAY NOT ACHIEVE MARKET ACCEPTANCE.

The market for real-time infrastructure software products is relatively new
and rapidly evolving, and there are a variety of infrastructure methods
available. We do not know if customers in our target markets will widely adopt
and deploy real-time infrastructure software products such as our SmartSockets
software and related products. If real-time infrastructure software products are
not widely adopted by customers in our target markets, our revenue will not
increase substantially, if at all.

THE SUBSTANTIAL EXPENDITURES REQUIRED TO EDUCATE PROSPECTIVE CUSTOMERS AND
DEVELOP MARKET ACCEPTANCE FOR OUR PRODUCTS MAY NEVER BE OFFSET BY FUTURE
REVENUES.

Due to the evolving nature of our market, we may have to devote substantial
resources to educate prospective customers about the benefits of infrastructure
software in general and our SmartSockets software and related products in
particular. Our efforts to educate potential customers may not result in our
products achieving market acceptance. In addition, many of these prospective
customers have made significant investments in internally developed or custom
systems and may incur significant costs in switching to third-party products
such as ours. Our target customers may not choose our products for technical,
cost, support, or other reasons. If the market for our products fails to grow or
grows more slowly than we anticipate, these substantial expenditures may not be
offset by incremental revenue.

WE DERIVE MORE THAN 90% OF OUR TOTAL REVENUE FROM OUR SMARTSOCKETS PRODUCT LINE
AND IF DEMAND FOR SMARTSOCKETS DECREASES OR DOES NOT INCREASE, OUR TOTAL REVENUE
WILL NOT INCREASE AND MAY DECREASE.

We currently derive more than 90% of our total revenue from licensing our
SmartSockets software product line and providing related consulting and
maintenance services. We expect to continue to derive a substantial portion of
our revenue from these sources for the foreseeable future. Accordingly, our
future operating results will depend on the demand for SmartSockets by future
customers. If our competitors release products that are superior to SmartSockets
in performance or price, SmartSockets is not widely accepted by the market, or
we fail to enhance SmartSockets and introduce new versions in a timely manner,
demand for this product may decrease or fail to increase. A decline in demand
for SmartSockets or a failure of demand to increase, as a result of competition,
technological change or other factors, would significantly and adversely affect
our business, financial condition, and operating results.

COMPETITION IN THE REAL-TIME INFRASTRUCTURE SOFTWARE MARKET IS INTENSE; MANY OF
OUR COMPETITORS AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN WE ARE AND HAVE
SIGNIFICANTLY GREATER RESOURCES; WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

EAI Vendors. We currently face competition from various enterprise
application integration, or EAI, vendors that offer some of the features of our
products in their technology. These EAI vendors include webMethods and Vitria.

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IT Departments. We currently face competition from the information
technology departments of potential customers which have developed or may
develop systems that provide for some or all of the functionality of our
SmartSockets software and related products. It is often difficult for us to sell
our products to a potential customer that has already invested heavily in a
system that our products are intended to replace.

Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Historically, our expenditures on research and development have been limited
due to resource constraints, and we will need to substantially increase our
investment in research and development in the future. Our competitors may be
able to develop products comparable or superior to those we offer, adapt more
quickly than we do to new technologies, evolving industry trends or customer
requirements, or devote greater resources to the development, promotion and sale
of their products than we do. Many of our competitors also have well-established
relationships with our existing and prospective customers as well as companies
that have significant influence in the industry. For example, Tibco has a
strategic relationship with Cisco Systems. Negotiating and maintaining favorable
customer and strategic relationships is critical to our business, and our
competitors may be able to negotiate strategic relationships on more favorable
terms than we are able to negotiate.

Furthermore, a number of these competitors may merge or form strategic
relationships that would enable them to offer, or bring to market earlier,
products or services that are superior to our own in terms of features, quality,
pricing or other factors. We expect additional competition from other
established and emerging companies. The industry in which we compete is rapidly
evolving. We may not be able to compete effectively against current and
potential competitors, especially those with significantly greater resources.

SOME OF OUR COMPETITORS HAVE SIGNIFICANTLY BROADER PRODUCT OFFERINGS, AND WE MAY
NEED TO PARTNER WITH THIRD PARTIES TO PROVIDE A BROADER RANGE OF PRODUCTS AND
SERVICES.

Our customers often purchase our real-time infrastructure software as part
of a large-scale information technology project requiring many products from
many vendors. Many of our competitors offer extended product lines, and some
customers may prefer to purchase products from vendors that are able to offer
broader functionality than can be provided by our products alone as part of the
customers' overall information technology project. For example, some of our
competitors offer a larger number of "adaptors" that facilitate connecting their
products with third-party applications, and some competitors have products that
contain a software feature, known as "business logic," that facilitates the
routing and delivery of information in a different manner than is used by our
products. In order to compete more effectively, we may need to expand the
breadth of our product offerings by partnering with companies offering
complementary products. We may not be able to enter into relationships of this
type, on reasonable terms or at all, and our failure to do so could adversely
affect our ability to sell our products and services.

IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE OR INDUSTRY STANDARDS, OUR
PRODUCTS MAY NOT BE COMPETITIVE AND OUR REVENUE AND OPERATING RESULTS MAY
SUFFER.

Our industry is characterized by rapid technological change, frequent new
product introductions and enhancements, and evolving customer demands and
industry standards. Our products may not be competitive if we fail to introduce
new products or product enhancements that meet new customer demands, support new
standards, or integrate with new or upgraded versions of packaged applications.
The development of new products is complex, and there can be no assurance that
we will be able to complete development in a timely manner, or at all. There are
currently no widely accepted standards in various technical areas of importance
to us, including the areas of reliable multicast and business-quality messaging.
There can be no assurance that the proposed standards we support will prevail or
be widely adopted. We believe that we will need to continue to enhance our
products and develop new products to keep pace with competitive and
technological developments and evolving industry standards, and our failure to
do so on a timely basis, or to achieve market acceptance for our products, would
harm our revenue and operating results.

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FAILURE TO DEVELOP AND MAINTAIN KEY STRATEGIC RELATIONSHIPS COULD CAUSE US TO
LOSE MARKET OPPORTUNITIES AND LIMIT OUR GROWTH.

We believe that our success in penetrating our target markets depends in
part upon our ability to develop and maintain strategic relationships with key
original equipment manufacturers, systems integrators, distributors, and
independent software vendors. Relationships with these parties are also
important because they often influence a customer's decision on which
infrastructure software will be used for a project. We believe these
relationships will introduce our products to potential customers and provide us
with insights into new technologies to which we may not otherwise have access.
For example, a system integrator that is responsible for reengineering a network
may be heavily involved in analyzing and ultimately selecting the infrastructure
software to be used in the network. To date, we have informal working
relationships with several system integrators and formal agreements with only a
limited number of system integrators. Some of our competitors have developed
more strategic relationships than we have. We cannot be certain that we will be
able to establish relationships with additional companies on a timely basis, or
at all, or that these companies will devote adequate resources to embedding,
promoting or selling our products. Additionally, in connection with Nortel
Networks' equity investment in us in February 2000, we entered into a preferred
marketing arrangement with Nortel Networks which, among other things, restricts
our ability to enter into marketing partnerships with specified third parties
until February 2001. Potential conflicts between our direct sales force and
third-party reselling efforts could also limit our ability to develop additional
key strategic relationships. If we fail to develop these strategic
relationships, or if any of our current relationships with these types of
organizations is terminated, we might lose important revenue opportunities and
our growth might be limited.

IF WE FAIL TO PENETRATE KEY TARGET MARKETS, SUCH AS THE BUSINESS-TO-BUSINESS
E-COMMERCE MARKET, OR IF THESE MARKETS FAIL TO GROW AS ANTICIPATED, OUR REVENUE
GROWTH WILL BE IMPAIRED.

We have recently devoted substantial resources to penetrating new target
markets, including the market for Internet infrastructure software. If we fail
to address the needs of these new markets, our revenue growth will be impaired.
Historically, we have directed our sales and marketing efforts toward companies
in the financial services, telecommunications and aerospace industries. To date,
less than 10% of our revenue has been derived from customers in the Internet
infrastructure market. This market is new and rapidly changing. Customers in
this market and other potential new markets are likely to have different
requirements than our current customers, and may require us to change our
product design or features, sales methods, support capabilities or pricing
policies. The costs of addressing these requirements, as well as the failure to
do so, could be substantial and could adversely affect our operating results.

Furthermore, because we have expended and will continue to allocate
substantial resources toward providing Internet-based products and services, the
growth of our business depends on the increased acceptance and use of the
Internet as a medium for conducting e-commerce and demand for our products in
Internet-based applications. The rapid growth of the Internet as a means for
conducting business is a recent occurrence and may not continue at historical
rates. If the use of the Internet and e-commerce does not grow as anticipated,
the Internet infrastructure market may not offer the revenue opportunity we
currently perceive.

WE PLAN TO EXPAND OUR INTERNATIONAL OPERATIONS, AND THE SUCCESS OF OUR
INTERNATIONAL EXPANSION IS SUBJECT TO SIGNIFICANT UNCERTAINTIES.

Revenue from the sale of our products and services outside North America
accounted for 18% of our total revenue in fiscal 2000. We believe that we must
expand our international sales and distribution operations to be successful. In
attempting to conduct and expand business internationally, we are exposed to
various risks that could adversely affect our international operations and,
consequently, our operating results, including:

- difficulties and costs of staffing and managing international
operations;

- fluctuations in currency exchange rates;

- unexpected changes in regulatory requirements, including imposition of
currency exchange controls, applicable to our business or to the
Internet;

- difficulties and additional costs of tailoring our products to meet the
demands of foreign markets;

- political and economic instability; and

- potentially reduced protection for intellectual property rights.

24
<PAGE> 27

WE HAVE MADE AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH COULD PUT A STRAIN ON
OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS AND ADVERSELY AFFECT OUR
FINANCIAL RESULTS; WE MAY NOT BE ABLE TO MAKE STRATEGIC ACQUISITIONS IF OUR
STOCK PRICE IS LOW.

We have made and may continue to make acquisitions of other companies in
order to expand our business and services. For example, in September 1999 we
acquired the assets of GlobalCast, a provider of reliable multicast products and
services. In addition, in March 2000, we acquired WhiteBarn, a provider of
reliable multicast-related consulting services and developer of multicast
technology. Integrating newly acquired organizations and technologies into our
company could be expensive and time-consuming and may strain our resources. The
integration of WhiteBarn into our company is complete, however, we continue to
encounter challenges because its headquarters, near Chicago, Illinois, is
geographically distant from our own. We may not be successful in integrating
acquired businesses or technologies and may not achieve anticipated revenue and
cost benefits. In addition, future acquisitions could result in potentially
dilutive issuances of equity securities or the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill and other intangible
assets, any of which could adversely affect our balance sheet or operating
results. For example, in connection with the acquisition of substantially all of
the assets of GlobalCast, we recorded approximately $2.7 million in goodwill and
other intangibles, which will be amortized over a period of three to four years
and, in connection with the acquisition of WhiteBarn, we recorded approximately
$4.4 million in goodwill and other intangibles, which will be amortized over a
period of two to three years. Moreover, we cannot make any assurances that we
will be able to identify future suitable acquisition candidates or, if we are
able to identify suitable candidates, that we will be able to make these
acquisitions on commercially reasonable terms or at all. Additionally, even if
we identify suitable acquisition candidates, we may not be able to consummate
such acquisitions if our stock price is low.

THE RAPID GROWTH OF OUR OPERATIONS COULD STRAIN OUR RESOURCES AND CAUSE OUR
BUSINESS TO SUFFER.

Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have recently increased our headcount substantially and
plan to increase the scope of our operations and the size of our direct sales
force domestically and internationally. This growth may place a significant
strain on our management systems, infrastructure, and other resources. We expect
that we will need to continue to improve our financial and managerial controls,
reporting systems and procedures. We will also need to expand, train, and manage
our workforce worldwide. Furthermore, we expect that we will be required to
manage an increasing number of relationships with various customers and other
third parties. If we do not manage our growth efficiently and effectively, it
could adversely affect our business, operating results and financial condition.

THE LOSS OF KEY MANAGEMENT PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP, AND
TECHNICAL EXPERTISE WE RELY, WOULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE OUR
BUSINESS PLAN.

Our success depends heavily upon the continued contributions of our key
management personnel, whose knowledge, leadership, and technical expertise would
be difficult to replace. In particular, we rely upon the leadership of Paul A.
Larson, our President and Chief Executive Officer, and Thomas J. Laffey, our
Chief Technical Officer. If we were to lose the services of any of our key
personnel, the ability to execute our business plan would be adversely affected.
All of our executive officers and key personnel are employees at-will. We have
no employment contracts and maintain no key person insurance other than
$1,000,000 on Thomas J. Laffey and $500,000 on Paul A. Larson.

IF WE ARE UNABLE TO HIRE, TRAIN, AND RETAIN ADDITIONAL SALES, MARKETING,
ENGINEERING AND FINANCE PERSONNEL, OUR GROWTH WILL BE IMPAIRED.

In order to grow our business successfully and maintain a high level of
quality and service, we will need to recruit, retain, and motivate additional
highly skilled sales, marketing, engineering, and finance personnel. If we are
not able to hire, train, and retain a sufficient number of qualified employees,
our growth will be impaired. In particular, we will need to expand our sales and
marketing organizations in order to increase market awareness of our
SmartSockets software and related products and to generate increased revenue. In
addition, as a company focused on the development of complex software products,
we will need to hire additional software developers and engineers, systems
architects and project managers of various experience levels in order to keep
pace with technological change and develop products that meet the needs of
rapidly evolving markets. Competition for skilled employees, particularly in the
San Francisco Bay Area, is intense. We may have even greater difficulty
recruiting potential employees after this offering if they perceive the equity
component of our compensation package to be less valuable after this offering
than prior to this offering. Furthermore, new employees require training, take
time to achieve full productivity and, in light of the high rate of turnover for
these employees, may be difficult to retain.

25
<PAGE> 28

A NUMBER OF OUR EXECUTIVES AND OTHER EMPLOYEES HAVE JOINED US ONLY RECENTLY, AND
IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY, WE MAY NOT BE ABLE TO MANAGE
OUR GROWTH AND OPERATIONS.

A number of our executives and other employees joined us only recently and
have had only a limited time to work together. For example, Steven M. Gimnicher,
our Vice President, Product Development, and Mark G. Mahowald, our Vice
President, Multicast and Networking Technologies, joined us in March 2000; and
Joseph Addiego, our Senior Vice President, Sales and Marketing, joined us in
April 2000. In addition, many of the senior engineers involved in developing our
multicast technology have only recently joined us as part of our acquisitions of
WhiteBarn and GlobalCast. They may not be able to work effectively together to
develop our technology and manage our growth and continuing operations.

OUR SOFTWARE PRODUCTS MAY HAVE UNKNOWN DEFECTS, WHICH COULD HARM OUR REPUTATION,
DECREASE MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND
REVENUE, AND RESULT IN LIABILITY TO US.

Our products were created using highly complex software, both internally
developed and licensed from third parties. Highly complex software may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. We may not discover software defects that affect our
current or future products or enhancements until after they are sold. Any
interruptions caused by unknown defects in our products could cause substantial
damage to our customers' businesses and could damage our reputation, cause our
customers to initiate product liability suits against us, increase our product
development costs, divert our product development resources, cause us to lose
revenue or delay market acceptance of our products.

WE COULD RECEIVE NEGATIVE PUBLICITY AND SUFFER INJURY TO OUR REPUTATION IF
WELL-KNOWN CUSTOMERS SUFFER SERVICE INTERRUPTIONS.

Many of our customers, including financial exchanges, telecommunications
companies and large-scale e-businesses, rely upon our infrastructure software to
provide widely used and highly publicized services. If any of these customers
were to suffer a service interruption, we could receive negative publicity and
suffer injury to our reputation even if these interruptions were wholly
unrelated to the performance of our products. The degree of this injury could be
grossly disproportionate to the actual contribution of our products to the
service interruption.

OUR CUSTOMERS WILL NOT BE ABLE TO REALIZE THE FULL EFFICIENCY BENEFITS OF OUR
INFRASTRUCTURE SOFTWARE UNLESS THE INTERNET IS ENHANCED TO ALLOW MULTICAST.

As the volume of data transmitted across networks, particularly the
Internet, increases, it may be increasingly important for infrastructure
software to make efficient use of available network bandwidth. One of the
potential competitive advantages of our infrastructure software is that it
enables more efficient use of available network bandwidth. Our software achieves
this benefit through an efficient implementation of publish-subscribe
architecture and is capable of even greater efficiency using multicast
technology. However, our customers will not be able to realize the full
efficiency benefits of our multicast capabilities over the Internet unless the
Internet is enhanced to allow multicast. There can be no assurance that it will
be.

OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY
CAUSE US TO BECOME SUBJECT TO EXPENSIVE LITIGATION, CAUSE US TO INCUR
SUBSTANTIAL DAMAGES OR LICENSE FEES, OR PREVENT US FROM SELLING OUR PRODUCTS.

We cannot be certain that our products do not and will not infringe issued
patents or other intellectual property rights of others. Historically, patent
applications in the United States have not been publicly disclosed until the
patent is issued, and we may not be aware of filed patent applications that
relate to our products or technology. If patents later issue on these
applications, we may be liable for infringement. We may also be subject to legal
proceedings and claims in the ordinary course of our business, including claims
of alleged infringement of the patents, trademarks and other intellectual
property rights of third parties by us or our licensees in connection with their
use of our products. Intellectual property litigation is expensive and
time-consuming, and could divert our management's attention away from operating
our business. If we discovered that our products infringe the intellectual
property rights of others, we would need to obtain licenses from these parties
or substantially reengineer our products in order to avoid infringement. We
might not be able to obtain the necessary licenses on acceptable terms or at
all, or to reengineer our products successfully. Moreover, if we are sued for
infringement and lose the suit, we could be required to pay substantial damages
or enjoined from licensing or using the infringing products or technology. Any
of the foregoing could cause us to incur significant costs and prevent us from
selling our products.

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<PAGE> 29

OUR INTELLECTUAL PROPERTY COULD BE USED BY OTHERS WITHOUT OUR CONSENT.

We rely primarily on a combination of copyrights, trademarks, trade secret
laws, and contractual obligations with employees and third parties to protect
our proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property will not prevent third parties from
independently developing technology that is similar to or competes with our own.
Moreover, despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and obtain and use information that we
regard as proprietary. In addition, other parties may breach confidentiality
agreements or other protective contracts into which we have entered, and we may
not be able to enforce our rights in the event of these breaches. Furthermore,
we expect that we will increase our international operations in the future, and
the laws of many foreign countries do not protect our intellectual property
rights to the same extent as the laws of the United States.

OUR STOCK PRICE AND THOSE OF OTHER TECHNOLOGY COMPANIES HAVE EXPERIENCED EXTREME
PRICE AND VOLUME FLUCTUATIONS, AND ACCORDINGLY OUR STOCK PRICE MAY CONTINUE TO
BE VOLATILE, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT.

The trading price of our common stock has fluctuated significantly since our
initial public offering in July 2000 and is significantly below the original
offering price of $16 per share. An active public market for our common stock
may not be sustained in the future. Many factors could cause the market price of
our common stock to rise and fall, including:

- variations in our quarterly results;

- announcements of technological innovations by us or by our competitors;

- introductions of new products or new pricing policies by us or by our
competitors;

- acquisitions or strategic alliances by us or by our competitors;

- recruitment or departure of key personnel;

- the gain or loss of significant orders or customers;

- changes in the estimates of our operating performance or changes in
recommendations by securities analysts; and

- market conditions in the industry and the economy as a whole.

In addition, stocks of technology and Internet-related companies have
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to these companies' operating performance. Public
announcements by companies in our industry concerning, among other things, their
performance, accounting practices or legal problems could cause fluctuations in
the market for stocks of these companies. These fluctuations could lower the
market price of our common stock regardless of our actual operating performance.

In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could harm our operating results and our business.

OUR OFFICERS, DIRECTORS, AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR
COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS IN WAYS THAT
COULD ADVERSELY IMPACT OUR STOCK PRICE.

As of December 15, 2000, our executive officers, directors, entities
affiliated with them and other five percent stockholders, in the aggregate,
beneficially owned approximately 46% of our outstanding common stock. These
stockholders, acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors. These actions might be taken even if they are opposed by other
stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change of control of our company, which could have a
material adverse effect on our stock price.

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<PAGE> 30

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT MARKET
PRICES FOR OUR COMMON STOCK.

The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering or
the perception that these sales could occur. As of December 15, 2000, we had
18,976,441 shares of our common stock outstanding. Of these shares, 4,200,000
shares sold in our initial public offering are freely tradable except for any
shares purchased by our "affiliates" as defined in Rule 144 under the Securities
Act of 1933. All the 14,755,880 remaining shares are subject to 180-day
"lock-up" agreements with the underwriters or with us. The underwriter of our
initial public offering, Lehman Brothers, in its sole discretion, may release
any portion of the securities subject to these lock-up agreements. After the
180-day lock-up period ends on January 16, 2001, these shares may be sold in the
public market, subject to prior registration or qualification for an exemption
from registration and, in the case of shares held by affiliates and certain
other stockholders, to compliance with applicable volume restrictions. After the
lock-up period, pursuant to Rule 144, 12,283,383 of these shares will be
immediately subject to sale in the public market without registration subject to
volume limitations. The remaining shares held by our existing stockholders will
become available for sale pursuant to Rule 144 at varying times following the
end of the 180-day period. Stockholders owning 9,193,500 shares are entitled,
pursuant to contractual provisions providing for registration rights, to require
us to register our securities owned by them for public sale. In addition, as of
December 15, 2000, we had 2,980,384 shares issuable under outstanding options
and warrants, 625,729 of which were exercisable.

OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

Provisions of our Amended and Restated Certificate of Incorporation and
Bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:

- establishing a classified board of directors requiring that not all
members of the board may be elected at one time;

- providing that directors may only be removed "for cause" and only with
the approval of 66 2/3% of our stockholders;

- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;

- limiting the ability of our stockholders to call special meetings of
stockholders;

- prohibiting stockholder action by written consent, which requires all
stockholder actions to be taken at a meeting of our stockholders;

- eliminating cumulative voting in the election of directors; and

- establishing advance notice requirements for nominations, election to
the board of directors or for proposing matters that can be acted upon
by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay, or prevent a change in
control.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the section entitled "Risk Factors".

Foreign Currency Exchange Rate Risk

To date, all of our recognized revenue has been denominated in U.S. dollars and
primarily from customers in the United States, and our exposure to foreign
currency exchange rate changes has been immaterial. We expect, however, that
future product license and services revenue may increasingly be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to fluctuations
based upon changes in the exchange rates of various

28
<PAGE> 31

currencies in relation to the U.S. dollar. Furthermore, to the extent that
we engage in international sales denominated in U.S. dollars, an increase in the
value of the U.S. dollar relative to foreign currencies could make our products
less competitive in international markets. Although we will continue to monitor
our exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.

Interest Rate Risk

As of September 30, 2000, we had cash and highly liquid short-term
investments totaling $67.7 million. Declines of interest rates will reduce our
interest income from our short-term investments. Based upon our balance of cash
and short-term investments at September 30, 2000, a decrease in interest rates
of 0.5% would cause a corresponding decrease in our annual interest income by
$338,500. As of September 30, 2000, we did not have any short-term or long-term
debt outstanding.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and the report of the independent auditors appear
beginning on page F-1 of this annual report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

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<PAGE> 32

PART III

Certain information required by Part III is omitted from this annual report,
in that we will file our Proxy Statement for our Annual Meeting of Stockholders
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this annual report,
and certain information included therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 will be set forth in our Proxy
Statement for our March 2001 Annual Meeting of Stockholders, under the captions
Proposal No. 1 -- Election of Directors," "Executive Officers" and "Section
16(b) Beneficial Ownership Reporting Compliance," and is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 will be set forth in our Proxy
Statement for our March 2001 Annual Meeting of Stockholders, under the caption
"Executive Compensation," and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 will be set forth in our Proxy
Statement for our March 2001 Annual Meeting of Stockholders, under the caption
"Security Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 will be set forth in our Proxy
Statement for our March 2001 Annual Meeting of Stockholders, under the caption
"Certain Relationships and Related Transactions," and is incorporated herein by
reference.

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<PAGE> 33

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Consolidated Financial Statements and Report of KPMG LLP, which
are set forth in the consolidated index to Consolidated
Financial Statements on page F-1

(2) Financial Statement Schedule is set forth in the Index to
Consolidated Financial Statements on page F-1

(3) Exhibits:

Exhibits submitted with this annual report and those incorporated by
reference to other filings are listed below.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
2.01 Agreement and Plan of Merger between Talarian Corporation,
a California corporation, and Registrant. (1)

2.02 Asset Purchase Agreement dated September 30, 1999 between
Registrant and GlobalCast Communications, Inc., a
California corporation. (1)

2.03 Agreement and Plan of Merger dated March 7, 2000 between
Registrant and WhiteBarn, Inc., an Illinois corporation.
(1)

3.01 Registrant's Predecessor's Amended and Restated Articles of
Incorporation as filed February 4, 2000 with the Secretary
of State of California. (1)

3.02 Registrant's Predecessor's Bylaws as adopted March 28,
1991. (1)

3.03 Registrant's First Amended and Restated Certificate of
Incorporation as filed May 26, 2000 with the Secretary of
State of Delaware. (1)

3.05 Registrant's Bylaws as adopted April 3, 2000. (1)

3.06 Registrant's Certificate of Designation of preferred stock
as filed May 31, 2000 with the Delaware Secretary of State.
(1)

3.08 Registrant's Predecessor's Certificate of Amendment of
Articles of Incorporation as filed May 23, 2000. (1)

3.09 Registrant's Certificate of Retirement of preferred stock
as filed with the Delaware Secretary of State on July 26,
2000. (2)

3.10 Registrant's Second Amended and Restated Certificate of
Incorporation, as filed July 26, 2000 with the Delaware
Secretary of State. (2)

4.01 Specimen Common Stock Certificate. (1)

4.02 Amended and Restated Investors Rights Agreement dated
February 3, 2000, as amended March 10, 2000 between
Registrant and certain stockholders and warrant holders
named therein. (1)

10.01 Form of Indemnity Agreement. (1)

10.02 Registrant's 1991 Stock Option Plan and related documents.
(1)*

10.03 Registrant's 1998 Equity Incentive Plan and related
documents. (1)*

10.04 Registrant's 2000 Employee Stock Purchase Plan and related
documents. (1)*

10.05 Registrant's 2000 Equity Incentive Plan and related
documents. (1)*

10.06 WhiteBarn, Inc. Stock Option Plan and related document.
(1)*

10.07 WhiteBarn, Inc. 2000 Equity Incentive Plan and related
document. (1)*

10.09 Agreement dated March 13, 2000 between Registrant and
Certain WhiteBarn Shareholders. (1)

10.10 Form of Option Acceleration Agreement between Registrant
and each executive officer. (1)*

10.13 License Agreement dated July 25, 1997 between Lucent
Technologies Inc., a Delaware corporation, and Registrant
as successor to GlobalCast Communications, Inc., a
California corporation, as amended by Amendment No. 1
effective January 28, 1998 and letter dated September 3,
1999. (1) +

10.15 Standard Inbound License Agreement (Product Source Code)
dated September 30, 1999 between Registrant and
</TABLE>

31
<PAGE> 34

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
Novell, Inc., a Delaware corporation as amended by
Amendment No. 1 dated June 26, 2000. (1) +

10.18 Commitment Agreement dated March 13, 2000 between the
Registrant, Mark Mahowald and Wagner & Associates, P.C. (1)

10.19 Agreement dated February 3, 2000 between Registrant and
Nortel Networks Inc, as amended May 31, 2000. (1)+

10.20 Form of Registrant's Software License and Distribution
Agreement. (1)

10.21 Form of lock-up agreement with the underwriters. (1)

10.22 Lease dated March 7, 2000 between Registrant and GVE Distel
Associates. (1)

10.23 Settlement and License Agreement dated February 1, 1989
between the Registrant and Lockheed Missiles and Space
Company. (1)

10.24 Amended and Restated Loan and Security Agreement dated
August 6, 1998 between the Registrant and Silicon Valley
Bank, as amended February 22, 2000. (1)

10.25 Lease dated April 15, 2000 between Registrant and TJR
Management Co. (1)

10.26 Value Added Reseller Agreement dated December 17, 1993
between Registrant and Northern Telecom Limited, as amended
September 30, 1997. (1)

16.01 Letter from former independent auditors. (1)

21.01 Subsidiaries of the Registrant. (1)

23.01 Consent of KPMG LLP, independent auditors.

27.01 Financial Data Schedule.
</TABLE>

(1) Incorporated by reference to the exhibit with the same number to our
Registration Statement on Form S-1 (File No. 333-96494), which was
declared effective by the Securities and Exchange Commission on July 20,
2000.

(2) Incorporated by reference to the exhibit with the same number to our
Quarterly Report on Form 10-Q (File No. 000-31011) for the period ending
June 30, 2000, filed with the Securities and Exchange Commission on
September 1, 2000.

* Management contracts or compensatory plans required to be filed as an
exhibit to Form 10-K.

+ Confidential treatment has been granted for portions of this exhibit.
These portions have been omitted from this filing and have been filed
separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K.

No such reports were filed in the quarter ended September 30,
2000.

32
<PAGE> 35

TALARIAN CORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report .............................................. F-2

Consolidated Balance Sheets as of September 30, 2000 and 1999 ............. F-3
Consolidated Statements of Operations for the Fiscal
Years ended September 30, 2000, 1999 and 1998 ......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
Fiscal Years ended September 30, 2000, 1999 and 1998 .................. F-5
Consolidated Statements of Cash Flows for the Fiscal
Years ended September 30, 2000, 1999 and 1998 ......................... F-6
Notes to Consolidated Financial Statements ................................ F-7
Schedule II -- Valuation and Qualifying Accounts .......................... S-1
</TABLE>

F-1
<PAGE> 36

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Talarian Corporation:

We have audited the accompanying consolidated balance sheets of Talarian
Corporation and subsidiary (the Company) as of September 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
September 30, 2000. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the index on page F-1. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Talarian
Corporation and subsidiary as of September 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG LLP

Mountain View, California
October 31, 2000, except as to Note 10
which is as of December 22, 2000

F-2
<PAGE> 37

TALARIAN CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 35,144 $ 1,820
Short-term investments ....................................................... 32,594 --
Accounts receivable, net of allowance for doubtful accounts of $245 as
of September 30, 2000 and 1999 ............................................. 2,873 2,396
Prepaid expenses and other current assets .................................... 1,011 266
--------- ---------
Total current assets ....................................................... 71,622 4,482

Property and equipment, net .................................................... 1,345 592
Goodwill and other intangible assets, net ...................................... 5,577 2,920
Other assets ................................................................... 62 --
--------- ---------
Total assets ............................................................... $ 78,606 $ 7,994
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank borrowings and current portion of debt .................................. $ -- $ 1,213
Accounts payable ............................................................. 730 199
Accrued payroll and related expenses ......................................... 1,287 718
Other accrued expenses ....................................................... 1,471 444
Current portion of deferred revenue .......................................... 3,078 3,148
--------- ---------
Total current liabilities .................................................. 6,566 5,722
Debt, less current portion ..................................................... -- 83
Deferred revenue, less current portion ......................................... 1,401 1,833
--------- ---------
Total liabilities .......................................................... 7,967 7,638
--------- ---------
Commitments
Redeemable convertible preferred stock, $0.001 par value; nil and
8,449,915 shares authorized as of September 30, 2000 and 1999, respectively;
nil and 7,181,441 shares issued and outstanding as of September 30, 2000 and
1999, respectively; aggregate liquidation preference of nil and $8,760,162 as
of September 30, 2000 and 1999, respectively; ............................... -- 8,644
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 and nil shares authorized
as of September 30, 2000 and 1999, respectively; nil issued or
outstanding; ............................................................... -- --
Common stock, $0.001 par value; 50,000,000 and 15,000,000 shares authorized as
of September 30, 2000 and 1999, respectively; 18,986,596 and 3,809,888
shares issued and outstanding as of September 30, 2000 and 1999,
respectively ............................................................... 19 4
Additional paid-in capital ................................................... 107,495 8,165
Treasury stock, 108,557 and nil shares as of September 30, 2000 and
1999, respectively ......................................................... (57) --
Deferred stock compensation .................................................. (11,886) (3,436)
Note receivable from stockholders ............................................ (100) --
Accumulated deficit .......................................................... (24,832) (13,021)
--------- ---------
Total stockholders' equity (deficit) ....................................... 70,639 (8,288)
--------- ---------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit) ......................................................... $ 78,606 $ 7,994
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 38

TALARIAN CORPORATION AND SUBSIDIARY

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Licenses .......................................................... $ 10,553 $ 5,912 $ 5,100
Maintenance ....................................................... 3,094 2,488 1,873
Professional services ............................................. 2,204 640 540
-------- -------- --------
Total revenue .................................................. 15,851 9,040 7,513
-------- -------- --------
Cost of revenue:
Licenses .......................................................... 240 164 59
Maintenance ....................................................... 864 595 577
Professional services ............................................. 1,228 358 429
Amortization of deferred stock compensation ....................... 1,072 51 --
-------- -------- --------
Total cost of revenue .......................................... 3,404 1,168 1,065
-------- -------- --------
Gross profit ................................................... 12,447 7,872 6,448
-------- -------- --------
Operating expenses:
Sales and marketing ............................................... 9,219 5,321 4,237
Research and development .......................................... 5,733 3,214 2,363
General and administrative ........................................ 2,343 1,657 1,566
Amortization of deferred stock compensation:
Sales and marketing ............................................ 3,136 365 --
Research and development ....................................... 3,069 303 --
General and administrative ..................................... 3,177 234 --
Acquired in-process research and development ...................... -- 300 --
Amortization of goodwill and intangible assets .................... 1,769 -- --
-------- -------- --------
Total operating expenses ....................................... 28,446 11,394 8,166
-------- -------- --------
Loss from operations ........................................... (15,999) (3,522) (1,718)
Interest expense and other, net ..................................... (959) 17 10
-------- -------- --------
Net loss ....................................................... (15,040) (3,539) (1,728)
Preferred stock dividends ........................................... (6,536) (498) (497)
-------- -------- --------
Net loss attributable to common stockholders ........................ $(21,576) $ (4,037) $ (2,225)
======== ======== ========
Basic and diluted net loss per share attributable to common
stockholders ..................................................... $ (3.08) $ (1.30) $ (0.80)
======== ======== ========
Shares used in computing basic and diluted net loss per
share attributable to common stockholders ........................ 7,005 3,099 2,781
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 39

TALARIAN CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

COMMON STOCK ADDITIONAL DEFERRED
----------------------------- PAID-IN TREASURY STOCK
SHARES AMOUNT CAPITAL STOCK COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1997 ................ $ 2,711,286 $ 3 $ 85 $ -- $ --
Issuance of common stock in connection
with stock option exercises ............... 191,051 -- 19 -- --
Accretion for dividends on redeemable
preferred stock ........................... -- -- -- -- --
Net loss .................................... -- -- -- -- --
------------ --- -------- ---- ------------
BALANCES, SEPTEMBER 30, 1998 ................ 2,902,337 3 104 -- --
Issuance of common stock for acquisition
of GlobalCast ............................ 605,000 1 3,629 -- --
Issuance of common stock in connection
with stock option exercises ............... 302,551 -- 43 -- --
Accretion for dividends on redeemable
preferred stock ........................... -- -- -- -- --
Deferred stock compensation related to
stock option grants ....................... -- -- 4,351 -- (4,351)
Amortization of deferred stock .............. -- -- -- -- 915
compensation
Nonemployee stock compensation .............. -- -- 38 -- --
Net loss .................................... -- -- -- -- --
------------ --- -------- ---- ------------
BALANCES, SEPTEMBER 30, 1999 ................ 3,809,888 4 8,165 -- (3,436)
Issuance of common stock in connection
with stock option exercises ............... 1,892,953 2 724 -- --
Issuance of common stock in connection
with cashless exercise of warrants ........ 16,447 -- -- -- --
Issuance of common stock in connection
with initial public offering, net ......... 4,200,000 4 59,990 -- --
Issuance of common stock in connection
with conversion of preferred stock ........ 8,827,650 9 15,337 -- --
Beneficial conversion feature on issuance
of Series D preferred stock .............. -- -- -- -- --
Accretion for dividends on redeemable
preferred stock to date of conversion ..... -- -- -- -- --
Issuance of common stock for acquisition .... --
of WhiteBarn .............................. 348,215 -- 4,179 -- (713)
Issuance of stock options for acquisition
of WhiteBarn .............................. -- -- 746 -- --
Nonemployee stock compensation .............. -- -- 515 -- --
Issuance of options in connection with
office lease ............................. -- -- 163 -- --
Deferred stock compensation related to
stock option grants ....................... -- -- 17,676 -- (17,676)
Amortization of deferred stock
compensation .............................. -- -- -- -- 9,939
Repurchase of common stock .................. (108,557) -- -- (57) --
Net loss .................................... -- -- -- -- --
------------ --- -------- ---- ------------
BALANCES, SEPTEMBER 30, 2000 ................ 18,986,596 $19 $107,495 $(57) $ (11,886)
============ === ======== ==== ============

NOTE TOTAL
RECEIVABLE STOCKHOLDERS'
FROM ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT (DEFICIT)
------------ ------------ -------------
<S> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1997 ................ $ -- $ (6,759) $ (6,671)
Issuance of common stock in connection
with stock option exercises ............... -- -- 19
Accretion for dividends on redeemable
preferred stock ........................... -- (497) (497)
Net loss .................................... -- (1,728) (1,728)
------------ ------------ ------------
BALANCES, SEPTEMBER 30, 1998 ................ -- (8,984) (8,877)
Issuance of common stock for acquisition
of GlobalCast ............................ -- -- 3,630
Issuance of common stock in connection
with stock option exercises ............... -- -- 43
Accretion for dividends on redeemable
preferred stock ........................... -- (498) (498)
Deferred stock compensation related to
stock option grants ....................... -- -- --
Amortization of deferred stock .............. -- -- 915
compensation
Nonemployee stock compensation .............. -- -- 38
Net loss .................................... -- (3,539) (3,539)
------------ ------------ ------------
BALANCES, SEPTEMBER 30, 1999 ................ -- (13,021) (8,288)
Issuance of common stock in connection
with stock option exercises ............... (100) -- 626
Issuance of common stock in connection
with cashless exercise of warrants ........ -- -- --
Issuance of common stock in connection
with initial public offering, net ......... -- -- 59,994
Issuance of common stock in connection
with conversion of preferred stock ........ -- 9,765 25,111
Beneficial conversion feature on issuance
of Series D preferred stock .............. -- (5,719) (5,719)
Accretion for dividends on redeemable
preferred stock to date of conversion ..... -- (817) (817)
Issuance of common stock for acquisition ....
of WhiteBarn .............................. -- 3,466
Issuance of stock options for acquisition
of WhiteBarn .............................. -- -- 746
Nonemployee stock compensation .............. -- -- 515
Issuance of options in connection with
office lease ............................. -- -- 163
Deferred stock compensation related to
stock option grants ....................... -- -- --
Amortization of deferred stock
compensation .............................. -- -- 9,939
Repurchase of common stock .................. -- -- (57)
Net loss .................................... -- (15,040) (15,040)
------------ ------------ ------------
BALANCES, SEPTEMBER 30, 2000 ................ $ (100) $ (24,832) $ 70,639
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 40

TALARIAN CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $(15,040) $ (3,539) $ (1,728)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ....................................... 467 455 294
Acquired in-process research and development ........................ -- 300 --
Amortization of goodwill and other intangible assets ................ 1,769 -- --
Amortization of deferred stock compensation ......................... 9,939 915 --
Non-employee stock compensation ..................................... 515 38 --
Changes in assets and liabilities:
Accounts receivable ............................................... (183) (1,654) 867
Prepaid expenses and other assets ................................. (455) 66 (10)
Accounts payable .................................................. 524 97 41
Accrued payroll and related expenses .............................. 569 75 342
Other accrued expenses ............................................ 1,026 (164) 266
Deferred revenue .................................................. (502) 1,251 2,676
-------- -------- --------
Net cash (used in) provided by operating activities ............ (1,371) (2,160) 2,748
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments ................................... (34,244) -- --
Proceeds from sales of short-term investments ......................... 1,650 -- --
Purchase of property and equipment .................................... (1,198) (341) (486)
Cash acquired as part of GlobalCast acquisition ....................... -- 400 --
Acquisition of WhiteBarn, net of cash ................................. (713) -- --
-------- -------- --------
Net cash (used in) provided by investing activities ............ (34,505) 59 (486)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................ 60,620 43 19
Repurchase of common stock ............................................ (57) -- --
Proceeds from debt .................................................... -- 1,353 336
Proceeds from issuance of preferred stock, net ........................ 9,934 -- --
Payments on debt ...................................................... (1,297) (679) (310)
Principal payments on capital lease obligations ....................... -- -- (4)
-------- -------- --------
Net cash provided by financing activities ...................... 69,200 717 41
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................... 33,324 (1,384) 2,303
Cash and cash equivalents at beginning of year .......................... 1,820 3,204 901
-------- -------- --------
Cash and cash equivalents at end of year ................................ $ 35,144 $ 1,820 $ 3,204
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest ............................................................ $ 87 $ 108 $ 49
======== ======== ========
Noncash financing and investing activities:
Accretion for dividends on redeemable preferred stock ............... $ 817 $ 498 $ 497
======== ======== ========
Common stock and vested options issued for acquisition .............. $ 4,212 $ 3,630 $ --
======== ======== ========
Deferred stock compensation ......................................... $ 18,389 $ 4,351 $ --
======== ======== ========
Common stock issued in exchange for notes receivable ................ $ 100 $ -- $ --
======== ======== ========
Beneficial conversion feature on redeemable preferred stock ......... $ 5,719 $ -- $ --
======== ======== ========
Conversion of redeemable preferred stock ............................ $ 25,111 $ -- $ --
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 41

TALARIAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998

(1) NATURE OF OPERATIONS

Talarian Corporation (the Company) is a supplier of infrastructure software
that enables businesses to exchange information reliably and securely in real
time, both internally and with their partners, suppliers, and customers. The
Company's products and services allow software applications to communicate
across local or wide area networks, including private networks and the Internet.
The benefits of the Company's proprietary product SmartSockets are reduced
development effort, time to market and maintenance costs. The Company markets
and sells its software primarily through its direct sales organization,
value-added resellers, and OEMs in North America, the United Kingdom and Japan,
and through distributors internationally outside of the United Kingdom and
Japan.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Talarian Limited. All intercompany
transactions and balances have been eliminated in consolidation.

(b) USE OF ESTIMATES

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

Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of less than 90 days at the date of purchase. The Company
is exposed to credit risk in the event of default by the financial institutions
or the issuers of these investments to the extent of the amounts recorded on the
balance sheet in excess of amounts that are insured by the FDIC. As of September
30, 2000, cash equivalents consisted of money market accounts. As of September
30, 1999, cash equivalents consisted principally of money market accounts and
commercial paper.

(d) ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES

The Company classifies its investments in debt securities as
available-for-sale. Available-for-sale securities are carried at fair market
value, which approximates amortized cost. Any unrealized gains or losses are
recorded as a component of other comprehensive income (loss). As of September
30, 2000, all investments were considered available-for-sale securities and
consisted of the following (in thousand):

<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST GAIN/(LOSS) FAIR VALUE
------- ----------- ----------
<S> <C> <C> <C>
Cash .............................. $ 62 -- $ 62
Money market funds ................ 2,353 -- 2,353
Commercial paper .................. 47,282 -- 47,282
Municipal Bonds ................... 12,350 -- 12,350
US government obligations ......... 5,691 -- 5,691
------- ------- -------
$67,738 -- $67,738
======= ======= =======
</TABLE>

F-7
<PAGE> 42

As of September 30, 2000, all of these investments had contractual
maturities within one year. These investments were classified on the
consolidated balance sheet as follows (in thousands):

<TABLE>
<S> <C>
Cash and cash equivalents ......... $35,144
Short-term investments ............ 32,594
-------
$67,738
=======
</TABLE>

As of September 30, 1999, all investments were considered available-for-sale
securities and consisted of the following (in thousand):

<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST GAIN/(LOSS) FAIR VALUE
------ ----------- ----------
<S> <C> <C> <C>
Cash ....................... $ 483 -- $ 483
Money market funds ......... 23 -- 23
Commercial paper ........... 1,314 -- 1,314
------ ------
$1,820 -- $1,820
====== ======
</TABLE>

As of September 30, 1999, all of these investments had contractual
maturities within one year. These investments were classified on the
consolidated balance sheet as follows (in thousands):

<TABLE>
<S> <C>
Cash and cash equivalents ......... $1,820
Short-term investments ............ --
------
$1,820
======
</TABLE>

(e) PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives of between three and five
years. Leasehold improvements and assets recorded under capital leases are
amortized on a straight-line basis over the shorter of the lease term or their
estimated useful lives.

(f) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets, primarily comprising acquired
technology, are being amortized on a straight-line basis over their estimated
useful lives ranging from two to four years.

(g) IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

(h) REVENUE RECOGNITION

The Company has adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9. SOP 97-2, as amended, generally requires
revenue earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair values of the elements.

The Company licenses its products to end-user customers, original equipment
manufacturers (OEMs) and value-added resellers (VARs). Software license revenue
is generally recognized upon receipt of a signed contract or purchase order and
delivery of the software, provided the related fee is fixed and determinable,
collectibility of the fee is probable and vendor-specific objective evidence for
all undelivered elements has been established. The Company has established
sufficient vendor-specific objective evidence to

F-8
<PAGE> 43

ascribe a value to consulting services and post-contract customer support based
on the price charged when these elements are sold separately. Accordingly,
license revenue is recorded under the residual method described in SOP 98-9 for
arrangements in which licenses are sold with consulting services, post-contract
customer support, or both. However, the entire fee related to arrangements that
require the Company to deliver specified additional features or upgrades is
deferred until delivery of the feature and/or upgrade has occurred, unless the
Company has sufficient vendor-specific objective evidence of fair value to
allocate revenue to the various elements in these arrangements. Fees related to
arrangements that require the Company to deliver unspecified additional products
or in arrangements in which the Company grants a time-based license, bundled
with post contract support, for a period of one year or less are deferred and
recognized ratably over the term of the contract. All of the contract software
revenue related to arrangements involving consulting services that are essential
to the functionality of the software at the customer site is deferred and
recognized as the services are performed. Contract software revenue related to
arrangements to maintain the compatibility of the Company's software products
with the software products or platforms of the customer or other vendor is
recognized ratably over the term of the arrangement. License revenue from OEM
arrangements in which the Company earns a royalty based on a specified
percentage of OEM sales to end users incorporating the Company's software is
recognized upon delivery to the end user. Nonrefundable royalty fees received by
the Company from OEM customers are recognized as long as all other conditions of
SOP 97-2, as amended, have been satisfied.

Professional services revenue consists of fees for services including
integration of software, application development, training and software
installation. The Company bills professional services fees either on a time and
materials basis or on a fixed-price schedule. The Company generally recognizes
professional services fees as the services are performed. Our customers
typically purchase maintenance agreements annually, and we price maintenance
based on a percentage of the product license fee. The Company recognizes revenue
from maintenance and support agreements ratably over the term of the agreements,
which is typically one year.

(i) COST OF REVENUE

Cost of professional services revenue includes salaries and related expenses
for consulting services, implementation and training services, costs of
contracting with third parties to provide consulting services to customers and
an allocation of our facilities, communications and depreciation expenses and
attributable stock compensation cost. Cost of license revenue includes royalties
due to third parties for integrated technology, the cost of manuals and product
documentation, and the cost of production media used to deliver our products.
Cost of maintenance revenue primarily represents salaries and related expenses
for technical support operations.

(j) SOFTWARE DEVELOPMENT COSTS

Costs related to research, design and development of products are charged to
research and development expenses as incurred until technological feasibility
has been established. To date, the establishment of technological feasibility of
the Company's products and general release of these products have coincided. As
a result, the Company has not capitalized any software development costs since
these costs have not been significant.

The Company has adopted the Emerging Issues Task Force (the "EITF")
published their consensus on Issue No. 00-2, "Accounting for Web Site
Development Costs," which requires that costs incurred during the development of
web site applications and infrastructure, involving developing software to
operate the web site, including graphics that affect the "look and feel" of the
web page and all costs relating to software used to operate a web site should be
accounted for under Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." However, if a plan
exists or is being developed to market the software externally, the costs
relating to the software should be accounted for pursuant to FASB Statement No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." The Company's adoption of Issue No. 00-2 in its fourth
quarter of fiscal 2000 did not have a material impact on its financial
statements, cash flows or results of operations.

(k) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be recovered.

F-9
<PAGE> 44

(l) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable, and other financial instruments approximate fair value due
to their short maturities. Based upon borrowing rates currently available to the
Company for loans with similar terms, the carrying value of long-term debt also
approximates fair value.

Financial instruments that potentially subject the Company to concentrations
of credit risk include cash and cash equivalents, short-term investments and
accounts receivable. At September 30, 2000, cash equivalents consisted of money
market accounts. Short-term investments at September 30, 2000 consisted of
municipal bonds, commercial paper and government obligations. As of September
30, 1999, the Company's cash and cash equivalents, which consisted of money
market accounts and commercial paper with an original maturity of less than
three months, were on deposit with a commercial bank. The Company sells its
software products to large well-established companies throughout the world,
directly and through distributors, and generally does not require collateral on
accounts receivable. To date, the Company has had no write-offs of accounts
receivable and maintains an allowance for doubtful accounts receivable based
upon their expected collectibility.

(m) STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method. Expense associated with stock-based compensation is being
amortized on an accelerated basis over the vesting period of the individual
awards consistent with the method described in Financial Accounting Standards
Board (FASB) Interpretation No. 28. Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 123, the Company discloses the pro forma effect
of using the fair value method of accounting for employee stock-based
compensation arrangements. See Note 7(g).

Effective July 1, 2000, the Company has adopted the Financial Accounting
Standards Board issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an Interpretation of APB No. 25"
(FIN No. 44"). FIN No. 44 clarifies the application of Opinion No. 25 for
certain issues including: (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company's adoption of FIN No. 44 has not had a material impact
on its financial statements, cashflows or results of operations.

For nonemployees, the Company computes the fair value of the stock-based
compensation in accordance with SFAS No. 123.

(n) ADVERTISING EXPENSE

Advertising costs are expensed as incurred. In fiscal 2000, 1999, and 1998,
advertising expense was $946,225, $147,252, and $97,485, respectively.

(o) FOREIGN CURRENCY TRANSACTIONS

The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Accordingly, monetary assets and liabilities in this entity are
remeasured at exchange rates in effect as of each reporting date. Nonmonetary
items are remeasured at historical rates. Income and expense accounts are
remeasured at the average rates in effect during each such period. Remeasurement
adjustments and transaction gains and losses are recognized in the statements of
operations in the period of occurrence and have not been significant to date.

(p) COMPREHENSIVE INCOME

Other comprehensive income refers to revenues, expenses, gains, and losses
that are not included in net income, but rather are recorded directly in
stockholders' equity. For the years ended September 30, 2000, 1999, and 1998,
the Company had no items of other comprehensive income (loss) and, accordingly,
comprehensive loss is the same as the net loss.

(q) NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

Basic net loss per share attributable to common stockholders is computed using
the weighted-average number of outstanding shares of common stock. Diluted net
loss per share attributable to common stockholders is computed using the
weighted-average

F-10
<PAGE> 45

number of shares of common stock outstanding and, when dilutive, potential
common shares from options and warrants to purchase common stock using the
treasury stock method and from convertible securities using the
"as-if-converted" basis. The following potential common shares have been
excluded from the computation of diluted net loss per share attributable to
common stockholders for all periods presented because the effect would have been
antidilutive.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Shares issuable under stock options ................................... 2,665,573 1,773,604 1,277,676
Shares of unvested common stock subject to repurchase ................. 960,760 -- --
Shares issuable pursuant to warrants to purchase common stock ......... 97,367 162,985 162,985
Shares of redeemable convertible preferred stock on an
"as-if-converted" basis ............................................... -- 7,239,827 7,239,827
</TABLE>

The weighted-average exercise price of common stock options outstanding was
$3.55, $0.17, and $0.14 for the years ended September 30, 2000, 1999, and 1998,
respectively. The weighted-average exercise price of unvested common stock
subject to repurchase was $0.42 for the year ended September 30, 2000. The
weighted-average exercise price of warrants to purchase shares of convertible
preferred stock was $0.67 for the year ended September 30, 2000, and $0.77 for
the years ended September 30, 1998, and 1999.

(r) RECENT ACCOUNTING PRONOUNCEMENTS

(3) PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
2000 1999
------ ------
<S> <C> <C>
Computer equipment and software ........................ $3,206 $1,988
Furniture and equipment ................................ 323 322
Leasehold improvements ................................. 34 34
------ ------
3,563 2,344
Less accumulated depreciation and amortization ......... 2,218 1,752
------ ------
$1,345 $ 592
====== ======
</TABLE>

F-11
<PAGE> 46

(4) ACQUISITIONS

On March 13, 2000, the Company acquired WhiteBarn, Inc. (WhiteBarn), a
privately held company in Chicago, Illinois. WhiteBarn is a software consulting
and development company. The Company issued 348,215 shares of its common stock
and cash of approximately $581,000 for all outstanding WhiteBarn stock, and
issued 71,783 fully vested stock options for all outstanding options of
WhiteBarn. An escrow has been established for 59,490 of the issued shares, which
will be released contingent upon the continued employment of one of WhiteBarn's
officers. The transaction has been accounted for as a purchase. The purchase
price of approximately $4,940,000 was allocated $515,000 to acquired net
tangible assets and $4,425,000 to intangible assets including goodwill.

The purchase price represents the 288,725 unescrowed shares of common stock,
valued at an assumed fair value of $12.00 per share, the $746,000 fair value of
the 71,783 fully vested stock options (computed using the Black-Scholes option
pricing model), the cash paid and approximately $150,000 of transaction costs.
The fair value of 59,490 escrowed fully vested shares, of $713,000 (computed
using the Black Scholes option pricing model) has been recorded as deferred
stock compensation and is being amortized on a straight-line basis over two
years. The intrinsic value of new unvested options granted to former employees
of WhiteBarn, now employed by the Company, of $2,470,000, with exercise prices
less than the $12.00 fair value of the Company's common stock on the grant date
has been recorded as deferred stock compensation and is being amortized on an
accelerated basis in accordance with the provisions of Financial Accounting
Standards Board Interpretation 28 over four years.

The following pro forma financial information for the years ended September
30, 2000 and 1999 presents the combined results of the Company and WhiteBarn as
if the acquisition had occurred on October 1, 1998. The pro forma financial
information does not necessarily reflect the consolidated results of operations
that would have occurred had the Company and WhiteBarn constituted a single
entity during these periods (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue .................................................... $ 16,543 $ 10,474
Net loss attributable to common stockholders ............... (22,101) (6,702)
Basic and diluted net loss per share attributable
to common stockholders ................................... $ (3.08) $ (1.94)
</TABLE>

(5) COMMITMENTS AND CONTINGENCIES

(a) LEASE COMMITMENTS

The Company leases its corporate and sales office facilities under
noncancelable operating leases. The corporate office facility lease expires in
May 2005. The Illinois facility lease expires in March 2005. The Company also
has various sales office facilities with lease terms of one year or less with
renewal provisions. Rent expense charged to operations was $797,955, $531,000,
and $390,000 for the years ended September 30, 2000, and 1999, and 1998,
respectively. Future minimum lease payments under noncancelable operating leases
as of September 30, 2000, are as follows (in thousands):

<S> <C>
Year Ending September 30,
2001 ........................................... $ 952
2002 ........................................... 829
2003 ........................................... 856
2004 ........................................... 885
2005 ........................................... 571
------
Total minimum lease payments ................... 4,093
======
</TABLE>

F-12
<PAGE> 47

(b) LEGAL ACTIONS

From time to time, the Company has been subject to legal proceedings and
claims in the ordinary course of business. The Company is not currently engaged
in any material legal proceedings.

(6) BORROWINGS AND DEBT

As of September 30, 1999, the Company had credit facilities available from a
financial institution for working capital and for equipment financing,
collateralized by accounts receivable and the other assets of the Company. Under
the working capital facility, the Company could borrow up to the lesser of
$1,500,000 or 75% of eligible accounts receivable. Borrowings would bear
interest at the bank's prime rate plus 1.0% (9.75% at September 30, 1999). Under
the facility, which expired on January 3, 2000, the Company had to maintain
certain financial ratios and could not have losses exceeding certain quarterly
amounts.

The facility was renegotiated on February 22, 2000 such that the Company may
borrow up to $2,000,000 under a credit line with a revolving maturity date of
February 22, 2001, at an interest rate of prime plus 0.25%. As part of the
renegotiation, the lender agreed to waive any defaults on certain financial
covenants under its prior loan agreement during the fiscal year ended September
30, 1999. As of September 30, 2000 and 1999, the Company had no amounts
outstanding and $924,000 in borrowings, respectively, under this facility.

Under the equipment financing facility, the Company has borrowed up to
$1,300,000 against eligible equipment during draw-down periods. At the end of a
draw-down period, borrowings are repaid in 24 equal monthly installments of
principal and interest. Borrowings bear interest at the bank's prime rate plus a
percentage ranging from 1.50 -- 2.00% (10.25 -- 10.75% as of September 30,
1999). As of September 30, 2000, the Company has no amounts outstanding under
this facility.

(7) STOCKHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK

(a) INITIAL PUBLIC OFFERING

On July 20, 2000, the Company completed an initial public offering (IPO) of
4,200,000 shares of its common stock at a price of $16.00 per share and received
net proceeds of approximately $59,994,000.

(b) REINCORPORATION

On July 10, 2000, the Company completed its reincorporation in the State of
Delaware. The accompanying financial statements reflect this reincorporation,
and the resulting recognition of par value for all periods presented.

The Company has authorized 50,000,000 shares of common stock. Each share of
common stock has voting rights of one vote per share.

(d) REDEEMABLE CONVERTIBLE PREFERRED STOCK

Since inception the Company issued 8,920,970 shares of convertible preferred
stock. All outstanding convertible preferred stock automatically converted into
Common Stock upon the completion of the Company's initial public offering.
Conversion of the Series A, C and D preferred stock was on a 1:1 basis;
conversion of the Series B preferred stock was on a 1:1.04204 basis.

In February 2000, the Company issued 1,571,055 shares of Series D preferred
shares on which a beneficial conversion feature arose, due to the difference at
the issuance date between the issuance price for the shares ($6.36 per share)
and their underlying fair value ($10.00 per share). The beneficial conversion
totaling $5,719,000 was recorded in the financial statements as analogous to a
preferred stock dividend and accordingly recognized as a component of net loss
attributable to common stockholders.

Following the completion of the Company's Initial Public Offering (IPO), and
the automatic conversion of all the Company's preferred shares into common
shares, the amounts relating to the beneficial conversion, together with
cumulative accrued dividends on the preferred shares totaling $9.8 million were
reclassified from retained deficit to additional paid in capital.

F-13
<PAGE> 48

(e) STOCK OPTION PLANS

The number of shares of common stock reserved for issuance under the 1998
Equity Incentive Plan (the Incentive Plan) is 2,800,000. Under the Incentive
Plan, the Board of Directors may grant options to selected employees, officers,
directors, and consultants of the Company at an exercise price of not less than
100% of the fair market value of the shares on the date of grant, except that
nonqualified options may be granted at 85% of this fair market value and option
grants to a 10% stockholder will not be less than 110% of this fair market
value. Options expire no later than ten years from the date of grant and
generally vest ratably over four years. Unexercised options expire 90 days after
termination of employment from the Company.

The number of shares of common stock reserved for issuance under the 1991
Stock Option Plan (the Stock Plan) is 2,050,000. Under the Stock Plan, the Board
of Directors may grant either incentive or nonqualified stock options to key
employees, consultants, directors and officers to purchase common stock at an
exercise price of not less than 100% of the fair market value of the shares on
the date of grant, except that nonqualified options may be granted at 85% of
this fair market value. Options expire no later than ten years from the date of
grant and generally vest ratably over four years. Unexercised options expire 90
days after termination of employment from the Company.

The Company has the right to repurchase any unvested stock purchased at the
original issuance cost upon the termination of the purchaser's employment. The
Company's repurchase right lapses ratably over four years. Prior to September
30, 2000, the Company issued 1,279,171 shares that are subject to repurchase. As
of September 30, 2000, 56,826 of these shares had been repurchased and 960,760
more shares were subject to repurchase at a weighted-average price of $0.43 per
share. Of the restricted shares, 100,000 were issued to an employee of the
Company for a full recourse promissory note with an interest rate of 6.45% and
term of 5 years.

In March 2000, the Company's Board of Directors approved, subject to
stockholder approval, the 2000 Equity Incentive Plan (the 2000 Plan). The
Company has reserved 3,000,000 shares of common stock for issuance under the
2000 Plan. The number of shares reserved under the 2000 Plan will automatically
be increased on January 1 of each year, commencing in 2001, by an amount equal
to 5% of the shares outstanding as of the immediately preceding December 31. If
not terminated earlier, the 2000 Plan will terminate in March 2010.

Under the 2000 Plan, the exercise price of all incentive stock options will
be at least 100% of the stock's fair market value on the date of grant for
employees owning 10% or less of the voting power of all classes of stock and at
least 110% of the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock.

Under the 2000 Plan, options generally will expire after ten years. However,
the term of the options must be limited to five years in the case of an
incentive stock option granted to an option holder representing more than 10% of
the voting power of all classes of stock.

Options granted under the 2000 Plan generally become exercisable at the rate
of 12.5% of the total number of shares subject to the options on the date six
months from the grant date, and 2.083% of the total number of shares subject to
the options each month thereafter.

F-14
<PAGE> 49

A summary of the status of the Company's options under the Incentive Plan
and the Stock Plan is as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------- ------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE NUMBER AVERAGE NUMBER AVERAGE
NUMBER EXERCISE OF EXERCISE OF EXERCISE
OF SHARES PRICE SHARES PRICE SHARES PRICE
--------- ---------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period .............. 1,773,604 $ 0.17 1,277,676 $ 0.14 843,875 $ 0.12
Granted ............................ 2,994,783 3.41 1,080,500 0.20 768,500 0.15
Exercised .......................... (1,892,953) 0.38 (302,551) 0.14 (191,051) 0.10
Canceled ........................... (209,861) 1.48 (282,021) 0.16 (143,648) 0.14
Outstanding at end
of period ........................ 2,665,573 $ 3.55 1,773,604 $ 0.17 1,277,676 $ 0.14
========== ========== ==========
Options exercisable
at end of period ................. 420,932 $ 1.75 554,431 $ 0.14 504,771 $ 0.12
========== ========== ==========
Weighted-average fair
value of options
granted during the
period with exercise
prices equal to fair
value at date of grant ......... 186,000 $ 12.69 768,500 $ 0.025
Weighted-average fair
value of options
granted during the
period with exercise
prices less than
fair value at
date of grant .................. 2,808,783 $ 8.51 1,080,500 $ 4.10
</TABLE>

The options outstanding and currently exercisable by exercise price at
September 30, 2000 were as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE NUMBER AVERAGE
NUMBER LIFE EXERCISE OF EXERCISE
EXERCISE PRICES OF SHARES (YEARS) PRICE SHARES PRICE
--------------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 to 0.20 ............ 243,456 7.52 $ 0.18 103,938 $ 0.15
1.00 ................... 800,434 9.21 1.00 149,164 1.00
2.52 to 3.78 ........... 1,037,600 9.45 3.18 146,685 3.18
5.00 ................... 226,083 9.68 5.00 21,062 5.00
9.00 ................... 182,000 9.79 9.00 83 9.00
13.00 to 16.00 ......... 176,000 9.84 14.47 -- --
--------- ---------
$0.11 to $16.00 .......... 2,665,573 9.27 $ 3.55 420,932 $ 1.75
========= =========
</TABLE>

As of September 30, 2000, there were 3,597,134 additional shares available
for grant under the 2000 Plan.

(f) 2000 EMPLOYEE STOCK PURCHASE PLAN

In March 2000, the Company's Board of Directors approved, subject to
stockholder approval, the 2000 Employee Stock Purchase Plan (the Purchase Plan)
and reserved a total of 300,000 shares of common stock for issuance under the
Purchase Plan. The number of shares reserved for issuance under the Purchase
Plan will automatically increase on January 1 of each year commencing in 2001 by
an amount equal to 1% of the total shares outstanding on the immediately
preceding December 31.

Generally, each offering period will be 24 months in length. The Purchase
Plan will permit eligible employees to purchase common stock through payroll
deductions, which may not exceed 15% of an employee's base salary, commissions
and bonus. The purchase price will be equal to the lower of 85% of the fair
market value of the common stock (i) at the beginning of the applicable offering
period or (ii) at the end of the applicable purchase period.

(g) STOCK-BASED COMPENSATION

The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any stock options granted because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date for each stock option, except for stock options granted from
October 1, 1998 to July 20, 2000. With respect to the stock options granted in
the period from October 1, 1998 to July 20, 2000, the Company recorded deferred
stock compensation of $22.1 million for the difference at the grant or issuance
date between the exercise

F-15
<PAGE> 50

price of each stock option granted and the fair value of the underlying common
stock. This amount is being amortized on an accelerated basis over the vesting
period, generally four years, consistent with the method described in FASB
Interpretation No. 28. Amortization of the September 30, 2000 balance of
deferred stock compensation for the fiscal years ended 2001, 2002, 2003, and the
nine months ended June 30, 2004, is expected to approximate $7,081,000,
$3,391,000, $1,291,000, and $123,000, respectively.

Had compensation costs been determined in accordance with SFAS No. 123 for
all of the Company's stock-based compensation plans, net loss attributable to
common stockholders, and basic and diluted net loss per share attributable to
common stockholders would have been as follows (in thousands, except per share
data):

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders (in thousands):
As reported ................................................... $(21,576) $ (4,037) $ (2,225)
Pro forma ..................................................... (22,591) (4,051) (2,232)
Basic and diluted net loss per share attributable to common
stockholders:
As reported ................................................... $ (3.08) $ (1.30) $ (0.80)
Pro forma ..................................................... $ (3.22) $ (1.30) $ (0.80)
</TABLE>

The fair value of each option grant was estimated on the date of grant using
the minimum value method prior to the IPO and the Black Scholes Option Pricing
model after the IPO with the following assumptions, no dividends and the
following risk-free interest rates, expected lives and volatilities:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate ......... 6.37% 5.56% 5.31%
Expected life ................... 3.6 years 3.5 years 3.5 years
Volatility ...................... 161% -- --
</TABLE>

The weighted-average expected life was calculated based on the vesting
period and the expected exercise behavior. Stock options issued generally vest
at a rate of 12.5% upon the six month anniversary of the option grant date and
2.083% each month thereafter for the next 42 months. The risk-free interest rate
was calculated in accordance with the grant date and expected life.

(h) WARRANTS

Prior to 1993, the Company granted warrants to purchase an aggregate of
135,140 and 33,334 shares of Series A and B preferred stock, respectively. The
Series A warrants are exercisable at prices of $0.63 and $0.80 per share and all
of the Series B warrants are exercisable at $0.90 per share. The Series A and B
warrants are immediately exercisable and expire in the years 2000 through 2002.
These warrants were issued to a number of individuals and a bank in
consideration for the provision of cash advances and a line of credit,
respectively, necessary to fund the Company's working capital requirements
during the early years following its formation. At the closing of the Company's
Initial Public Offering, these warrants became exercisable for common stock. At
September 30, 2000, warrants to purchase an aggregate of 80,000 shares of Series
A preferred stock and 17,367 shares of Series B preferred stock (as converted)
remained outstanding with a weighted average exercise price of $0.67 per share.
The Company has reserved 97,367 shares of common stock for issuance upon the
exercise and conversion of these warrants. The values of these warrants,
computed using the Black-Scholes option pricing model, were not significant.

(8) SEGMENT INFORMATION

The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, for the year ended September 30, 1999. SFAS
No. 131 establishes standards for the reporting by public business enterprises
of information about operating segments, products and services, geographic
areas, and major customers. The method for determining what information to
report is based on the way that management organizes the operating segments
within the Company for making operational decisions and assessments of financial
performance.

F-16
<PAGE> 51

The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The consolidated financial information reviewed
by the CEO is identical to the information presented in the accompanying
consolidated statements of operations.

The Company maintains significant operations in the United States, with
direct sales and marketing offices located in the United Kingdom and other
European cities. The Company does not measure performance of net revenue by
geographical area, and accordingly no analysis has been provided. There were no
significant assets maintained by the Company outside the United States for the
years ended September 30, 2000, 1999 or 1998.

Therefore, the Company has determined that it operates in a single operating
segment: real-time infrastructure software. Disaggregated information on its
products and services is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Revenue:
Licenses ...................... $10,553 $ 5,912 $ 5,100
Maintenance ................... 3,094 2,488 1,873
Professional services ......... 2,204 640 540
------- ------- -------
Total revenue .............. $15,851 $ 9,040 $ 7,513
======= ======= =======
</TABLE>

Revenue from sales made to customers in Europe aggregated 15%, 22%, and 13%
for the years ended September 30, 2000, 1999 and 1998, respectively, and
represent a combination of export sales made from the United States to European
customers and sales originated by the United Kingdom sales subsidiary to
European customers. The primary geographic locations of customers by country
were the United Kingdom, France and Germany.

One customer accounted for 6%, 12% and 13% of total revenue for the fiscal
years ended September 30, 2000, 1999 and 1998, and 6% of accounts receivable
outstanding as of September 30, 2000. No other customer accounted for more than
10% of total revenue or accounts receivable for any of the last three fiscal
years.

(9) INCOME TAXES

A reconciliation between the income tax provision computed at the federal
statutory rate of 34% and the effective tax rate is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Expense (benefit) at federal statutory
tax rate ...................................... $(5,111) $(1,127) $ 16
State income tax, net of federal benefit ......... 2 2 1
Amortization of stock compensation ............... 3,553 253 --
Amortization of goodwill and intangibles ......... 494 -- --
Other ............................................ 18 10 14
Net operating loss not utilized .................. (1,057) 868 (26)
-------- ------- -------
Total tax provision .............................. $ 13 $ 6 $ 50
======== ======= =======
</TABLE>

F-17
<PAGE> 52

As of September 30, 2000 and September 30, 1999, the types of temporary
differences that give rise to significant portions of the Company's deferred tax
assets and liabilities are set out below (in thousands):

<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Deferred tax assets:
Depreciation .................................................. $ 185 $ 33
Intangibles ................................................... -- 126
Accrued liabilities ........................................... 336 147
Allowance for doubtful accounts ............................... 96 103
Net operating loss carryforwards .............................. 2,773 2,274
Research and development and other credits .................... 794 677
Deferred revenue .............................................. 570 770
Amortization of capitalized deferred research and
development expenses ........................................ -- --
-------- -------
Gross deferred tax assets ....................................... 4,754 4,130
Valuation allowance ............................................. (4,052) (4,130)
-------- -------
Total deferred assets ........................................... 702 --
Deferred tax liabilities - intangibles .......................... (702) --
-------- -------
Net deferred tax asset, net of deferred tax liabilities ......... $ -- $ --
======== =======
</TABLE>

Management has established a valuation allowance for the portion of deferred
tax assets for which realization is uncertain. The change in the valuation
allowance for deferred tax assets for the years ended September 30, 2000 and
September 30, 1999 was a decrease of $78,000 and an increase of $2,052,000
respectively.

As of September 30, 2000, the Company had net operating loss carryforwards
for federal and California income tax purposes of approximately $7,182,000 and
$2,425,000, respectively, available to offset income in future years. The
federal net operating loss carryforwards expire from 2007 through 2020. The
California net operating loss carryforwards expire from 2000 through 2005.

As of September 30, 2000, the Company had research and experimentation
credit carryforwards for federal and California income tax purposes of
approximately $482,000 and $302,000 available to reduce future income taxes. The
federal research credit carryforwards expire in various years from 2005 through
2020. The California research credit carries forward indefinitely until
utilized. In addition, the Company had $7,000 and $4,000 of tax credit
carryforwards related to the AMT tax for federal and state purposes,
respectively. The federal and state AMT credit carries forward indefinitely
until utilized.

Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code.

(10) SUBSEQUENT EVENT

In December, 2000, the Company entered into a non-cancelable operating lease
for additional facilities in Los Altos, CA, which expires in December, 2005.

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

<TABLE>
<CAPTION>
Year Ending September 30,
<S> <C>
2001 ................................. $ 976
2002 ................................. 1,015
2003 ................................. 1,056
2004 ................................. 1,098
2005 ................................. 1,142
------
Total minimum lease payments ......... $5,287
======
</TABLE>

F-18
<PAGE> 53

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Los Altos, State of California, on this 22nd day of December,
2000.

TALARIAN CORPORATION

By: /s/ MICHAEL A. MORGAN
------------------------------------------
Michael A. Morgan
Vice President, Finance and Administration
and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:

/s/ PAUL A. LARSON President and Chief Executive Officer December 22, 2000
--------------------------------------
Paul A. Larson

PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:

/s/ MICHAEL A. MORGAN Vice President, Finance and Administration December 22, 2000
--------------------------------------
Michael A. Morgan and Chief Financial Officer

ADDITIONAL DIRECTORS:

/s/ PAUL D. CALLAHAN Director December 22, 2000
--------------------------------------
Paul D. Callahan

/s/ DAVID I. CAPLAN Director December 22, 2000
--------------------------------------
David I. Caplan

/s/ DAVID E. GOLD Director December 22, 2000
--------------------------------------
David E. Gold

/s/ BRIAN T. HOREY Director December 22, 2000
--------------------------------------
Brian T. Horey

/s/ THOMAS J. LAFFEY Director December 22, 2000
--------------------------------------
Thomas J. Laffey
Director December , 2000
--------------------------------------
Richard A. Nortz
</TABLE>

33
<PAGE> 54

TALARIAN CORPORATION AND SUBSIDIARY

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance, beginning of period ............. $245,000 $185,000 $125,000
Additions charged to expense ............. -- 60,000 60,000
Reductions ............................... -- -- --
Balance, end of period ................... $245,000 $245,000 $185,000
</TABLE>

S-1
<PAGE> 55

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
2.01 Agreement and Plan of Merger between Talarian Corporation, a
California corporation, and Registrant. (1)

2.02 Asset Purchase Agreement dated September 30, 1999 between
Registrant and GlobalCast Communications, Inc., a California
corporation. (1)

2.03 Agreement and Plan of Merger dated March 7, 2000 between Registrant
and WhiteBarn, Inc., an Illinois corporation. (1)

3.01 Registrant's Predecessor's Amended and Restated Articles of
Incorporation as filed February 4, 2000 with the Secretary of State
of California. (1)

3.02 Registrant's Predecessor's Bylaws as adopted March 28, 1991. (1)

3.03 Registrant's First Amended and Restated Certificate of
Incorporation as filed May 26, 2000 with the Secretary of State of
Delaware. (1)

3.05 Registrant's Bylaws as adopted April 3, 2000. (1)

3.06 Registrant's Certificate of Designation of preferred stock as filed
May 31, 2000 with the Delaware Secretary of State. (1)

3.08 Registrant's Predecessor's Certificate of Amendment of Articles of
Incorporation as filed May 23, 2000. (1)

3.09 Registrant's Certificate of Retirement of preferred stock as filed
with the Delaware Secretary of State on July 26, 2000. (2)

3.10 Registrant's Second Amended and Restated Certificate of
Incorporation, as filed July 26, 2000 with the Delaware Secretary
of State. (2)

4.01 Specimen Common Stock Certificate. (1)

4.02 Amended and Restated Investors Rights Agreement dated February 3,
2000, as amended March 10, 2000 between Registrant and certain
stockholders and warrant holders named therein. (1)

10.01 Form of Indemnity Agreement. (1)

10.02 Registrant's 1991 Stock Option Plan and related documents. (1)*

10.03 Registrant's 1998 Equity Incentive Plan and related documents. (1)*

10.04 Registrant's 2000 Employee Stock Purchase Plan and related
documents. (1)*

10.05 Registrant's 2000 Equity Incentive Plan and related documents. (1)*

10.06 WhiteBarn, Inc. Stock Option Plan and related document. (1)*

10.07 WhiteBarn, Inc. 2000 Equity Incentive Plan and related document.
(1)*

10.09 Agreement dated March 13, 2000 between Registrant and Certain
WhiteBarn Shareholders. (1)

10.10 Form of Option Acceleration Agreement between Registrant and each
executive officer. (1)*

10.13 License Agreement dated July 25, 1997 between Lucent Technologies
Inc., a Delaware corporation, and Registrant as successor to
GlobalCast Communications, Inc., a California corporation, as
amended by Amendment No. 1 effective January 28, 1998 and letter
dated September 3, 1999. (1) +

10.15 Standard Inbound License Agreement (Product Source Code) dated
September 30, 1999 between Registrant and Novell, Inc., a Delaware
corporation as amended by Amendment No. 1 dated June 26, 2000. (1)
+

10.18 Commitment Agreement dated March 13, 2000 between the Registrant,
Mark Mahowald and Wagner & Associates, P.C. (1)

10.19 Agreement dated February 3, 2000 between Registrant and Nortel
Networks Inc, as amended May 31, 2000. (1)+

10.20 Form of Registrant's Software License and Distribution Agreement.
(1)

10.21 Form of lock-up agreement with the underwriters. (1)

10.22 Lease dated March 7, 2000 between Registrant and GVE Distel
Associates. (1)

10.23 Settlement and License Agreement dated February 1, 1989 between the
Registrant and Lockheed Missiles and Space Company. (1)
</TABLE>

<PAGE> 56

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
10.24 Amended and Restated Loan and Security Agreement dated August 6,
1998 between the Registrant and Silicon Valley Bank, as amended
February 22, 2000. (1)

10.25 Lease dated April 15, 2000 between Registrant and TJR Management
Co. (1)

10.26 Value Added Reseller Agreement dated December 17, 1993 between
Registrant and Northern Telecom Limited, as amended September 30,
1997. (1)

16.01 Letter from former independent auditors. (1)

21.01 Subsidiaries of the Registrant. (1)

23.01 Consent of KPMG LLP, independent auditors.

27.01 Financial Data Schedule.
</TABLE>

----------

* Management contracts or compensatory plans required to be filed as an
exhibit to Form 10-K.

+ Confidential treatment has been granted for portions of this exhibit.
These portions have been omitted from this filing and have been filed
separately with the Securities and Exchange Commission.