WONDERWARE CORP, 10-K, 1998-03-30

WONDERWARE CORP
10-K, 1998-03-30
PREPACKAGED SOFTWARE

Previous: PDV AMERICA INC, 10-K, 1998-03-30

Next: MORTGAGE CAPITAL FUNDING INC, 10-K, 1998-03-30

<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-22044

WONDERWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-03046777
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

100 TECHNOLOGY DRIVE IRVINE, CA 92618 (714) 727-3200
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE) (REGISTRANT'S TELEPHONE
NUMBER, INCLUDING AREA CODE)

NONE COMMON STOCK, $.001 PAR VALUE
SECURITIES REGISTERED PURSUANT (SECURITIES REGISTERED PURSUANT
TO SECTION 12(B) OF THE ACT) TO SECTION 12(G) OF THE ACT)

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 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.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 2, 1998 was $336,097,524, based on the last sales price
on that date as reported on the Nasdaq National Market.*

As of March 2, 1998, there were 14,334,041 shares of the Registrant's Common
Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
NONE

* Excludes 110,701 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds ten percent of the shares
outstanding at February 28, 1998. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under
common control with the Registrant.
<PAGE> 2
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. The actual future results of Wonderware(R)
Corporation ("Wonderware" or the "Company") could differ materially from those
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those factors discussed in Item 1, "Business - Risk
Factors," Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Report.

PART I

ITEM 1. BUSINESS

Wonderware supplies Microsoft(R) Windows(R)-based software products
for the industrial automation market. The components of the Company's flagship
product, FactorySuite(TM) 2000, provide object-oriented software development
tools that enable customers to rapidly develop personal computer applications
that provide dynamic, graphical representations of physical processes in a
factory. These applications gather and display information about an automated
manufacturing process and can interact with and control that process. Wonderware
has offered industrial automation software development tools since 1989 that
feature ease-of-use and an intuitive operator interface typical of Windows
applications. The Company's products enable customers to reduce operating costs
and improve product quality by providing access to real-time information
throughout a manufacturing enterprise.

The Company has shipped its products to a wide range of industries,
including chemical, oil and gas, food, public utility, pharmaceutical, pulp and
paper, automobile, aerospace, electronics, telecommunications, water treatment,
transportation and numerous other industries. End user customers include
Anheuser Busch, AT&T, Boeing, Coca-Cola, Ford, Lockheed, Mercedes Benz, Nestle,
Philip Morris, Procter & Gamble, Shell Oil, Texaco and Weyerhaeuser.

Wonderware was formed as a partnership in April 1987 and was
incorporated in California in June 1988 as Wonderware Software Development
Corporation. The Company reincorporated in Delaware in July 1993.

On February 24, 1998, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Siebe plc ("Siebe"), WDR Acquisition
Corp. ("Purchaser") and WDR Sub Corp. ("Sub"), pursuant to which Purchaser has
commenced a tender offer to acquire all of the outstanding shares of Common
Stock of the Company at a purchase price of $24.00 per share (the "Tender
Offer"). The Tender Offer is currently anticipated to expire on April 3, 1998,
subject to extension under certain circumstances. Following the completion of
the Tender Offer, the Company will be merged with and into Sub (the "Merger"),
becoming a wholly owned subsidiary of Purchaser, and any outstanding shares of
Common Stock that were not previously tendered to Purchaser will automatically
be converted into the right to receive $24.00 per share, subject to properly
exercised appraisal rights. For more information concerning the Merger
Agreement, the Tender Offer or the Merger, please refer to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 that was filed on March
3, 1998, as it may be amended from time to time.

BACKGROUND

In the 1960s, electronic equipment and computers were generally
believed to be unsuitable for the manufacturing environment, primarily because
of their insufficient reliability for mission-critical production management and
control tasks. Pneumatic controls and electromechanical devices were the
preferred methods for controlling production equipment. However, as improvements
were made in the capability and reliability of analog and digital electronics,
production control tasks were increasingly assumed by controllers employing
integrated circuits and early microprocessors. In the 1970s, the programmable
logic controller (PLC) was introduced. PLCs were thought of as "hard hat"
computers, designed to function in the hostile environment of the factory floor
and to be programmed by electricians. PLCs found early acceptance in "discrete"
manufacturing segments, such as the automotive industry. In parallel with this
trend, distributed control systems (DCSs) evolved to provide computerized
control capabilities for "continuous" processes such as oil refining and
chemical production. Both PLCs and DCSs were based on proprietary hardware and
software technology. Today, these and other computer-based control systems are
widely used throughout both the discrete and continuous process manufacturing
industries.

2
<PAGE> 3
Initially, the operator interface for PLCs was provided by dedicated
panels of buttons, lights and indicators known as operator interface panels. For
DCSs, this interface capability was typically provided by special purpose
devices or proprietary graphics consoles supplied by the DCS vendor. Because of
their proprietary, closed architectures and primitive operator interfaces, these
approaches were generally expensive, inflexible, difficult to program, limited
in capability and unable to communicate easily with other systems.

On the plant management side of manufacturing, computers began to
replace the manual recording of production data and other hand written reports
in the 1960s. In the 1970s, vendors of mainframe and minicomputers identified
manufacturing industries as potentially significant markets for their hardware
and software products. These companies developed applications, such as materials
resource planning, cost accounting, inventory control and production scheduling,
that offered improved functionality but were closed and tedious to program,
cumbersome to use and difficult to integrate with other systems. Also, these
applications did not address the problem of tracking and allocating factory
resources, such as materials, equipment and labor, nor did they address the
tracking of work in process inventory.

As PLCs, DCSs and computer systems became increasingly prevalent in
the manufacturing environment throughout the 1980s, several problems became
apparent. Most of these systems were proprietary and built on platforms that
lacked the ability to communicate outside their own environment. For example,
PLCs, while greatly improving control of individual processes, created multiple
"islands of information" that were generally unable to communicate or share data
with other systems throughout the manufacturing enterprise. Software for a
manufacturing operation typically had to be developed or customized to satisfy
the unique requirements for that operation. In addition, mastery of multiple
proprietary programming languages was required to modify and maintain
applications once developed. As a result, high initial cost and high cost of
ownership have characterized the application of computer hardware and software
to each facet of the manufacturing enterprise.

Manufacturers have also become aware of the importance of accurate
and timely data capture on the factory floor and the value of the data for
decision making throughout the manufacturing enterprise. Manufacturers
increasingly need cost-effective mechanisms to connect the "islands of
information" that characterized manufacturing automation throughout the 1980s
and early 1990s. With the advent of low-cost, high-performance, standard
personal computers and open operating environments, such as Microsoft Windows,
the economics of the mass market can now be brought to the factory floor to
solve the problems inherent in the traditional automation solutions.

Personal computers have become the platform of choice for
human-machine interface ("HMI") and other manufacturing automation functions,
including PLC and DCS capabilities. However, low-cost, standard platforms alone
do not address the problem of delivering cost-effective solutions to complex
industrial process and control problems. Manufacturers are increasingly seeking
software products that allow the rapid development and deployment of automation
systems built on standard hardware, operating system and networking platforms.

PRODUCTS

Wonderware supplies easy-to-use application development tools and
connectivity products, rather than finished applications. The Company's products
incorporate object-oriented, graphical user interface concepts, support popular
communication standards, and run on low-cost, high-performance personal computer
hardware. Each new release of a Wonderware product is typically designed to
offer users application compatibility with all prior releases, providing
continuity as the capabilities and performance of the product are improved. In
addition, the Company's product families are scaleable from entry-level through
high-end products, permitting end-users to upgrade easily as their requirements
increase.

Wonderware FactorySuite(TM) 2000

FactorySuite 2000, first shipped to customers on December 14, 1997,
is the Company's most recent release of its integrated, component-based
Manufacturing Management Information ("MMI") system. FactorySuite 2000 runs on
the Microsoft Windows NT(R) 4.0 operating system and the Human-Machine Interface
("HMI") and clients also run on Windows 95. By combining the Company's core
product components into an integrated system, FactorySuite 2000

3
<PAGE> 4
provides process visualization, process control, a real-time relational
database, an internet/intranet tool for remote data viewing, tracking and
management of production operations, batch management and I/O servers to connect
the FactorySuite 2000 components to the data on the plant floor. FactorySuite
2000 is sold at a reduced price when compared to the cost of buying each of the
components of the suite separately. The large discount available to customers
when buying the FactorySuite 2000 packages is designed to produce additional
volume, but could have an adverse effect on the Company's future revenues for
other products. Further it is expected that some of the Company's competitors,
some of whom have much greater resources than the Company, will offer similar
suites of products. There can be no assurance that the FactorySuite 2000 will
gain acceptance in the industrial automation market.

Wonderware InTouch(TM)

InTouch, Version 7.0, a principal component of FactorySuite 2000, is
a Microsoft Windows based, 32-bit object-oriented, graphical human-machine
interface ("HMI") application generator for industrial automation, process
control and supervisory monitoring. Applications developed using InTouch allow
personal computers to act as "dashboards" that are used by operators to monitor
and manage computer-controlled processes. With InTouch, a developer uses an
object-oriented graphics editor to create an animated, graphical representation
of a manufacturing process. Changes in data values cause immediate changes in
the appearance of the graphics images. The size, color, location, orientation,
or other attributes of objects, such as tanks, gauges or pumps, may change in
response to changes in the data values acquired from the manufacturing process
via Dynamic Data Exchange ("DDE"). Objects can also act as "buttons" or
"sliders" that cause data values to change when the objects are pressed or moved
with a mouse or touchscreen. The Windows based operator interface applications
that are implemented and deployed using Wonderware InTouch are integrated with
FactorySuite 2000 control, plant database, batching and internet applications,
which are briefly described below.

Wonderware InControl(TM)

The InControl Version 7.0 component of FactorySuite 2000 is a
Windows NT based real-time open architecture control system that allows a user
to design, create, test and run application programs for controlling factory
floor processes. InControl provides an integrated control solution that replaces
proprietary control systems such as PLCs and DCSs with open architecture
NT-based control, providing a lower cost control architecture with integrated
connectivity, powerful processing capability and easy expandability. Like other
Company products, InControl is tightly integrated with InTouch and the other
components of FactorySuite 2000. It is the control component that executes
real-time control logic, connects to factory floor I/O and is a data server to
FactorySuite 2000. It is a scripting engine for Intouch, phase logic engine for
InBatch, and data server for IndustrialSQL Server or InTrack.

Wonderware IndustrialSQL Server(TM)

The IndustrialSQL Server Version 7.0 component of FactorySuite 2000
is a real-time relational database for factory data. IndustrialSQL Server imbeds
Microsoft SQL Server(TM), providing universal data access, a powerful relational
engine and integration with Microsoft BackOffice(TM). It acquires and stores
plant data at full resolution and integrates real-time and historic plant data
with configuration, event, summary and production data. The relational query
engine enables users to search for and find data and to analyze that data in
order to better understand the relationships and correlations between physical
plant, manufacturing operating conditions, process events, product quality and
production efficiency. The universal data access feature allows users to view
and analyze data with other Company software products and with other commercial
software such as Microsoft Office and other tools using SQL or OBDC. New with
FactorySuite 2000, IndustrialSQL Server's support of the Company's new SuiteLink
I/O servers enables time and quality stamping at the data acquisition level to
assure quality data. FactoryOffice(TM), a pack of desktop applications new with
FactorySuite 2000, allows users to view, graph and analyze IndustrialSQL Server
data without significant prior knowledge of SQL. As the FactorySuite 2000
database, IndustrialSQL Server is tightly integrated with the other components
of FactorySuite 2000.

4
<PAGE> 5
Wonderware Scout(TM)

The Scout component of FactorySuite 2000 is a web server add-on and
client browser that provides the user read-only remote viewing of FactorySuite
data and visual objects and a variety of other data sources over the internet
and intranets.

Wonderware InTrack(TM)

The InTrack component of FactorySuite 2000 is a production
management and tracking application generator. Applications developed using
InTrack allow manufacturers to model computer-controlled manufacturing processes
and then track material flow and resource usage through that process. It
provides real time views of work in process and shop floor inventory as well as
order status, equipment utilization and process performance. The Wonderware
InTouch graphical user interface provides operators with a "window" into the
manufacturing process at each work station. Information collected provides a
production history of events, such as yields, material consumed, and actual
process conditions, for each operation. InTrack is integrated with other
components of FactorySuite 2000, including InTouch, IndustrialSQL Server and
SPCPro to provide a comprehensive means for modeling, acquiring, and visualizing
all elements of the manufacturing process and enabling automatic data transfer
to and from plant floor devices such as PLCs, DCSs, and barcode readers.

Wonderware InBatch(TM)

The InBatch component of FactorySuite 2000 is a flexible,
sustainable and scaleable batch management software designed specifically for
the modeling and automation of batch-oriented production processes, such as in
the chemical, pharmaceutical and food processing industries. Wonderware InBatch
applications provide recipe control, equipment modeling, sequence control and
scheduling of batch processes. InBatch also provides complete production history
and materials genealogy.

I/O servers

I/O servers are input/output drivers that connect the computers to
the factory floor machines. A wide selection of I/O servers are included in the
FactorySuite 2000. They provide seamless data sharing among other FactorySuite
2000 components, including InTouch, other Windows-based programs (e.g.,
spreadsheets and word processing programs), and more than 250 PLCs, DCSs and
other control devices used in process automation. These devices can then be
configured as servers in a client/server architecture. The need to support a
broad range of controllers in the industrial automation market has been a
significant barrier to entry to providers of general purpose application
development tools. The Company believes that its ability to develop, acquire and
support such a broad range of controllers is a significant competitive
advantage.

FactorySuite Toolkit

The FactorySuite Toolkit is a set of product-specific tools that
allows the user to extend FactorySuite 2000 components to meet the user's
specific application needs. The FactorySuite Toolkit contains five development
kits.

The InTouch Extensibility Toolkit contains the following three
tools: The Wizard Development Kit facilitates creation of preconfigured
graphical objects or command sequences. The Script Development Kit allows
creation of complex algorithms and embedding them directly into the InTouch
scripting language. The InTouch Database Extension APIs (IDEA) Toolkit lets
users give external applications access to the InTouch database.

The I/O Server Toolkit enables programmers to quickly and easily
develop their own I/O servers that use DDE, Wonderware's FastDDE or SuiteLink
protocols, to connect InTouch with custom equipment or communications protocols
not served by the Company's line of I/O servers. This toolkit is the same
toolkit Wonderware uses to develop all of the Company's I/O servers for InTouch.

5
<PAGE> 6
The InControl I/O Toolkit allows the user to develop I/O drives to
communicate to the InControl client.

The InBatch Toolkit enables the user to access the different InBatch
databases. The user can also control certain InBatch processes.

The Scout Toolkit allows the user to develop data agents to their
database. The Scout client can then access the information through the data
agents.

Wonderware Technical Services

Product Training. The Company offers comprehensive training
programs. InTouch Basic Training and InTouch Advanced Training teach application
development for the InTouch component of FactorySuite 2000. InControl Training
teaches users to design, create, test and run control applications for
controlling manufacturing processes. InTrack Foundation and Modeling Course is
designed for systems integrators, plant floor managers, project managers,
evaluation team members and other s who want to use InTrack in their
manufacturing process. The InTrack Developer Course provides experienced InTrack
users with advanced product knowledge to help them develop and implement
high-end InTrack solutions in an enterprise systems environment. IndustrialSQL
Server Training provides participants with information on topics including
IndustrialSQL Server architecture, hardware, configuration, data retrieval and
client tools. InBatch Training includes instruction on topics like modeling the
plant, creating recipes, managing materials produced and consumed, scheduling
and executing batches, recording history and generating reports on all batch
processing activities, along with the procedures required to set up a redundant
InBatch system. Recipe, SPCPro and SQL Training addresses the subjects of
Recipe, Statistical Process Control Pro (SPCPro) and Structured Query Language
(SQL). The Company is currently developing an internet course for the Scout
component of FactorySuite 2000. Training courses are available at the Company's
training facilities in Irvine, California, Atlanta, Georgia and selected
regional offices outside the United States. Courses are also available through
Certified Training Centers. The Certified Training Centers have completed and
passed a rigorous certification process to ensure that they have the ability to
effectively train customers using the Company's training materials.

Software Maintenance Programs/Technical Support Services.
Wonderware Technical Support offers three software maintenance support programs:
Basic Support; Comprehensive Support and Site Support. Basic Support services
include e-mail and fax support through which users may send in their technical
questions for submission to a Certified Support Provider. It also includes
web-site support through which users may access Wonderware technical
publication, download available software patch fixes, participate in discussion
groups and submit questions to Wonderware Technical Support. Basic Support also
includes automated telephone support and access to the WonderFax System through
which a customer may obtain by fax at any time certain technical support,
training and financial documents. Comprehensive Support includes the Basic
Support Services plus certain rights with respect to future software releases,
when and if available, immediate telephone access to the nearest Certified
Support Provider during normal business hours, priority E-mail and Advanced Web
Services, and a subscription to the periodic FactorySuite InSider Newsletter.
Also included is the Wonderware Knowledge Base CD-ROM which is an encyclopedia
of FactorySuite technical information that includes, among other information,
"how to" notes, software service packs and patch fixes, sample product
applications, demonstration videos, utilities, and product add-on extensions.
Site Support includes special rates for all licenses at a single site, all the
benefits of Comprehensive Support Service as well as certain additional
benefits. Technical Support services are provided by the Company or by its
distributors who have become Certified Support Providers by completing and
passing a rigorous certification process to ensure that they have the ability to
effectively provide technical support services for the Company's products.

Products - Year 2000 Compliance. The Company believes that its
FactorySuite software programs released and shipped after April 14, 1997 are
"Year 2000 Compliant". More specifically such FactorySuite software programs are
designed, developed, tested and supported to adhere to the following criteria:
(a) No value for current date will cause abnormal interruption in operation of
the programs; (b) Date-based functionality will behave consistently for dates
through the year 2000; (c) In all program interfaces and data storage routines,
the century is specified either explicitly or by unambiguous algorithms or
inferencing rules; and (d) Year 2000 is recognized as a leap year. Any Year 2000
nonconformity or defect (or "bugs") that may be detected in any FactorySuite
2000 component (and it is likely that "bugs" will arise) will receive the
Company's highest priority response from its technical support services

6
<PAGE> 7
personnel. The Company does not provide any assurances that software programs
released prior to April 14, 1997 are "Year 2000 Compliant".

MARKETING, SALES AND DISTRIBUTION

Wonderware's products are sold in 58 countries principally through a
network of more than 80 technically skilled, independent distributors
specializing in industrial automation products. With the exception of the
Company's wholly owned subsidiaries in Germany and Italy, the distributors are
not within the control of the Company, and are not obligated to purchase
products from the Company. However, sales of the Company's products constitute a
substantial portion of revenues for a number of these distributors. The Company
believes that its relationships with its distributors represent a significant
competitive advantage for the Company.

Many of these distributors represent other lines of products. While
the Company encourages its distributors to focus primarily on the promotion and
sale of the Company's products, there can be no assurance that these
distributors will not give higher priority to the sale of other products. A
reduction in sales efforts or discontinuance of sales of the Company's products
by its distributors could lead to reduced sales and could adversely affect the
Company's operating results. There can be no assurance as to the continued
viability or financial stability of the Company's distributors, the Company's
ability to retain its existing distributors or the Company's ability to add new
distributors in the future. In addition, as a result of new product
introductions or pricing actions by the Company or others, the Company's
distributors or end-users may alter the expected timing of their product
purchases, thereby exacerbating the possible variability of the Company's
quarterly operating results.

In October 1997, the Company purchased minority equity interests in
two of its distributors. In connection with the investments, the Company agreed
either to loan or guaranty a loan to each distributor, the proceeds of which may
be used by the distributor only for certain uses approved by the Company
including further development of the distributor's business. The Company
believes that selective assistance to specific distributors may promote revenue
growth from those distributors.

Wonderware maintains a sales, marketing and technical support
organization to support the distribution channel. On December 31, 1997 there
were 138 full time employees involved in sales and marketing, and 61 full time
employees involved in technical support services. The Company's sales staff also
targets large end-user customers, system integrators, OEMs and value added
resellers to complement the selling efforts of the Company's distributors. The
Company believes that, for certain customers and markets, this supplemental
sales effort enhances the Company's penetration. The Company has a sales office
at its headquarters in Irvine, California and eight domestic field offices. To
enhance its presence in international markets, the Company maintains several
sales and support offices throughout Europe, Asia and Latin America.
International sales accounted for 46%, 42% and 43% of total revenues in 1997,
1996 and 1995, respectively. See Management's Discussion and Analyses of
Financial Condition and Results of Operations, and Note 7 of Notes to
Consolidated Financial Statements.

Wonderware seeks to establish relationships with OEM providers of
industrial automation solutions, as well as value-added resellers and systems
integrators, to broaden the distribution of its products and to pursue
additional market segments. The Company has established relationships with
several OEMs, including Moore Products, Motorola, and Yokogawa. Moore Products
uses several components of the Wonderware FactorySuite software in process
systems that it sells. Motorola bundles Wonderware InTouch with Motorola's
remote monitoring and control terminals. Yokogawa purchases Wonderware InTouch
for use in its Darwin product which is part of its line of chart recorders. The
Company is pursuing additional OEM relationships to broaden the distribution of
its products to new market segments.

Supplying premium quality product support to every customer is a
primary Wonderware objective. The Company offers several customer support
services including the Wonderware Information Exchange, a bulletin board service
designed to facilitate communications with and among end-users. Users who dial
into the bulletin board can leave or retrieve messages or files and can access a
library of "How To Notes." The Company maintains a World Wide Web site on the
Internet that offers hundreds of pages of corporate, marketing and product
information to any interested browser around the world. The Company offers six
to twelve-month comprehensive support agreements to its end-user customers
entitling them to software upgrades, when and if available, and numerous other
benefits distributed via CD-

7
<PAGE> 8
ROM. The Company also supports a user group that has established a Program
Information Exchange to allow users to share their evaluations of third-party
hardware and software devices for use with Wonderware InTouch. The user group is
led by an Advisory Board of Directors comprised of representatives from a number
of Wonderware end-user customers including Philip Morris, Lockheed Missiles &
Space, Texaco, Weyerhaeuser and Nestle. Wonderware has a comprehensive training
department that offers a number of different courses covering each of the
Company's products and communications technologies. See Products - Wonderware
Technical Services.

BACKLOG

The Company typically ships its products within a very short period
after acceptance of purchase orders from distributors. Accordingly, the Company
typically does not have a material backlog of unfilled orders, and revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. Any significant weakening in customer demand would therefore have an
almost immediate adverse impact on the Company's operating results and on the
Company's ability to maintain profitability.

PRODUCT DEVELOPMENT

The Company believes that its success will depend in large part on
its ability to maintain and enhance its current product line, develop new
products, maintain technological competitiveness and meet an expanding range of
customer requirements. The Company's product development department is
headquartered in Irvine, California. The Company also maintains product
development and research facilities in Johnson City, Tennessee, where employees
focus on the development of industrial control products, and in York,
Pennsylvania, where employees focus on the development of production and batch
management products. The Company also has a development department in Munich,
Germany, where employees focus on development of I/O servers. In February 1997,
the Company closed its Cupertino development center and consolidated the
development of it production management products in the York, Pennsylvania
development center (see Note 14 of Notes to Consolidated Financial Statements).
As of December 31, 1997, the Company's research and development group consisted
of 132 full-time employees. During 1997, 1996 and 1995, research and development
expenses were approximately $19.8 million, $18.8 million and $10.6 million,
respectively. See Item 7, Management's Discussion and Analyses of Financial
Condition and Results of Operations. The Company anticipates that it will
continue to commit substantial resources to research and development in the
future. See Note 2 of Notes to Consolidated Financial Statements for a
discussion of the Company's policy regarding capitalization of software
development expenses. See also Technology.

COMPETITION

The market for industrial automation and process control software
products is intensely competitive and is characterized by rapid changes in
technology and frequent introductions of new platforms and features. To maintain
or improve its position in this industry, the Company must continue to enhance
its current products and develop new products in a timely fashion.

The Company competes generally on the basis of breadth of product
features and functions, the relatedness or integration of its products, ease of
use, product architecture, the ability to interface with a variety of industry
standard platforms, local technical support and other related services, ease of
product integration with third party applications software and
price/performance. The Company competes with a number of independent software
suppliers as well as large PLC and DCS manufacturers that provide interface
software along with their hardware products. Many of the Company's existing and
potential competitors have longer operating histories and significantly greater
financial, technical, sales, marketing and other resources than the Company.
Certain of these organizations may also have greater name recognition and a
larger installed base than the Company. The Company's competitors could in the
future introduce products with more features and lower prices than the Company's
product offerings. These organizations could also bundle existing or new
products with other products or systems to compete with the Company. The Company
expects competition to increase and the Company's market share may decline as
other companies introduce additional and more competitive Microsoft
Windows-based products in this emerging market segment. As the market for
industrial automation and process control software products develops, a number
of companies with significantly greater resources than the Company could attempt
to increase their presence in this market by acquiring, or forming

8
<PAGE> 9
strategic alliances with, competitors of the Company. There can be no assurance
that the Company will be able to compete successfully in the future.

PROPRIETARY RIGHTS

The Company regards its software as proprietary and attempts to
protect it with copyrights, trademarks, trade secret laws and restrictions on
disclosure, copying and transferring title. However, the Company has no patents
and existing copyright laws afford only limited practical protection for its
software. Furthermore, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. The Company licenses its products primarily under "shrink wrap" license
agreements that are not signed by licensees and therefore may be unenforceable
under the laws of certain foreign jurisdictions. In addition, in some instances
the Company licenses its products under agreements that give licensees limited
access to the source code of the Company's products. Accordingly, despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to obtain and use
information that the Company regards as proprietary.

The Company believes that, due to the rapid pace of innovation
within its industry, factors such as the technological and creative skills of
its personnel are more important to establishing and maintaining a technology
leadership position within the industry than are the various legal protections
of its technology. As the number of software products in the industry increases
and the functionality of these products further overlaps, the Company believes
that its software will become increasingly the subject of claims that such
software infringes the rights of others. See Note 10 of notes to consolidated
financial statements for a description of legal proceedings involving the
Company pertaining to proprietary rights and the Company's intellectual
property.

The Company considers its name, "Wonderware", to be a valuable asset
with significant recognition within the industrial automation community, and has
taken steps to protect its rights in its name, including trademark registration
in the United States and certain foreign countries. The Company plans to
discontinue use of certain other marks that it has historically used in
connection with certain of its products, including "InTouch", in favor of a new
product name program that the Company believes will better convey the use and
integrated functionality of its products.

EMPLOYEES

As of December 31, 1997, the Company employed 405 full-time
employees, of which 138 were engaged in sales and marketing, 61 were engaged in
technical support and training, 132 were engaged in software development and
engineering and 74 were engaged in general management, administration, finance,
and operations. None of the Company's employees is subject to a collective
bargaining agreement, and the Company has not experienced any work stoppage. The
Company believes that its employee relations are good.

EXECUTIVE OFFICERS

Roy H. Slavin, 52, has served as Chairman, President and Chief
Executive Officer since December 1995. From July 1995 to November 1995, he
served as President and Chief Operating Officer of the Company. From October
1993 to June 1995, he was President and Chief Executive Officer of Siemens
Industrial Automation, Inc., a manufacturer of industrial automation components
and systems. From January 1986 to September 1993, he was President and Chief
Executive Officer of Potter and Brumfield, Inc. (A Siemens Company), a
manufacturer of electronic components.

Sam M. Auriemma, 45, has served as Vice President, Finance, Chief
Financial Officer and Secretary since April 1996. From September 1990 to March
1996, he served as Vice President of Finance and Chief Financial Officer of
Locus Computing Corporation, a software and software services company.

Joe L. Cowan, 48, has served as Vice President, Sales and Marketing
since December 1995. From December 1993 to November 1995, he held various sales
and marketing positions with the Company. From April 1992 to

9
<PAGE> 10
November 1993, Mr. Cowan was Director of Automation Business for Lanex, Inc., a
system integration company for industrial automation.

Jeffrey L. Kissling, 42, has served as Vice President, Product
Development since July 1996. From September 1995 to July 1996 he served the
Company as General Manager of the Company's York, Pennsylvania development
center. From 1989 to September 1995 Mr. Kissling was President and Chief
Executive Officer of Soft Systems Engineering, Inc. which was acquired by the
Company in September 1995.

Victoria Stowe, 47, has served as Vice President, Wonderware Studios
since January 1995. From February 1991 to January 1995, Ms. Stowe served as the
Company's Director of Marketing Communications.

RISK FACTORS

In addition to the other information set forth in this Report,
particularly the information contained in the section of this report captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the following risk factors should be considered carefully in
evaluating the Company and its business.

Pending Acquisition of the Company

The Company has entered into the Merger Agreement with Siebe,
Purchaser and Sub pursuant to which Purchaser has commenced the Tender Offer.
Assuming that the Tender Offer is completed as anticipated, the Company will
ultimately be merged with and into Sub in the Merger pursuant to the Merger
Agreement. If the Tender Offer and the Merger were completed, none of the shares
of Common Stock of the Company currently outstanding would remain outstanding
following the Merger (subject to properly exercised appraisal rights) pursuant
to the Merger Agreement. The consummation of the Tender Offer and of the Merger
is each subject to certain conditions as set forth in the Merger Agreement.
There can be no assurance that the Tender Offer or the Merger will be completed
as currently contemplated.

The purchase of shares of Common Stock by Purchaser pursuant to the
Tender Offer will reduce the number of shares of Common Stock that might
otherwise trade publicly and may reduce the number of holders of Common Stock,
which could adversely affect the liquidity and market value of the remaining
shares of Common Stock held by stockholders other than Purchaser. Depending upon
the number of shares purchased pursuant to the Tender Offer, the Common Stock
may no longer meet the standards for continued inclusion on the Nasdaq National
Market. If trading volume were lower than such standards, quotations might
continue to be published in the "additional list" or in one of the "local
lists", or such quotations might not be published at all. If the number of
holders of Common Stock (based on round lots) fell below 400, NASDAQ might cease
to provide quotations, but quotations might still be available from other
sources. The Company cannot predict whether NASDAQ trading volume standards for
publication will be met after the Tender Offer.

The shares of Common Stock are currently registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
registration may be terminated upon application by the Company to the Commission
if there are fewer than 300 record holders of shares of Common Stock. It is the
stated intention of Purchaser to seek to cause an application for such
termination to be made as soon after consummation of the Tender Offer as the
requirements for termination of registration for the Common Stock are met. If
such registration were terminated, the Company would no longer legally be
required to disclose publicly in proxy materials distributed to stockholders the
information which it now must provide under the Exchange Act or to make public
disclosure of financial and other information in annual, quarterly and other
reports required to be filed with the Commission under the Exchange Act; the
officers, directors and 10% stockholders of the Company would no longer be
subject to the "short-swing" insider trading reporting and profit recovery
provisions of the Exchange Act or the proxy statement requirements of the
Exchange Act in connection with stockholders' meetings; and the Common Stock
would no longer be eligible for NASDAQ reporting or for continued inclusion on
the Federal Reserve Board's "margin list". Furthermore, if such registration
were terminated, persons holding "restricted securities" of the Company may be
deprived of their ability to dispose of such securities under Rule 144
promulgated under the Securities Act of 1933, as amended.

10
<PAGE> 11
Short Operating History; Fluctuations in Quarterly Operating Results

The Company has a limited operating history and, although the
Company has experienced significant growth in recent periods, such growth rates
may not be sustainable and are not indicative of future operating results. The
Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including, among others:
delays in introduction of products or product enhancements by the Company, its
competitors or other providers of hardware, software and components for the
industrial automation market; costs associated with product or technology
acquisitions; the size and timing of individual orders; software "bugs" or other
product quality problems; competition and pricing in the software industry;
seasonality of revenues; customer order deferrals in anticipation of new
products; market acceptance of new products; reductions in demand for existing
products and shortening of product life cycles as a result of new product
introductions; changes in operating expenses; changes in Company strategy;
personnel changes; foreign currency exchange rates; regulatory requirements and
political and economic instability in foreign markets; mix of products sold; and
general economic conditions. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.

Because the Company ships software products within a short period
after receipt of an order, the Company typically does not have a material
backlog of unfilled orders, and revenues in any quarter are substantially
dependent on orders booked in that quarter. The Company's expense levels are
based in part on its expectations as to future revenues and the Company may be
unable to adjust spending in a timely manner to compensate for any revenue
shortfall. Accordingly, operating results would be adversely affected by a
reduction in revenues in that quarter since the majority of the Company's
expenses are fixed. Any significant weakening in demand would have an almost
immediate adverse impact on the Company's operating results and on the Company's
ability to achieve profitability. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock.

Product Concentration

Although the Company has introduced two releases of its FactorySuite
family of integrated software programs over the last year, the bulk of the
Company's revenues are still concentrated in InTouch product for industrial
automation applications. The Company introduced the initial version of InTouch
in August 1989. Revenues from the InTouch family of products have grown rapidly
and have represented a significant portion of the Company's total revenues since
1990. The Company expects that revenues from these products will continue to
account for a substantial portion of the Company's revenues. The life cycles of
the Company's products are difficult to estimate due in large measure to the
recent emergence of the Company's market, the future effect of product
enhancements and future competition. Declines in demand for these products,
whether as a result of competition, technological change or otherwise, or price
reductions would have a material adverse effect on the Company's operating
results.

Competition

The market for the Company's products is intensely competitive. The
Company expects competition to increase and the Company's market share may
decline as other companies introduce additional and more competitive Microsoft
Windows-based products in this emerging market segment. This trend is expected
to accelerate with the increased acceptance of Microsoft Windows 95 and Windows
NT 4.0 in the market. Many of the Company's present or anticipated competitors
have substantially greater financial, technical, marketing and sales resources
than the Company. There can be no assurance that the Company will be able to
compete successfully in the future.

Dependence on Microsoft Windows

The Company's software development tools are designed for use with
personal computers running in the Microsoft Windows operating environment, and
future sales of the Company's products are dependent upon continued use of
Windows and Windows NT. In addition, changes to Windows (such as the release of
Windows 95 and the anticipated release of Windows 98 later this year) or Windows
NT require the Company to continually upgrade its

11
<PAGE> 12
products. Any inability to produce upgrades or any material delay in doing so
would adversely affect the Company's operating results. The successful
introduction of new operating systems or improvements of existing operating
systems that compete with Windows or Windows NT also could adversely affect
sales of the Company's products and have a material adverse effect on the
Company's operating results.

Rapid Technological Change

The market for the Company's products is characterized by rapid
technological advances, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. While the
Company to date has been committed to the Microsoft Windows and Windows NT
platforms, the introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
and products currently under development obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments, respond to evolving end-user requirements and
achieve market acceptance. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenues. In the past, the Company occasionally
experienced delays in the introduction of new products and product enhancements.
There can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis or that the
Company will not experience significant delays in the future, which could have a
material adverse effect on the Company's results of operations. In addition,
there can be no assurance that new products or product enhancements developed by
the Company will achieve market acceptance.

Management of Remote Operations

The Company maintains several remote and international facilities,
including operations in Germany and Italy. As the Company grows it may add
additional foreign and remote offices, and may need to add additional personnel
to existing foreign and remote offices. The Company must rely upon local
managers to conduct, supervise and manage the Company's business in its foreign
and remote offices. There can be no assurance that the Company will be
successful in hiring and retaining skilled personnel for its international and
remote offices. Inability to attract and retain such personnel would have an
adverse affect on the Company's operations and performance at such locations.

Management of Growth

The Company has recently experienced rapid growth in the scope of
its operating and financial systems and the geographic area of its operations.
This growth has resulted in an increase in the level of responsibility for both
existing and new management personnel. To manage its growth effectively, the
Company will be required to continue to implement and improve its operating and
financial systems and to expand, train and manage its employee base. There can
be no assurance that the management skills and systems currently in place will
be adequate if the Company continues to grow. The Company may make additional
acquisitions in the future. The Company's management has only limited experience
with acquisitions, which involve numerous risks, including difficulties in the
assimilation of the operations and products of the acquired companies, the
diversion of management's attention from other business concerns and the
potential loss of key employees of the acquired companies.

Key Employees

The Company's continued success will depend upon its ability to
retain a number of key employees, most of whom are not subject to employment
agreements or agreements that restrict their ability to compete with the Company
following the termination of their employment. In addition, the Company believes
that its future success will depend in large part on its ability to attract and
retain highly skilled technical, managerial and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. The loss of
certain key employees or the Company's inability to attract and retain other
qualified employees could have a material adverse effect on the Company's
business.

12
<PAGE> 13
Reliance upon Distribution Channel

The Company has relied and expects to continue to rely primarily on
independent distributors for the marketing and distribution of its products.
These distributors may also represent other lines of products. The Company's
distributors are not within the control of the Company and are not obligated to
purchase products from the Company. While the Company encourages its
distributors to focus primarily on the promotion and sale of the Company's
products, there can be no assurance that these distributors will not give higher
priority to the sale of other products. A reduction in sales efforts or
discontinuance of sales of the Company's products by its distributors could lead
to reduced sales and could adversely affect the Company's operating results.
There can be no assurance as to the continued viability or financial stability
of the Company's distributors, the Company's ability to retain its existing
distributors or the Company's ability to add new distributors in the future.
Also, there can be no assurance that the Merger with Siebe, Purchaser and Sub
will not have an adverse effect on the Company's relations with its
distributors. In addition, as a result of new product introductions or pricing
actions by the Company or others, the Company's distributors or end-users may
alter the expected timing of their product purchases, thereby exacerbating the
possible variability of the Company's quarterly operating results.

Dependence on General Economic Conditions

Based in part on the growth in the overall market for and the
Company's penetration of the industrial automation software market, as well as
the geographic and industry diversity of the Company's customers, the Company
believes that general economic conditions have not had a material adverse effect
on the Company's results of operation to date. There can be no assurance,
however, that economic conditions will not have a material adverse effect on the
Company in the future.

International Sales

The Company derived approximately $37.7 million (46%) of its total
revenues from international sales during 1997. The Company expects that
international sales will continue to represent a significant percentage of its
total revenues. The Company's international operations are subject to various
risks, including exposure to currency fluctuations, regulatory requirements,
political and economic instability and trade restrictions. The Company's Germany
operation is exposed to the risks of fluctuations in the deutsch mark relative
to the dollar. Although the Company's sales in other international markets are
typically made in U.S. dollars, a weakening in the value of foreign currencies
relative to the U.S. dollar could have an adverse impact on the effective price
of the Company's products in its international markets. The Company maintains
regional offices in Japan, Taiwan, Singapore and Korea, and a significant
portion of the Company's international sales during 1997 (approximately 9% of
the Company's 1997 revenue) were from sales in these and other Asian countries.
The economies of certain of these and other countries in the Asian region have
recently experienced instability. Continued economic instability in the Asian
region may have an adverse effect on the Company's sales in that region. In
addition, the Company's business may be adversely affected by lower sales levels
in Europe, which typically occur during the summer months.

Dependence on Proprietary Rights

The Company regards its software as proprietary and attempts to
protect it with copyrights, trademarks, trade secret laws and restrictions on
disclosure, copying and transferring title. However, the Company has no patents,
and existing copyright laws afford only limited practical protection for the
Company's software. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. The Company licenses its products primarily under "shrink
wrap" license agreements that are not signed by licensees and therefore may be
unenforceable under the laws of certain foreign jurisdictions. In addition, in
some instances the Company licenses its products under agreements that give
licensees limited access to the source code of the Company's products.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to obtain and use information that the Company regards as proprietary. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that such software will
become increasingly the subject of claims that such software infringes the
rights of others.

13
<PAGE> 14
Although the Company does not believe that its products infringe on
the rights of third parties, there can be no assurance that third parties will
not assert infringement claims against the Company in the future or that any
such assertion will not result in costly litigation or require the Company to
obtain a license to intellectual property rights of such parties. In addition,
there can be no assurance that such licenses will be available on reasonable
terms, or at all. See Item 3, Legal Proceedings, and Note 10 of notes to
consolidated financial statements for a description of litigation involving the
Company pertaining to proprietary rights and the Company's intellectual
property.

The Company plans to discontinue use of certain names that
historically have been associated with certain components of FactorySuite 2000,
including the name "InTouch", in favor of a new product name program that the
Company believes will better describe the products' uses and integrated
functionality. There can be no assurance that the change will not temporarily
affect the products' name recognition within the industry.

Potential Volatility of Stock Price

The Company believes factors such as quarterly fluctuations in
results of operations and announcements of new products by the Company or by its
competitors may cause the market price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
shares of technology companies in particular, have experienced extreme price
fluctuations. These broad market and industry fluctuations may adversely affect
the market price of the Company's Common Stock.

Anti-Takeover Effects of Certain Charter Provisions, Unissued Preferred Stock
and Delaware Law

The Company's Board of Directors has the authority, without action
by the stockholders, to fix the rights and preferences of and to issue shares of
Preferred Stock. In February 1996, the Board of Directors adopted a Preferred
Share Purchase Rights Plan (the "Rights Plan" and commonly known as a "poison
pill"), which may have the effect of delaying or preventing a change in control
of the Company. The Company is also subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. Furthermore, certain
provisions of the Company's Certificate of Incorporation and Bylaws may
discourage certain types of transactions involving an actual or potential change
in control of the Company, including transactions in which the stockholders
might otherwise receive a premium for their shares over then current prices, and
may limit the ability of the stockholders to approve transactions that they deem
to be in their best interests.

In connection with the Merger Agreement, the Company has amended the
Rights Plan and made certain determinations under Section 203 to exempt the
Tender Offer and Merger from their application.

ITEM 2. PROPERTIES

The Company's principal sales, marketing, technical support,
administration, product development and support facilities occupy an aggregate
of 120,000 square feet in four office buildings in Irvine, California. The lease
agreements with respect to such space expire between August 2000 and January
2002. The Company also leases office space for its development centers in York,
Pennsylvania; Johnson City, Tennessee and Munich, Germany. In addition, the
Company leases sales office space in the metropolitan areas of several cities in
the United States and internationally. The Company considers its leased real
property adequate for its current and reasonably foreseeable needs.

ITEM 3. LEGAL PROCEEDINGS

14
<PAGE> 15
restraining order against Cyberlogic and Intellution, and pursuant to the
Court's order, U.S. Marshals seized and copied certain materials at the offices
of Cyberlogic and Intellution. In January 1997, the Court entered its
preliminary injunction which generally bars Cyberlogic and Intellution from
marketing or otherwise distributing any infringing copies of the computer
software at issue in the proceeding. In February 1997, Intellution filed its
appeal of the preliminary injunction to the U.S. Court of Appeals for the Ninth
Circuit, and the Court denied the defendants' requests to stay the injunction
pending appeal. Cyberlogic also appealed the injunction. In September 1997, the
Court of Appeals affirmed the preliminary injunction.

In December 1996, Cyberlogic submitted a demand for arbitration of
the underlying contractual issues involved in these proceedings. The U.S.
District Court for the Central District of California has ordered the case to
arbitration in Michigan before the American Arbitration Association. Dates for
hearing the arbitration and other related events have not yet been set. The
Company intends to vigorously prosecute its claims in the arbitration. It is too
early to determine the impact, if any, of these proceedings on the Company, its
financial condition or the results of the Company's operations.

In January 1997, the Company received a copy of a complaint which
Cyberlogic filed in the U.S. District Court for the Eastern District of
Michigan. Among other claims, this complaint purports to claim damages in excess
of $40 million and injunctive relief for the Company's alleged infringement of
certain software programs which Cyberlogic contends it owns. The Company
believes the allegations in Cyberlogic's complaint to be without merit and
intends to vigorously defend itself against these claims. Further, the Company
believes that these claims arise out of or relate to the proceeding pending in
the U.S. District Court of the Central District of California and the
anticipated arbitration proceeding. The Company moved the U.S. District Court
for the Eastern District of Michigan to compel arbitration of that action, and
in February 1998, the Court granted the Company's motion. It is too early to
determine the impact, if any, of this proceeding on the Company, its financial
condition or the results of the Company's operations.

In December 1996, the Company received a copy of a complaint that
had been filed in the U.S. District Court for the Eastern District of
Pennsylvania by Otto M. Voit, III. In the complaint, Mr. Voit purports to be
acting on behalf of all former holders of common stock, or options to acquire
common stock, of Soft Systems Engineering, Inc. ("SSE"). Mr. Voit alleges in the
complaint that the Company and certain of its officers made false and misleading
statements and concealed material information in connection with the Company's
acquisition of SSE. In the complaint, Mr. Voit claims that these alleged
misrepresentations and omissions constitute violations of various federal and
state securities laws, fraud, negligence and inducement to enter into a contract
by material misrepresentation, and he requests relief in the form of
compensatory and punitive damages as well as the costs incurred in pursuing his
claims. In January 1997, the Company filed a motion to dismiss the complaint on
several grounds. In September 1997, the court denied the Company's motion to
dismiss. In October 1997, Mr. Voit filed a motion seeking certification of the
action as a class action. The Company has opposed certification of the action as
a class action; and as of February 28, 1998 the Court has not ruled on the
motion. The trial of the case is set to commence at some point during or after
October 1998. The Company believes the allegations in the complaint to be
without merit and intends to vigorously defend itself and the other defendants,
each of whom has been previously indemnified by the Company in connection with
his employment as an officer of the Company, against the claims stated in the
complaint. It is too early to determine the impact, if any, of this proceeding
on the Company, its financial condition or the results of the Company's
operations.

In June 1997, the Company received a copy of a complaint (the "TES
Complaint") filed in Massachusetts Superior Court in Worcester County by
Flagship Automation, a division of EMX Controls, Inc., and Total Enterprises
Solutions, Inc. (collectively, "TES"). The TES Complaint alleges that the
Company breached its contract with TES, breached an implied covenant of good
faith, wrongfully terminated TES' distributorship relationship, committed fraud,
misappropriated trade secrets, intentionally interfered with TES' contractual
and advantageous relationships and committed unfair and deceptive acts or
practices under Chapter 93A of the Massachusetts General Laws. The TES Complaint
seeks monetary damages. The copy of the TES Complaint was initially forwarded to
the Company by the President of TES who indicated in his cover letter a
willingness to seek an alternative resolution of the matter. In July 1997, the
Company obtained removal of the TES complaint to the U.S. District Court for the
District of Massachusetts. The TES Complaint was served in October 1997, and TES

15
<PAGE> 16
has granted the Company an extension to answer until March 27, 1998. The Company
believes that the allegations in the TES Complaint are without merit and intends
to vigorously defend itself against the claims stated in the TES Complaint. It
is too early to determine the impact, if any, of the TES Complaint on the
Company, its financial condition or the results of the Company's operations.

In August 1997, all matters in the various proceedings involving
Constantin S. Delivanis, Vladimir Preysman, the Delivanis-Kibrick Family Trust
and the Company were finally concluded in an out-of-court settlement binding all
parties. The settlement includes mutual and general releases of all claims by
all parties and cash payments by the Company to Messrs. Delivanis and Preysman.
The settlement resulted in a one-time charge to earnings of $1.9 million,
including attorneys' fees and related costs, during the third quarter of 1997.

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

No matter was submitted to a vote of security holders during the
quarter ended December 31, 1997.

16
<PAGE> 17
PART II

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

The Company's Common Stock trades on the Nasdaq National Market
under the symbol "WNDR." The following table sets forth for the periods
indicated the high and low sale prices for the Common Stock reported by the
Nasdaq National Market. These prices do not include retail markups, markdowns or
commissions.

<TABLE>
<CAPTION>
1997 HIGH LOW
---- ----- ---
<S> <C> <C>
Fourth Quarter 18 3/4 12 1/8
Third Quarter 20 3/8 13 7/8
Second Quarter 14 3/4 8 3/4
First Quarter 11 3/4 8 3/4
<CAPTION>
1996 HIGH LOW
---- ----- ---
<S> <C> <C>
Fourth Quarter $11 1/4 $ 7
Third Quarter $19 3/8 $ 7 7/8
Second Quarter $24 5/8 $17 7/8
First Quarter $24 3/4 $14 1/4
</TABLE>

The closing sale price per share of Common Stock was $16.00 on
February 23, 1998, the last full day of trading prior to the public announcement
of the Merger Agreement and Purchaser's intention to commence the Tender Offer,
and $23.63 on February 27, 1998, the last full day of trading prior to the
commencement of the Tender Offer.

There were approximately 256 holders of record of the Common Stock
as of February 28, 1998. The Company has never declared or paid any cash
dividends on its capital stock. The Company currently intends to retain future
earnings to finance the growth and development of its business and, therefore,
does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company's bank line of credit prohibits the Company from paying
cash dividends without the bank's prior approval. See Note 11 of notes to
consolidated financial statements.

17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA

The following information should be read in conjunction with the
consolidated financial statements and related notes.

<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
Total revenues $82,519 $ 64,924 $ 55,011 $35,705 $21,328

Operating income (loss) 3,691 (10,240) (21,703) 9,772 5,603

Net income (loss) 4,284 (6,121) (14,302) 7,575 3,823

Net income (loss) per share (1)
Basic $ 0.30 $ (0.45) $ (1.13) $ 0.64 $ 0.58
Diluted $ 0.29 $ (0.45) $ (1.13) $ 0.58 $ 0.36

Weighted average common shares (1)
Basic 14,093 13,658 12,650 11,877 6,611
Diluted 14,570 13,658 12,650 13,131 10,695

Cash generated from operations $ 3,284 $ 358 $ 5,528 $ 8,825 $ 4,000

AS OF DECEMBER 31,
Cash and short-term investments $52,061 $ 52,170 $ 66,925 $58,482 $36,359

Working capital 63,107 55,544 71,393 59,532 37,274

Total assets 98,095 93,499 91,362 71,613 42,000

Stockholders' equity 86,455 78,606 81,841 65,749 39,433
</TABLE>

(1) See Note 2 of notes to consolidated financial statements for a
description of shares used in calculating net income (loss) per share.

18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Wonderware develops, manufactures, licenses, sells and supports
PC-based software products for the industrial automation market. The Company's
object-oriented software development tools enable customers to rapidly develop
personal computer applications that provide dynamic, graphical representations
of physical processes in a factory. These applications gather and display
information about an automated manufacturing process and can interact with and
control that process. Wonderware has offered industrial automation software
development tools since 1989 that feature ease-of-use and an intuitive operator
interface typical of Windows applications.

In April 1997, the Company introduced the Wonderware FactorySuite.
The FactorySuite bundles most of the development versions of the Company's
products into one package at a reduced price when compared to buying each of the
related products separately. Sales of the Company's InTouch development systems
are therefore being replaced by sales of the FactorySuite, which includes the
InTouch development environment.

On February 24, 1998, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") whereby Siebe plc, a company incorporated in
the United Kingdom ("Siebe"), will acquire the Company for $24 per share, or
approximately $375 million in cash. The closing of the Tender Offer is subject
to a majority of the shares being tendered and other customary conditions. If
the Tender Offer is successful, it will be followed as promptly as possible by a
Merger in which any remaining shares of the Company's stock will be converted
into the right to receive $24 per share in cash. In consideration with the
Merger, the Company has amended the Share Purchase Rights Plan to exempt the
Tender Offer and Merger from its application. (See Item 1 Risk Factors and Note
6 of notes to consolidated financial statements.)

RESULTS OF OPERATIONS 1995, 1996 AND 1997

The following table sets forth the percentage of total revenues
represented by certain consolidated statement of operations data for the periods
indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--- --- ---
<S> <C> <C> <C>
Revenue 100% 100% 100%
Cost of revenue 8% 7% 5%
--- --- ---
Gross profit 92% 93% 95%
Operating expenses:
Research and development 24% 29% 19%
Selling, general and administrative 61% 74% 53%
Restructuring and severance costs 3% 2%
Acquired in-process research and development costs 2% 60%
Legal settlement 2%
--- --- ---
Operating income (loss) 5% (15%) (39%)
Other income, net 3% 4% 5%
--- --- ---
Income (loss) before provision for income taxes 8% (11%) (34%)
Provision (benefit) for income taxes 2% (2%) (8%)
--- --- ---
Net income (loss) 6% (9%) (26%)
=== === ===
</TABLE>

REVENUE. The Company's revenue grew 18% in 1996 to $64.9 million and
27% in 1997 to $82.5 million. The sales increase in 1996 was primarily from
increased unit sales of the Wonderware InTouch product line and to a lesser
extent from increased sales of the Wonderware InTrack products and the
introduction of Wonderware InBatch. The increase in 1997 was primarily related
to the sales of FactorySuite and also to the acquisition of ICT-

19
<PAGE> 20
Wonderware GmbH (ICT-Wonderware), the Company's distributor in Germany. Revenues
subsequent to the close of the acquisition in mid-December 1996 reflect higher
unit sales prices because there is no longer a distributor markdown associated
with such sales.

Revenues from the Wonderware InTouch product line represented 90%,
85%, and 69% of the Company's total sales in 1995, 1996 and 1997, respectively.
The decreases as a percentage of total revenue are directly related to the
introduction of new products and in 1997 are primarily related to the
introduction of FactorySuite. In 1997, revenues from the Wonderware FactorySuite
represented 14% of total revenue. Also in 1997, the Company began entering into
enterprise license agreements. Revenues from such agreements totaled $3.4
million, or 4% of total revenues in 1997. Under an enterprise license agreement,
the customer pays a fixed license fee for unlimited copies of specified
components of the Wonderware FactorySuite and runtimes for the term of the
agreement. Under terms and conditions that are separate from the license fee,
the customer also pays annual maintenance charges.

International sales in 1995, 1996 and 1997 were $23.6 million, $27.0
million and $37.7 million, respectively and as a percentage of sales were 43%,
42% and 46%. Despite overall growth in international sales during 1996 the rate
of growth slowed relative to total sales. The decline in international sales
growth in 1996 was primarily due to the increased competitive pressures and a
general economic slowness in Europe. In 1997, international sales increased due
to FactorySuite and also due to the elimination of the distributor discount on
certain sales in Europe following the Company's acquisition of its German
distributor in December 1996.

GROSS PROFIT. As a percentage of total revenues the Company's gross
margin was 95% in 1995, 93% in 1996 and 92% in 1997. The decrease in 1996 was
primarily due to increased documentation included with new releases of the
Company's products. In 1997, the decrease was attributable to higher third party
royalty content in the FactorySuite and higher expenses due to the related
product introductions. These cost increases were partially offset by the
conversion of some product documentation to electronic format. The Company
expects gross margins to decrease slightly in the future as more third party
software is incorporated into its products.

RESEARCH AND DEVELOPMENT EXPENSES. Wonderware invested heavily in
research and development (R&D) primarily related to the FactorySuite and its
components. R&D expenses increased 77% in 1996 to $18.8 million and 5% in 1997
to $19.8 million. As a percentage of total revenue, R&D expenses were 19%, 29%
and 24% in 1995, 1996 and 1997, respectively. In 1996, approximately half of the
increase in cost is attributable to operating expenses of entities acquired
during the latter half of 1995. The remaining increase was primarily due to the
addition of development personnel associated with the Company's core product
line, as well as other products. In 1997, the increase in absolute spending was
primarily related to contract programmers and software translation, as well as
to depreciation on fixed assets purchased during 1996 in support of the
development effort. These increases were partially offset by decreases related
to the closure of the Company's development center in Cupertino, California in
February 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased 66% in 1996 to $48.4 million and 5% in
1997 to $50.6 million. As a percentage of total revenue, SG&A expenses were 53%,
74% and 61% in 1995, 1996 and 1997, respectively. In 1996, the increase in the
dollar amount of SG&A expenses was primarily due to the increased staffing in
field sales and marketing required to further penetrate current and new markets
for the Company's products; increased staffing in technical support to provide
service to the Company's new product lines; increased staffing and other costs
in administrative functions to support the overall growth of the Company; and
operating costs associated with the entities acquired in the second half of
1995. In 1997, the overall growth rate in expenses declined due to the decreased
sales and marketing costs resulting from the Company streamlining its operations
related to the product strategy from many individual products into the single
Wonderware FactorySuite.

RESTRUCTURING AND SEVERANCE COSTS. During the fourth quarter of
1995, the Company accrued severance costs totaling $1.3 million, including
compensation and benefits expense, incurred in conjunction with the resignation
of seven former executives of the Company. The accrued severance costs are being
paid in accordance with the terms of the severance agreements. At December 31,
1997, $92,000 was remaining in accrued liabilities in the accompanying
consolidated balance sheet.

20
<PAGE> 21
During the fourth quarter of 1996, the Company recorded a charge of
$2.4 million for restructuring costs associated with the closure of its
Cupertino, California, development center and the consolidation of its
Manufacturing Business Systems group into the Company's York, Pennsylvania,
development center. The charge primarily included accruals for severance and
real property lease termination costs. At December 31, 1997, $24,000 was
remaining in accrued liabilities in the accompanying consolidated balance sheet.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. As a result of
the acquisitions of EnaTec Software Systems, Inc. (EnaTec) and Soft Systems
Engineering, Inc. (SSE) in 1995 the Company incurred pre-tax charges of $33.1
million ($23.4 million net of taxes of $9.7 million) to reflect direct
transaction costs and the allocation of a portion of the purchase price to
in-process research and development costs based on management's estimates.

As a result of the acquisition of ICT-Wonderware in December 1996,
the Company incurred an after-tax charge of $1.3 million related to the
allocation of a portion of the purchase price to in-process research and
development costs acquired in the transaction based on management's estimates.

LEGAL SETTLEMENT. In August 1997, the Company entered an
out-of-court settlement agreement in the matter of Delivanis, et. al. vs.
Wonderware Corporation and all related cases. The settlement included mutual and
general releases of all claims by all parties and cash payments by the Company
to Messrs. Delivanis and Preysman. The settlement resulted in a charge to
earnings of $1.9 million, including attorneys' fees and related costs.

PROVISION (BENEFIT) FOR INCOME TAXES. The Company had an effective
tax rate of (24%) in 1995, (19%) in 1996 and 27% in 1997. The decrease in the
rate from 1995 to 1996, was due to an increase in the valuation allowance
recorded against the Company's deferred tax assets based on an evaluation of the
recoverability of such deferred tax assets, offset by the tax effect related to
the write-off of in-process research and development costs in 1995. The increase
in the rate from 1996 to 1997, was primarily due to non-deductible write-offs of
in-process research and development from the acquisition of ICT-Wonderware in
1996, offset by a decrease due to the utilization of operating loss and tax
credit carryforwards.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

Many software companies experience seasonal variations in revenues,
with lower domestic sales in the first quarter and soft European sales in the
third quarter. Although the significant growth in the Company's total revenues
over the past several years may have masked seasonal variations in the Company's
operating results, the Company believes that its results of operations are
subject to similar quarterly variations.

The Company has experienced significant fluctuations in its
quarterly operating results in the current year. The Company expects to
experience significant fluctuations in future quarterly operating results that
may be caused by many factors, including, among others: delays in introduction
of products or product enhancements by the Company, the Company's competitors or
other providers of hardware, software and components for the industrial
automation market; costs associated with product or technology acquisitions; the
size and timing of individual orders; software "bugs" or other product quality
problems; competition and pricing in the software industry; seasonality of
revenues; customer order deferrals in anticipation of new products; market
acceptance of new products; reductions in demand for existing products and
shortening of product life cycles as a result of new product introductions;
changes in distributors' ordering patterns; changes in operating expenses;
changes in Company strategy; personnel changes; foreign currency exchange rates;
regulatory requirements and political and economic instability in foreign
markets; mix of products sold; and general economic conditions. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance.

Because the Company ships software within a short period after
receipt of an order, the Company typically does not have a material backlog of
unfilled orders and revenues in any quarter are substantially dependent on
orders booked in that quarter. The Company's expense levels are based in part on
its expectations as to future revenues and the Company may be unable to adjust
spending in a timely manner to compensate for any revenue

21
<PAGE> 22
shortfall. Accordingly, operating results would be adversely affected by a
reduction in revenues in that quarter since the majority of the Company's
expenses are fixed. Any significant weakening in demand would have an almost
immediate adverse impact on the Company's operating results and on the Company's
ability to achieve profitability. Fluctuations in operating results may also
result in volatility in the price of the Company's common stock.

LIQUIDITY AND CAPITAL RESOURCES

The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations and its current cash
and short-term investment balances. The short-term investments consist of highly
rated, taxable, short-term securities selected to maximize the Company's
after-tax return on its excess funds at a relatively low risk level. At December
31, 1997, the Company's cash, cash equivalent and short-term investment balances
totaled $52.1 million.

During 1997, operating activities provided cash totaling $3.3
million primarily related to operating income, depreciation and amortization
expense, and a decrease in deferred taxes offset by increases in accounts
receivable and prepaid expenses and decreases in accounts payable and other
liabilities. During 1996, operating activities provided cash totaling $358,000
primarily related to depreciation and amortization expense, an increase in
accounts payable and the write-off of acquired in-process research and
development costs offset by operating losses and increases in deferred taxes,
other assets and inventory. During 1995, operating activities provided cash
totaling $5.5 million primarily related to operating income before acquired
in-process research and development costs, depreciation and amortization expense
and increases in accrued expenses, offset by increases in deferred taxes,
accounts receivable, and other assets. The net loss in 1995 resulted from the
write-off of acquired in-process research and development costs. As these were
non-cash transactions, the Company's liquidity was not impacted.

During 1997, the Company used cash in investing activities totaling
$10.3 million. Of this amount, $5.2 million was used to purchase property and
equipment, $2.3 million was invested in two distributors, Standard Automation
and Softcell (See Note 5 of notes to consolidated financial statements) and $2.8
million was used for net purchases of short-term investments. During 1996, the
Company generated cash from investing activities totaling $2.1 million. Net
proceeds from sales and maturities of short-term investments generated
approximately $18.4 million in cash. This was offset by $11.5 million used for
the purchase of property and equipment and $4.8 million used for the purchase of
the outstanding shares of ICT-Wonderware (See Note 13 of notes to consolidated
financial statements). During 1995, the Company used cash in investing
activities totaling $11.0 million. Of this amount, $4.8 million was used to
purchase property and equipment, $555,000 was used in acquisitions and $5.7
million was used for net purchases of short-term investments.

During 1997, the Company generated cash from financing activities of
$4.1 million, primarily from $2.1 million generated through the exercise of
stock options and sale of stock through the employee stock purchase plan, $1.7
million in realized tax benefits from the exercise of stock options, and
$306,000 from the net borrowings against the credit line of the German
subsidiary. During 1996, the Company generated cash from financing activities of
$1.4 million, primarily from $2.5 million generated through the exercise of
stock options and sale of stock through the employee stock purchase plan. This
was offset by net payments of approximately $1.0 million against the credit line
of the German subsidiary. During 1995, the Company generated cash from financing
activities of $8.0 million, including tax benefits from the exercise of stock
options totaling $6.0 million. The remaining cash was generated primarily
through the exercise of stock options and the sale of Common Stock through the
employee stock purchase plan.

The Company maintains an unsecured bank line of credit with a
domestic bank expiring in October 1998 that provides for borrowings up to $10
million at the bank's prime rate. This bank line of credit permits certain
affiliates to borrow directly up to $7.5 million under the line in aggregate,
provided that the Company guarantees such borrowings and that total borrowings
made by both the affiliates and the Company do not exceed $10 million. At
December 31, 1997 one affiliate had $1 million of outstanding borrowings, and
the Company had no borrowings outstanding under the line of credit. The line of
credit agreement contains restrictive covenants, the most significant of which
relate to profitability, minimum tangible net worth, debt to tangible net worth,
and current asset to current

22
<PAGE> 23
liability requirements. At December 31, 1997, the Company was in compliance with
such covenants. The line of credit agreement also prohibits the Company from
paying cash dividends without the bank's prior approval.

The Company's German subsidiary maintains a separate bank line of
credit in Germany which expires in February 1998. This line of credit provides
for maximum borrowings of 2.5 million Deutsch marks at the German bank's prime
rate. Approximately $547,000 (DM981,000) of borrowings against the German credit
line were outstanding as of December 31, 1997. Subsequent to December 31, 1997,
the amount outstanding under the German line of credit has been repaid. The
Company plans to renew these bank lines of credit at terms comparable to the
current agreements.

The Company's principal commitments as of December 31, 1997
consisted primarily of leases on its headquarters and other facilities, and
there were no material commitments for capital expenditures.

The Company believes that its cash and short-term investment
balances and availability under its bank lines of credit as of December 31,
1997, and cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements for at least the next twelve
months.

Outlook: Issues and Uncertainties

Although Wonderware does not provide forecasts of future financial
performance, this annual report does contain forward-looking statements that
involve risks and uncertainties. The Company's actual future results could
differ materially from those forward-looking statements. The issues and
uncertainties discussed below, together with those discussed in the Section of
this report captioned "Business - Risk Factors", should be considered in
evaluating the Company's growth outlook.

INTEGRATED SUITE PRICING. The price of the FactorySuite is less than
the sum of the prices for the individual components included in the suite when
such components are licensed separately. The discount available to customers
that purchase the Wonderware FactorySuite or who purchase under enterprise
license agreements could have a material adverse impact on the Company's future
revenues from its other products and on the Company's results of operations and
financial condition.

SALES PRODUCT MIX. The Company expects that its product mix will
continue to change in the future as new products, such as the Wonderware
FactorySuite, are introduced and gain market acceptance and that the share of
revenues contributed by the Wonderware InTouch line will decline as sales of
Wonderware InTouch development systems are replaced by sales of the Wonderware
FactorySuite. The Company expects that enterprise license agreements will
represent a greater percentage of total revenues in the future.

COMPETITION. The Company expects that some of its competitors, some
of whom have greater resources than the Company, will offer similar suites of
products. There can also be no assurance that the Wonderware FactorySuite will
gain further market acceptance.

GENERAL ECONOMIC CONDITIONS. Based in part on the growth in the
overall industrial automation software market and the Company's penetration of
that market, as well as the geographic and industry diversity of the Company's
customers, the Company believes that general economic conditions have not had a
material adverse effect on the Company's results of operations to date. There
can be no assurance, however, that economic conditions will not have a material
adverse effect on the Company in the future.

INTERNATIONAL OPERATIONS. The Company's international operations are
subject to various risks, including seasonality, regulatory requirements,
political and economic instability and trade restrictions. Although the
Company's sales have been typically made in US dollars, the Company's German
operation conducts its business in Deutsch marks. Therefore, a portion of the
Company's revenues are directly subject to the risk of currency fluctuations in
that market. In addition, a weakening in the value of foreign currencies
relative to the US dollar could have an adverse impact on the effective price of
the Company's products in other international markets. The

23
<PAGE> 24
Company expects that it will increasingly be required to transact in local
currencies in order to further its growth internationally and will become more
directly exposed to the risk of foreign currency fluctuations. In 1997, the
Company was not severely impacted by the economic slow down in Asian markets.
Approximately 9% of total revenues came from Asian operations in 1997 compared
to 10% in 1996. Management believes the Asian market to be a viable long-term
growth opportunity.

PRODUCT LIFE CYCLES. The life cycles of the Company's products are
difficult to estimate due in large measure to the recent emergence of some of
the Company's markets, the future effect of product enhancements and future
competition. Declines in demand for these products, whether as a result of
competition, technological change, price reductions or otherwise would have a
material adverse effect on the Company's operating results.

RESEARCH AND DEVELOPMENT. The Company believes that the introduction
of new technologies and products to the industrial automation market in a timely
manner is crucial to its success. As a consequence, the Company has increased
the amount of its expenditures on research and development. For the foreseeable
future, the Company anticipates that it will continue to increase spending in
absolute dollars on research and development for both the enhancement of current
products, the addition of new product capabilities and the integration efforts
associated with the Wonderware FactorySuite. Costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed. Because the Company believes that its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no internal software development
costs were capitalized as of December 31, 1997. Significant new products
developed in the future may require the capitalization of internal software
development expenses.

DEPENDENCE ON MICROSOFT WINDOWS. The Company's software development
tools are designed for use with personal computers running in the Microsoft
Windows operating environment, and future sales of the Company's products are
dependent upon continued use of Windows and Windows NT. In addition, changes to
Windows (such as the release of Windows 95 and anticipated release of Windows 98
later this year) or Windows NT require the Company to continually upgrade its
products. Any inability to produce upgrades or any material delay in doing so
would adversely affect the Company's operating results. The successful
introduction of new operating systems or improvements of existing operating
systems that compete with Windows or Windows NT also could adversely affect
sales of the Company's products and have a material adverse effect on the
Company's operating results.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES. The Company expects that
SG&A expenses will continue to increase in absolute dollars as it expands its
worldwide sales distribution and customer support network to penetrate new
markets for its production management products, as well as to increase worldwide
market penetration for its Wonderware FactorySuite product line.

PAY AND PARTICIPATION MODEL. Wonderware employees currently receive
salaries, incentive bonuses, other fringe benefits, and stock options. New
accounting rules and regulations, poor stock price performance or other factors
could diminish the value of the option program and force the Company into more
of a cash compensation model. Had the Company paid employees in cash the grant
date Black-Scholes value of options vested in 1995, 1996 and 1997, the pretax
expense would have been approximately $2.6 million, $3.1 million and $4.6
million, respectively.

LITIGATION. Litigation regarding intellectual property rights,
patents, and copyrights occurs in the software industry. In addition, there are
government regulation and investigation risks along with other general corporate
legal risks (See Item 3 Legal Proceedings, and Note 10 of notes to consolidated
financial statements).

YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements.

24
<PAGE> 25
Although the Company believes that its FactorySuite software programs released
and shipped after April 14, 1997 are Year 2000 compliant and substantially all
internal systems are Year 2000 compliant, the Company's customers may be
affected by Year 2000 issues as companies expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those sold by the Company. The Company does not provide any assurances
that software programs released prior to April 14, 1997 are Year 2000 compliant.
The Company is making inquiries of its vendors regarding whether the systems
upon which they rely are Year 2000 compliant and whether they anticipate any
impairment of their ability to deliver product and services as a result of Year
2000 issues.

NEW ACCOUNTING PRONOUNCEMENTS. For the fiscal years beginning after
December 15, 1997, the Company will adopt SFAS No. 130, Reporting Comprehensive
Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. In addition, the Company will adopt Statement of Position (SOP)
97-2, Software Revenue Recognition, which supersedes SOP 91-1. The Company is
reviewing the impact of such accounting pronouncements on its financial
statements.

Estimates of 1998 Performance

During the course of the discussions between the Company and Siebe
that led to the execution of the Merger Agreement, the Company provided Siebe
with certain information relating to the Company. This information included an
operating budget for the Company for 1998 developed by the Company predicated on
its assumptions for macroeconomic conditions, gross profits and operating
expenses. The Company's 1998 operating budget projected 1998 revenues of $100
million; operating income in a range between $15,099,000 and $17,899,000; net
income in a range between $11,615,000 and $13,463,000; and net income per share
of Common Stock in a range between $.78 and $.90 (based on weighted average
shares of 15,125,000). The foregoing information does not reflect consummation
of the Tender Offer or the Merger.

The foregoing information constitutes forward-looking statements
that involve risks and uncertainties, including, but not limited to, risks
associated with fluctuations in quarterly results, product introductions,
competition, rapid technological change, reliance on distribution channels,
international sales and other factors. These risks and uncertainties are
discussed in greater detail in this Report.

The Company does not as a matter of course make public any
projections as to future performance or earnings, and the estimates set forth
above are included in this report only because the information was made
available to Siebe by the Company and subsequently disclosed publicly by Siebe.
The projections were not prepared with a view to public disclosure or compliance
with the published guidelines of the Securities and Exchange Commission or the
guidelines established by the American Institute of Certified Public Accountants
regarding projections or forecasts. The Company's internal financial forecasts
are, in general, prepared solely for internal use and capital budgeting and
other management decision-making purposes and are subjective in many respects
and thus susceptible to various interpretations and periodic revision based on
actual experience and business developments. Projected information of this type
is based on estimates and assumptions that are inherently subject to significant
economic and competitive uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond the control of the Company.
Many of the assumptions upon which the information was based are dependent upon
economic forecasting (both general and specific to the Company's businesses),
which is inherently uncertain and subjective. The inclusion of the foregoing
information in this Report should not be regarded as an indication that the
Company considers it an accurate prediction of future events.

25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are filed as part of this Report:

PAGE

Independent Auditors' Report 27
Consolidated Balance Sheets as of December 31, 1997 and 1996 28
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 29
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 31
Notes to Consolidated Financial Statements 32

26
<PAGE> 27
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Wonderware Corporation
Irvine, California

We have audited the accompanying consolidated balance sheets of
Wonderware Corporation and its subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31,1997. Our audits also included the financial statement
schedule listed in the index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Wonderware
Corporation and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

January 26, 1998 (except for Note 15, as to which the date is February 24, 1998)

27
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,500 $ 26,488
Short-term investments 28,561 25,682
Accounts receivable, less allowance for doubtful accounts of
$1,447 and $1,132 at December 31, 1997 and 1996, respectively 16,834 12,187
Inventories 1,025 1,100
Deferred tax assets 1,450 2,184
Prepaid expenses and other current assets 3,377 2,796
-------- --------
Total current assets 74,747 70,437

Property and equipment, net 12,421 13,396
Investments 2,275
Goodwill, net 4,345 4,830
Noncurrent deferred tax assets 3,573 3,736
Other assets 734 1,100
-------- --------
Total assets $ 98,095 $ 93,499
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Bank line of credit $ 547 $ 289
Accounts payable 3,127 5,211
Accrued employee incentive compensation 909 978
Accrued commissions 71 310
Income taxes payable 112 80
Accrued payroll and related liabilities 2,370 2,845
Other accrued liabilities 3,050 3,538
Deferred revenue 1,454 1,642
-------- --------
Total current liabilities 11,640 14,893
Commitments (Note 10)
Stockholders' equity (Note 6):
Preferred stock, $.001 par value; 10,000 shares authorized; no
shares issued or outstanding as of December 31, 1997 and 1996
Common stock, $.001 par value; 50,000 shares authorized;
14,240 and 13,867 shares issued and outstanding
at December 31, 1997 and 1996 90,390 86,438
Unrealized gain (loss) on short-term investments 38 (15)
Accumulated translation loss (440)
Accumulated deficit (3,533) (7,817)
-------- --------
Total stockholders' equity 86,455 78,606
-------- --------
Total liabilities and stockholders' equity $ 98,095 $ 93,499
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

28
<PAGE> 29
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Revenue $82,519 $ 64,924 $ 55,011
Cost of revenue 6,536 4,298 2,581
------- -------- --------
Gross profit 75,983 60,626 52,430
Operating expenses:
Research and development 19,778 18,789 10,607
Selling, general and administrative 50,614 48,427 29,114
Restructuring and severance costs 2,350 1,320
Acquired in-process research and development costs 1,300 33,092
Legal settlement 1,900
------- -------- --------
Operating income (loss) 3,691 (10,240) (21,703)
Other income, net 2,202 2,714 2,815
------- -------- --------
Income (loss) before provision (benefit) for income taxes 5,893 (7,526) (18,888)
Provision (benefit) for income taxes 1,609 (1,405) (4,586)
------- -------- --------
Net income (loss) $ 4,284 $ (6,121) $(14,302)
======= ======== ========
Net income (loss) per share:
Basic $ 0.30 $ (0.45) $ (1.13)
Diluted $ 0.29 $ (0.45) $ (1.13)
Weighted average common shares:
Basic 14,093 13,658 12,650
Diluted 14,570 13,658 12,650
</TABLE>

See accompanying notes to consolidated financial statements.

29
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ACCUMULATED RETAINED TOTAL
COMMON STOCK SHORT-TERM TRANSLATION EARNINGS STOCKHOLDERS'
-------------------
SHARES AMOUNT INVESTMENTS LOSS (DEFICIT) EQUITY
------ -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 12,098 $ 53,215 $ (72) $ $ 12,606 $65,749

Common stock issued in acquisitions 571 21,261 21,261
Compensation costs related to stock option grants 283 283
Stock options exercised 528 1,621 1,621
Tax benefit related to exercise of stock options 5,994 5,994
Proceeds from sale of common stock 51 970 970
Unrealized gain on short-term investments 265 265
Net loss (14,302) (14,302)
------ -------- -------- ------- -------- -------
Balance, December 31, 1995 13,248 83,344 193 (1,696) 81,841

Compensation costs related to stock option grants 636 636
Stock options exercised 473 876 876
Proceeds from sale of common stock 146 1,582 1,582
Unrealized loss on short-term investments (208) (208)
Net loss (6,121) (6,121)
------ -------- -------- ------- -------- -------
Balance, December 31, 1996 13,867 86,438 (15) (7,817) 78,606

Compensation costs related to stock option grants 189 189
Stock options exercised 237 821 821
Tax benefit related to exercise of stock options 1,688 1,688
Proceeds from sale of common stock 136 1,254 1,254
Unrealized gain on short-term investments 53 53
Foreign currency translation loss (440) (440)
Net income 4,284 4,284
------ -------- -------- ------- -------- -------
Balance, December 31, 1997 14,240 $ 90,390 $ 38 $ (440) $ (3,533) $86,455
====== ======== ======== ======= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements

30
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,284 $ (6,121) $(14,302)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation & amortization 7,085 5,326 2,214
Provision for doubtful accounts 263 241 558
Deferred taxes 897 (1,814) (10,941)
Compensation costs related to stock options 189 636 283
Acquired in-process research and development costs 1,300 33,092
Changes in operating assets and liabilities
Net of effect of acquisitions:
Accounts receivable (5,447) (319) (5,637)
Inventories (2) (519) (82)
Prepaid expenses and other current assets (691) (598) (1,778)
Accounts payable (2,034) 1,541 315
Accrued employee incentive compensation (49) (7) 5
Accrued commissions (239) (140) 71
Income taxes payable 66 (354) 186
Accrued payroll and other accrued liabilities (851) 779 1,226
Deferred revenue (187) 407 318
-------- -------- --------
Net cash provided by operating activities 3,284 358 5,528
Cash flows from investing activities:
Purchases of property and equipment (5,221) (11,537) (4,787)
Investment in affiliates (2,275)
Cash paid for acquisitions, net of cash acquired (4,808) (555)
Purchases of short-term investments (32,500) (76,287) 67,856
Sales and maturities of short-term investments 29,674 94,685 (73,544)
-------- -------- --------
Net cash (used in) provided by investing activities (10,322) 2,053 (11,030)
Cash flows from financing activities:
Proceeds from exercise of stock options 821 876 1,622
Tax benefit related to exercise of stock options 1,688 5,994
Borrowings (payments) on bank line of credit 306 (1,018) (593)
Net proceeds from issuance of common stock 1,254 1,581 969
-------- -------- --------
Net cash provided by financing activities 4,069 1,439 7,992
Effect of exchange rate changes on cash (19)
-------- -------- --------
Net increase in cash and cash equivalents (2,988) 3,850 2,490
Cash and cash equivalents, beginning of period 26,488 22,638 20,148
-------- -------- --------
Cash and cash equivalents, end of period $ 23,500 $ 26,488 $ 22,638
======== ======== ========

Supplemental cash flow information:
Interest paid $ 76 $ 8 $ 2
Net income taxes paid (refunded) $ (1,212) $ 749 $ 216

Detail of business acquired in purchase business combinations:
Acquired in-process research and development costs $ 1,300 $ 33,092
Goodwill 4,850
Fair value of assets acquired (net of previous investment) 3,132 646
Common stock issued in acquisitions (21,260)
Cash paid for acquisitions, net of cash acquired (4,808) (555)
-------- --------
Liabilities assumed or created $ 4,474 $ 11,923
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1997, 1996 and 1995

1. NATURE OF OPERATIONS

Wonderware Corporation (the Company) is primarily engaged in the development and
marketing of PC-based software products for use in the worldwide industrial
automation market. Its customers include end users, system integrators and
original equipment manufacturers. The Company markets its products principally
through distributors and grants credit to customers in a wide range of
industries.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain
reclassifications have been made in prior years' consolidated financial
statements to conform to the current year's presentation.

CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid, short-term
investments purchased with an original maturity of three months or less to be
cash equivalents.

SHORT-TERM INVESTMENTS - The Company's short-term investments, consisting
entirely of highly rated, taxable debt securities, have been classified as
"available-for-sale" and, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, have been recorded at fair value as of December 31, 1997 and 1996.
Unrealized gains or losses on such investments as of December 31, 1997 and 1996
have been recorded as a separate component of stockholders' equity (see Note 3).

FAIR VALUE OF FINANCIAL INSTRUMENTS -SFAS No. 107, Disclosures About Fair Value
of Financial Instruments, requires management to disclose the estimated fair
value of certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as cash
or a contractual obligation that both conveys to one entity a right to receive
cash or other financial instruments from another entity, and imposes on the
other entity the obligation to deliver cash or other financial instruments to
the first entity. At December 31, 1997, the Company believes that the carrying
amounts of cash and cash equivalents, receivables, bank line of credit and trade
payables approximate fair value because of the short maturity of these financial
instruments.

INVENTORIES - Inventories, consisting primarily of software program storage
media, related user manuals, and packaging materials, are valued at the lower of
cost, determined on the first-in, first-out method, or market.

DEPRECIATION AND AMORTIZATION - Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives
of the related assets, ranging from three to five years. Leasehold improvements
are amortized using the straight-line method over the lesser of the economic
useful lives of the assets or the related lease term. Intangible assets,
including goodwill, are amortized over the estimated useful life of the asset.

GOODWILL - Goodwill is amortized over ten years on a straight-line basis. At
December 31, 1997, the Company believes there has been no impairment of the
value of goodwill.

OTHER ASSETS - Other assets include the cost of technology procured in the
acquisition of Soft Systems Engineering, Inc. (SSE) in 1995, technology acquired
from Professional Technology Management (PTM) in 1995, and the cost of
non-compete agreements executed with certain former shareholders of PTM. The
Company is amortizing these assets over an estimated useful life of three years.

SOFTWARE DEVELOPMENT COSTS - Costs incurred in the research and development of
new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been

32
<PAGE> 33
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the
Company believes that its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
internally generated software development costs have been capitalized as of
December 31, 1997 or 1996.

LONG-LIVED ASSETS - The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In accordance
with SFAS No. 121, long-lived assets to be held are reviewed for events or
changes in circumstances which indicate that their carrying value may not be
recoverable. At December 31, 1997, the Company believes there has been no
impairment of the value of such assets.

REVENUE RECOGNITION - Revenues from the licensing of computer software products
are recognized upon delivery of the products to customers in accordance with
Statement of Position (SOP) 91-1, Software Revenue Recognition, as there are no
significant vendor obligations remaining and collection of the related
receivable is probable. The Company accounts for insignificant vendor
obligations and post-contract support at the time of product delivery by
accruing such costs and recognizing them ratably on completion of performance.
The Company also offers its customers a 60-day right of return on sales (returns
over 30 days from shipment are subject to restocking charges) and records an
estimate of such returns at the time of product delivery based on historical
experience. Revenues related to version support contracts with customers are
deferred and amortized over the terms of the contracts, which range from six to
12 months.

INCOME TAXES - The provision for income taxes is determined in accordance with
SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities
arise from temporary differences between the tax bases of assets and liabilities
and their reported amounts in the consolidated financial statements that will
result in taxable or deductible amounts in future years.

TRANSLATION OF FOREIGN CURRENCIES - Assets and liabilities of foreign
operations, where the functional currency is the local currency, are translated
into U.S. dollars at the fiscal year end exchange rate. The related translation
adjustments are recorded as cumulative translation adjustments, a separate
component of stockholders' equity. Revenues and expenses are translated using
weighted average exchange rates during the period. Foreign currency transaction
gains and losses, as well as translation adjustments for assets and liabilities
of foreign operations where the functional currency is the dollar are included
in net income (loss). Foreign currency realized and unrealized net losses
included in net income for the year ended December 31, 1997 were $312,000 and is
included in net other income in the accompanying statements of operations.

NET INCOME (LOSS) PER SHARE - The Company has adopted SFAS No. 128, Earnings per
Share, which replaces the presentation of "primary" earnings per share with
"basic" earnings per share and the presentation of "fully diluted" earnings per
share with "diluted" earnings per share. All previously reported earnings per
share amounts have been restated based on the provisions of the new standard.
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share amounts are based upon the
weighted average number of common and common equivalent shares for each period
presented. Common equivalent shares include stock options assuming conversion
under the treasury stock method.

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS - For the fiscal years beginning after December
15, 1997, the Company will adopt SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. In addition, the Company will adopt SOP 97-2, Software Revenue
Recognition, which supersedes SOP 91-1. The Company is reviewing the impact of
such accounting pronouncements on its financial statements.

33
<PAGE> 34
3. SHORT-TERM INVESTMENTS

The Company's short-term investments as of December 31, 1997 and 1996 consist
almost entirely of debt securities issued by the United States or its agencies,
states of the United States and political subdivisions of the states and are
recorded at an aggregate fair value of $28,561,000 and $25,682,000,
respectively. The amortized cost basis of these investments was $28,060,000 at
December 31, 1997 and $25,697,000 at December 31, 1996. Net unrealized holding
gains of $38,000 at December 31, 1997 and net unrealized holding losses of
$15,000 at December 31, 1996 were included in stockholders' equity at the end of
each year.

During 1997, proceeds from the sale of short-term investments totaled
$29,674,000. Net realized losses from these sales were $29,000. During 1996,
proceeds from the sale of short-term investments totaled $94,685,000. Net
realized gains from these sales were $171,000. The cost of the investments sold
was determined through specific identification.

4. PROPERTY AND EQUIPMENT

The following table summarizes the components of property and equipment:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 3,760 $ 3,163
Data processing equipment 18,970 14,912
Furniture, fixtures and other equipment 4,982 4,515
-------- -------
27,712 22,590
Less: accumulated depreciation (15,291) (9,194)
-------- -------
Property and equipment, net $ 12,421 $13,396
======== =======
</TABLE>

5. INVESTMENTS IN AFFILIATES

In October 1997, the Company acquired minority interests in two of its
distributors for $2,275,000 including acquisition costs of $177,000. The Company
acquired a 19.9% interest in SoftCell, Inc., a North Carolina corporation, and a
19.9% interest in Standard Automation & Control LLC, a Texas limited liability
company. Each investment is recorded on the cost basis. In addition to the
investments, the Company is obligated to loan or guarantee loans up to
$1,500,000 to each distributor. The Company also obtained options to purchase
the remaining ownership interests in each distributor at a value based upon its
financial performance. The option with respect to SoftCell, Inc. is exercisable
by the Company at any time during the two years commencing October 21, 2000 and
is exercisable only for cash. The option with respect to Standard Automation &
Control LLC is exercisable by the Company at any time during the three years
commencing October 28, 1999 and is exercisable for cash or shares of the
Company's Common Stock, at the election of the Company.

6. STOCKHOLDERS' EQUITY

STOCK-BASED COMPENSATION PLANS - At December 31, 1997 the Company has two types
of stock-based compensation plans, which are described below. The Company
accounts for these plans in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations (APB 25). No compensation expense has been
recognized for its stock-based compensation plans other than for stock options
granted at below fair market value and for stock options granted in connection
with a guaranteed gain contract (See Note 8). Options were granted at below fair
market value to selected employees at various times from 1992 to 1995. The
compensation expense that has been charged against income for options granted at
below market rates was $189,000, $487,000 and $158,000 in 1997, 1996 and 1995,
respectively.

34
<PAGE> 35
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). As permitted by SFAS No.
123, the Company has chosen to continue to account for its stock-based
compensation plans under APB Opinion No. 25 and provide the expanded disclosures
specified in SFAS No. 123.

Had compensation cost been determined under all of the Company's plans using the
provisions of SFAS No. 123, the Company's net income (loss) and income (loss)
per share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $4,284 $(6,121) $(14,302)
Pro forma $ (330) $(9,213) $(16,043)

Income (loss) per share:
Basic: As reported $ 0.30 $ (0.45) $ (1.13)
Pro forma $(0.02) $ (0.67) $ (1.27)

Diluted: As reported $ 0.29 $ (0.45) $ (1.13)
Pro forma $(0.02) $ (0.67) $ (1.27)
</TABLE>

FIXED OPTION PLANS - The Company has five fixed option plans. The 1989 Plan
provides for granting incentive stock options or non-statutory stock options to
all employees, non-employee members of the Board of Directors (the Board) and
consultants who provide valuable services to the Company. The 1989 Plan allows
for the issuance of options covering 4,000,000 shares of Common Stock. The
option price per share may not be less than 100% of the fair market value of a
share of Common Stock on the grant date as determined by the Board for incentive
stock options and 85% of fair market value for non-statutory stock options. For
incentive stock options, the exercise price may not be less than 110% of the
fair market value of a share of Common Stock on the grant date for any
individual possessing 10% or more of the voting power of all classes of stock of
the Company. The timing of exercise for individual option grants is at the
discretion of the Board, and the options expire no later than ten years after
the grant date (five years in the case of incentive stock options granted to
individuals possessing 10% or more of the voting power of all classes of stock
of the Company).

On May 2, 1997, to restore incentives to employees under the level of Vice
President who hold options under the 1989 Plan, the Company revised the terms of
certain options held by these employees to purchase 623,000 shares of the
Company's Common Stock, such that the exercise price was reduced to $9.69, the
market price of the Common Stock as of that date.

The 1994 Non-Employee Directors' Stock Option Plan (the Directors' Plan) allows
for the issuance of options covering 200,000 shares of Common Stock. The
Directors' Plan provides for the granting of stock options to directors of the
Company who are not otherwise employed by the Company or any affiliate of the
Company. Option grants under the Directors' Plan are non-discretionary. Each
person who is elected a non-employee director of the Company after adoption of
the Directors' Plan is granted upon such election options to purchase 10,000
shares of Common Stock. These options vest 25% one year after the date of grant
and 6.25% for each full three-month period thereafter. In addition, on the date
of each annual meeting of stockholders, each non-employee director is granted
options to purchase 10,000 shares of Common Stock. Such options vest 25% one
year from the date of grant and 6.25% for each full three-month period
thereafter. The exercise price of all options granted under the Directors' Plan
shall be equal to 100% of the fair market value of the Company's Common Stock on
the date of grant. Unexercised options issued under the Directors' Plan expire
ten years from the date of grant.

In connection with the acquisition of EnaTec Software Systems, Inc. (EnaTec) in
July 1995, the Company assumed all outstanding options to purchase shares of
EnaTec stock in exchange for options to purchase 73,000 shares of Wonderware
Corporation Common Stock. Such options are outside of the 1989 Plan and are
incentive stock options which vest 25% one year following the date of grant,
with the remaining vesting occurring ratably over the

35
<PAGE> 36
following 36 months. Option grant dates range from February 1992 to May 1995.
There are currently no shares available under this plan for future option
grants.

In connection with the acquisition of certain assets of PTM in December 1995,
options to purchase 45,000 shares of Common Stock were issued to six of the
former shareholders of PTM at an exercise price of $3.00 per share. The options
vest one third on the date of grant and one third on each anniversary date
thereafter, contingent upon continued employment with the Company.

At December 31, 1997 and 1996, 2,566,000 and 2,803,000 shares, respectively, of
the Company's Common Stock were reserved for future exercise of stock options.

For purposes of estimating the compensation cost of the Company's option grants
in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in the years 1997, 1996 and 1995,
respectively: weighted average expected volatility of 53.7%, 52.8% and 57.4%;
weighted average risk-free interest rates of 6.1%, 5.8% and 6.2%; and weighted
average expected lives of the Company's option grants 2.5, 3.4 and 3.3 years.

A summary of the status of the Company's fixed option plans as of December 31 is
presented below:

<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
WEIGHTED AVG WEIGHTED AVG WEIGHTED AVG
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,725 $11.50 1,868 $14.27 1,757 $ 5.45
Granted at fair market value 1,376 $10.15 1,155 $14.55 574 $31.85
Granted at less than fair market value
45 $ 3.00 140 $22.69
Exercises (238) $ 3.47 (473) $ 1.89 (528) $ 3.01
Canceled (984) $15.32 (870) $24.06 (75) $20.24
------ ------- ------
Balance, end of year 1,879 $ 9.49 1,725 $11.50 1,868 $14.27
====== ======= ======

Options exercisable at year-end 346 510 725

Weighted average fair value of options
granted during year $10.15 $ 6.36 $14.42
</TABLE>

36
<PAGE> 37
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
RANGE OF WEIGHTED AVG
EXERCISE NUMBER REMAINING WEIGHTED AVG NUMBER WEIGHTED AVG
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.01 -- $8.82 471 6.9 $ 5.63 182 $ 1.12
$8.88 -- $9.57 247 9.1 $ 9.33 1 $ 9.13
$9.69 512 7.9 $ 9.69 97 $ 9.69
$9.75 427 8.8 $ 9.75
$12.25 -- $31.00 222 9.3 $16.84 66 $18.80
----- ---
1,879 8.2 $ 9.49 346 $ 6.89
===== ===
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN - In May 1993, the Company adopted the Employee
Stock Purchase Plan (the Purchase Plan) covering an aggregate of 300,000 shares
of Common Stock. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
Under the Purchase Plan, the Board may authorize participation by eligible
employees, including officers, in periodic six-month offerings following the
commencement of the Purchase Plan. The current offering under the Purchase Plan
commenced on August 16, 1997 and will terminate on February 15, 1998. Employees
are eligible to participate in the Purchase Plan if they are employed by the
Company or a subsidiary of the Company designated by the Board for at least 20
hours per week and are customarily employed by the Company or a subsidiary of
the Company designated by the Board for at least five months per calendar year.
Participating employees may elect to have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of Common Stock on specified dates determined by the Board. The price of
Common Stock purchased under the Purchase Plan is equal to 85% of the lower of
the fair market value of the Common Stock at the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period and
participation ends automatically on termination of employment with the Company.

In the event of a merger, reorganization, consolidation or liquidation involving
the Company, the Board has discretion to provide that each right to purchase
Common Stock will be assumed or an equivalent right substituted by the successor
corporation, or the Board may shorten the offering period and provide for all
sums collected by payroll deductions to be applied to purchase stock immediately
prior to such merger or other transaction. The Purchase Plan will terminate in
May 2003. The Board has the authority to amend or terminate the Purchase Plan,
provided, however, that no such action may adversely affect any outstanding
rights to purchase Common Stock.

At December 31, 1997, $652,000 had been withheld from employee earnings for
stock purchases under the Purchase Plan. The Company issued 136,000 shares of
Common Stock in 1997 in connection with the semi-annual offerings under the
Purchase Plan and raised net proceeds of approximately $1,254,000.

For purposes of estimating the compensation cost of employees' purchase rights
under the Purchase Plan in accordance with SFAS No. 123, the fair value of the
purchase rights has been estimated using the Black-Scholes model with the
following assumptions used for 1997, 1996 and 1995, respectively: weighted
average volatility of 59.8%, 71.5% and 63.0%; weighted average risk-free
interest rates of 5.6%, 5.4% and 6.5%; and weighted average expected lives of
six months. The weighted-average fair value of those purchase rights granted in
1997, 1996 and 1995 was $4.03, $5.72 and $9.31, respectively.

SHARE PURCHASE RIGHTS PLAN - In February 1996, the Company adopted a Share
Purchase Rights Plan (the Rights Plan) designed to protect the Company's
stockholders should the Company become the target of coercive and unfair
takeover tactics. Upon adoption of the Rights Plan, the Company declared a
dividend distribution of preferred stock purchase rights at the rate of one
right for each share of Common Stock outstanding on February 29, 1996. A right

37
<PAGE> 38
entitles the holder, upon occurrence of certain events, to purchase one-one
hundredth of a share of Series A Junior Preferred Stock at a purchase price of
$90, subject to adjustment. The rights, however, will not become exercisable
unless and until, among other things, any person or group acquires 15% or more
of the outstanding Common Stock of the Company or any person or group announces
its intent to launch a tender offer to acquire 15% or more of the Company. Upon
the occurrence of either of these events, the rights (other than those held by
any defined acquirer) will become exercisable for Common Stock of the Company
having a market value of twice the exercise price of a right. Furthermore, if
the Company is involved in a merger or other business combination or sale of a
specified percentage of assets or earnings power, the rights (other than those
held by any defined acquirer) may be used to purchase, for the exercise price,
that number of shares of the acquirer's common stock having a market value of
twice the exercise price of a right. The rights are redeemable under certain
circumstances at $.001 per right and, unless redeemed earlier, expire on
February 15, 2006. (See Note 15.)

7. INTERNATIONAL REVENUE AND CUSTOMER CONCENTRATIONS

Revenue from customers located in Europe was $26,013,000, $17,146,000 and
$17,585,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. Revenue from customers in other international geographic locations
was $11,705,000, $9,826,000 and $5,982,000 during the years ended December 31,
1997, 1996 and 1995, respectively. The Company expects that international sales
will continue to represent a significant percentage of its total revenues.

The Company's revenue has historically been concentrated in a small number of
distributors. During the years ended December 31, 1997, 1996 and 1995, sales to
five distributors totaled 23%, 24% and 31%, respectively. The loss of, or
reduction in, sales to any such distributor could have a material adverse effect
on the Company's operating results and financial condition.

8. TRANSACTIONS WITH RELATED PARTIES

CHIEF EXECUTIVE OFFICER - The Company has entered into an agreement with its
President and Chief Executive Officer, who commenced service in July 1995. Under
the terms of the agreement, options to purchase 200,000 shares of the Company's
Common Stock under the 1989 Plan were granted to the officer at an exercise
price of $37.75, the market price of the Common Stock as of July 31, 1995 (the
"1995 Grant"). Such options originally vested at the rate of 24% one year from
the date of grant and 2% per month thereafter. Following the appointment of the
President and Chief Executive Officer, options to purchase 100,000 shares of the
Company's Common Stock under the 1989 Plan were granted at an exercise price of
$15.25, the market price of the Common Stock as of January 26, 1996 (the "1996
Grant"). On August 31, 1996, the terms of the 1995 Grant and the 1996 Grant were
revised such that the exercise price was reduced to $9.75 (the market price of
the Common Stock on August 30, 1996) and the vesting schedule was revised so
that 50% of the options vest two years from August 31, 1996 and 25% per year
thereafter. In addition, the Company has guaranteed the officer will achieve a
minimum gain of $1,250,000 (the "guaranteed amount") related to the options. The
guaranteed amount is reduced by the maximum total gain achieved by vested
options during the vesting period. At the end of the vesting period, any
remaining guaranteed amount would be due and payable. The compensation expense
that has been recognized in connection with the guaranteed amount was $149,000
and $126,000 in 1996 and 1995, respectively. A credit is recorded to additional
paid-in capital to reflect the stock option compensation expense amounts
recognized. In 1997, no compensation expense related to the guaranteed amount
was recognized due to the effect of the repricing and changes to the vesting
schedule on August 31, 1996. The income tax effect of any difference between the
market price of the Company's Common Stock at the grant date and the market
price at the exercise date is credited to additional paid-in capital.

Also under the terms of the agreement, the officer received a $200,000 loan to
assist in the relocation of his primary residence to Orange County, California.
In December 1995, the loan was forgiven and the officer received additional
funds to cover the effect of payroll taxes on the forgiveness. The total cost to
the Company of $400,000 was charged to compensation expense in 1995.

38
<PAGE> 39
SEVERANCE PROTECTION AGREEMENTS - In October 1997, the Compensation Committee of
the Board of Directors revised severance protection arrangements covering all
officers of the Company. Under the revised arrangements covering the Chief
Executive Officer of the Company, he will receive 2.99 times his average annual
compensation over the last three years if either he is terminated other than
with cause, or a change of control of the Company occurs and he decides not to
continue his employment with the Company. The revised arrangements covering
officers other than the Chief Executive Officer have essentially the same terms
as the agreement with the Chief Executive Officer except that the payment will
be 2.0 times his or her average annual compensation. Under all of the severance
arrangements, in the event of a change of control of the Company, all unvested
stock options held by the officers shall immediately vest and become
exercisable.

OWNERSHIP INTEREST IN DISTRIBUTORS - During 1996, the Company purchased the
remaining 85% interest in ICT-Wonderware GmbH which it did not already own (See
Note 13). ICT-Wonderware GmbH is the principal distributor of Wonderware's
products in Germany. Revenues derived from ICT-Wonderware GmbH for the years
ended December 31, 1996 and 1995 amounted to 3.8% and 12.2% of total revenues,
respectively.

In October 1997, the Company acquired minority interests in two of its domestic
distributors, SoftCell, Inc. and Standard Automation & Control LLC (See Note 5).
Revenues derived from these two distributors in 1997 amounted to 4.1% and 5.6%
of total revenues, respectively.

9. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------
<S> <C> <C> <C>
Current:

Federal $ 270 $ 701 $ 4,792
State 536 485 1,563
Foreign (193) 353
-------------------------------------
613 1,539 6,355
Deferred:
Federal 979 (2,027) (8,501)
State 17 (917) (2,440)
-------------------------------------
996 (2,944) (10,941)
-------------------------------------
$ 1,609 $ (1,405) $ (4,586)
=====================================
</TABLE>

A reconciliation of the statutory federal tax rate to the Company's effective
tax rate is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
---------------------------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate 35% (35%) (35%)
State tax (benefit) net of federal effect 6% (4%) (3%)
Change in deferred tax valuation allowance (17%) 29%
Acquired in-process research and development costs 18%
Nontaxable interest income (10%) (4%)
Other 3% 1%
-- --- ---
27% (19%) (24%)
== === ===
</TABLE>

39
<PAGE> 40
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The significant portions of the Company's net deferred tax asset of
$5,023,000 and $5,920,000 at December 31, 1997 and 1996, respectively, are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(in thousands) 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Allowance for doubtful accounts $ 603 $ 478
Vacation accrual 340 451
Restructuring reserve 866
State income tax (524) (562)
Other reserves and allowances 766 678
NOL carryforwards 2,327 3,431
Credit carryforwards 3,071 2,715
Depreciation and amortization 273 1,011
Other 543 337
---------------------
7,399 9,405
Valuation allowance (2,376) (3,485)
---------------------
$ 5,023 $ 5,920
=====================
</TABLE>

Based on the Company's assessment of future realizability of certain deferred
tax assets, a valuation allowance has been provided, primarily related to
acquired net operating loss carryforwards and credit carryforwards, as it is
more likely than not that sufficient taxable income will not be generated to
realize these temporary differences. Additionally, at December 31, 1997 and
1996, approximately $1,002,000 and $1,131,000 of the valuation allowance was
attributable to the potential tax benefit of stock option transactions, which
will be credited directly to stockholders' equity if realized.

At December 31, 1997, the Company had federal net operating loss carryforwards
of approximately $5,967,000 and federal research credit carryforwards of
approximately $1,356,000, both of which are subject to various limitations and
expire at various dates through 2012. The Company also has an alternative
minimum tax carryforward of approximately $996,000, which has no expiration
date.

As of December 31, 1997 and 1996, the Company believes that its net deferred tax
assets, after valuation allowance, will be recoverable out of future taxable
income.

40
<PAGE> 41
10. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS - The Company leases its office facilities under
non-cancelable operating leases that expire at various dates through 2002.
Future minimum rental payments under non-cancelable operating leases as of
December 31, 1997 are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (in thousands)
- -----------------------------------------------
<S> <C>
1998 $1,970
1999 1,521
2000 1,312
2001 945
2002 166
------
$5,914
======
</TABLE>

Rent expense for all operating leases totaled $2,600,000, $2,050,000, and
$997,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

EMPLOYMENT AGREEMENTS - The Company has executed employment agreements with
certain former shareholders of PTM. The aggregate potential termination expense
under these agreements was $1,100,000 at December 31, 1997.

LEGAL PROCEEDINGS - In August 1997, all matters in the various proceedings
involving Constantin S. Delivanis, Vladimir Preysman, Delivanis-Kibrick Family
Trust and the Company were finally concluded in an out-of-court settlement
binding all parties. The settlement includes mutual and general releases of all
claims by all parties and cash payments by the Company to Messrs. Delivanis and
Preysman. The settlement resulted in a one-time charge to earnings of $1,900,000
including attorneys' fees and related costs.

In 1995, The Foxboro Company ("Foxboro") initiated litigation against SSE to
delay the acquisition of SSE by the Company and subsequently amended its
complaint to assert additional claims with respect to Foxboro's ownership
interest in certain software developed by SSE, which interest is subject to a
repurchase right in favor of SSE. Following the completion of the acquisition of
SSE by the Company, Foxboro withdrew its initial claims related directly to the
acquisition. SSE has tendered payment to Foxboro for the repurchase of Foxboro's
asserted ownership interest in the subject software, which Foxboro has rejected.
In 1996, SSE filed its answer and counterclaim to Foxboro's amended complaint,
seeking damages based upon SSE's allegation that Foxboro breached its
contractual obligation to sell its interest in the subject software. In January
1997, the parties negotiated an agreement for the mutual dismissal, without
prejudice, of the claims asserted in the litigation, and the case has been
dismissed without prejudice.

In October 1996, the Company filed a complaint in the U.S. District Court for
the Central District of California against Cyberlogic Technologies, Inc.
("Cyberlogic") and Intellution, Inc. ("Intellution"). The complaint alleges that
Cyberlogic and Intellution have infringed the copyright of particular software
programs which Cyberlogic originally developed under contract for the Company,
and seeks preliminary and permanent injunctive relief as well as actual and
punitive damages and attorneys fees. In October 1996, the Court issued a
temporary restraining order against Cyberlogic and Intellution, and pursuant to
the Court's order, U.S. Marshals seized and copied certain materials at the
offices of Cyberlogic and Intellution. In January 1997, the Court entered its
preliminary injunction which generally bars Cyberlogic and Intellution from
marketing or otherwise distributing any infringing copies of the computer
software at issue in the proceeding. In February 1997, Intellution filed its
appeal of the preliminary injunction to the U.S. Court of Appeals for the Ninth
Circuit, and the Court denied the defendants' requests to stay the injunction
pending appeal. Cyberlogic also appealed the injunction. In September 1997, the
Court of Appeals affirmed the preliminary injunction.

41
<PAGE> 42
In December 1996, Cyberlogic submitted a demand for arbitration of the
underlying contractual issues involved in these proceedings. The U.S. District
Court for the Central District of California has ordered the case to arbitration
in Michigan before the American Arbitration Association. Dates for hearing the
arbitration and other related events have not yet been set. The Company intends
to vigorously prosecute its claims in the arbitration. It is too early to
determine the impact, if any, of these proceedings on the Company, its financial
condition or the results of the Company's operations.

In January 1997, the Company received a copy of a complaint which Cyberlogic
filed in the U.S. District Court for the Eastern District of Michigan. Among
other claims, this complaint purports to claim damages in excess of $40 million
and injunctive relief for the Company's alleged infringement of certain software
programs which Cyberlogic contends it owns. The Company believes the allegations
in Cyberlogic's complaint to be without merit and intends to vigorously defend
itself against these claims. Further, the Company believes that these claims
arise out of or relate to the proceeding pending in the U.S. District Court of
the Central District of California and the anticipated arbitration proceeding,
and the Company has moved the U.S. District Court for the Eastern District of
Michigan to compel arbitration of that action. The Court has taken the Company's
motion under submission. It is too early to determine the impact, if any, of
this proceeding on the Company, its financial condition or the results of the
Company's operations.

In December 1996, the Company received a copy of a complaint that had been filed
in the U.S. District Court for the Eastern District of Pennsylvania by Otto M.
Voit, III. In the complaint, Mr. Voit purports to be acting on behalf of all
former holders of common stock, or options to acquire common stock, of Soft
Systems Engineering, Inc. ("SSE"). Mr. Voit alleges in the complaint that the
Company and certain of its officers made false and misleading statements and
concealed material information in connection with the Company's acquisition of
SSE. In the complaint, Mr. Voit claims that these alleged misrepresentations and
omissions constitute violations of various federal and state securities laws,
fraud, negligence and inducement to enter into a contract by material
misrepresentation, and he requests relief in the form of compensatory and
punitive damages as well as the costs incurred in pursuing his claims. In
January 1997, the Company filed a motion to dismiss the complaint on several
grounds. In September 1997, the court denied the Company's motion to dismiss. In
October 1997, Mr. Voit filed a motion seeking certification of the action as a
class action. The Company has opposed certification of the action as a class
action; and, as of January 26, 1998, the Court has not ruled on the motion. The
Company believes the allegations in the complaint to be without merit and
intends to vigorously defend itself and the other defendants, each of whom has
been previously indemnified by the Company in connection with his employment as
an officer of the Company, against the claims stated in the complaint. It is too
early to determine the impact, if any, of this proceeding on the Company, its
financial condition or the results of the Company's operations.

In June 1997, the Company received a copy of a complaint (the "TES Complaint")
filed in Massachusetts Superior Court in Worcester County by Flagship
Automation, a division of EMX Controls, Inc., and Total Enterprises Solutions,
Inc. (collectively, "TES"). The TES Complaint alleges that the Company breached
its contract with TES, breached an implied covenant of good faith, wrongfully
terminated TES' distributorship relationship, committed fraud, misappropriated
trade secrets, intentionally interfered with TES' contractual and advantageous
relationships and committed unfair and deceptive acts or practices under Chapter
93A of the Massachusetts General Laws. The TES Complaint seeks monetary damages.
The copy of the TES Complaint was initially forwarded to the Company by the
President of TES, who indicated in his cover letter a willingness to seek an
alternative resolution of the matter. In July 1997, the Company obtained removal
of the TES complaint to the U.S. District Court for the District of
Massachusetts. The TES Complaint was served in October 1997, and TES has granted
the Company an extension to answer until March 1998. The Company believes that
the allegations in the TES Complaint are without merit and intends to vigorously
defend itself against the claims stated in the TES Complaint. It is too early to
determine the impact, if any, of the TES Complaint on the Company, its financial
condition or the results of the Company's operations.

11. LINES OF CREDIT

The Company has an unsecured line of credit arrangement with a domestic bank
expiring in October 1998 that provides for borrowings of up to $10,000,000 at
the bank's prime rate. This bank line of credit permits certain

42
<PAGE> 43
affiliates to borrow directly up to $7,500,000 under the line in aggregate,
provided that the Company guarantees such borrowings and that total borrowings
made by both the affiliates and the Company do not exceed $10,000,000. At
December 31, 1997 one affiliate had $1,012,000 of outstanding borrowings, and
the Company had no borrowings outstanding under the line of credit.

The Company's German subsidiary has an unsecured, revolving line of credit with
a German bank that provides for borrowings of up to DM 2,500,000 expiring in
February 1998. Outstanding loans under this line of credit bear interest at the
bank's prime rate. As of December 31, 1997, $547,000 (DM 981,000) was
outstanding under this line of credit. The Company has provided a guarantee of
payment to the bank in the event of default by the subsidiary. Subsequent to
December 31, 1997, the amount outstanding under the German line of credit has
been repaid.

12. EMPLOYEE BENEFIT PLANS

INCENTIVE COMPENSATION PROGRAM - Beginning in January 1996, the Company
instituted a discretionary, performance-based incentive compensation program
that provides additional compensation in the form of an annual bonus for certain
eligible employees. Bonus payments are based, in part, on the overall financial
performance of the Company and individual performance of the employee. Total
incentive compensation expense recognized during 1997 and 1996 under this
program was $870,000 and $784,000, respectively.

Prior to 1996, the Company had a discretionary incentive compensation program
that provided additional compensation in the form of a quarterly bonus for
certain eligible employees and a semi-annual profit bonus for all employees as
determined by formulas in the program. Total incentive compensation expense
recognized under this program amounted to $1,618,000 for the year ended December
31, 1995.

EMPLOYEE SAVINGS PLAN - The Company has a defined contribution retirement
savings plan (the 401(k) Plan) covering substantially all full-time employees.
Each pay period the Company matches 25% of the first 4% of compensation
contributed by each employee. The Company's matching contribution to the 401(k)
Plan was $173,000, $149,000 and $54,000 in 1997, 1996 and 1995, respectively.
Annually, the Company may make a discretionary contribution to the 401(k) Plan
as determined by the Board of Directors. No such discretionary contribution was
made for the years ended December 31, 1997, 1996 or 1995.

13. ACQUISITIONS

In December 1996, the Company purchased all outstanding shares of ICT-Wonderware
GmbH not already owned by the Company. ICT-Wonderware GmbH was the distributor
of the Company's products in Germany. Under the terms of the acquisition
agreement, the Company paid $4,850,000 in cash for all of the outstanding voting
stock of ICT-Wonderware GmbH other than shares held by the Company. The total
value of the transaction was $6,150,000, which included the Company's 1994
investment in ICT-Wonderware GmbH of $800,000, and was accounted for under the
purchase method of accounting. Accordingly, the Company's total investment in
ICT-Wonderware GmbH was allocated to the assets acquired, including in-process
research and development, and liabilities assumed based on the estimated fair
value of such assets and liabilities. The purchase price allocated to in-process
research and development was charged to the Company's operations, resulting in a
non-recurring charge of $1,300,000. Approximately $4,850,000 of the total
purchase price has been allocated to goodwill and is being amortized over ten
years from the acquisition date on a straight-line basis.

In July 1995, the Company merged with EnaTec by issuing 399,000 shares of its
Common Stock in exchange for all of the outstanding voting stock of EnaTec,
other than shares held by the Company. In addition, the Company assumed all
outstanding options to purchase EnaTec common stock, which resulted in the
reservation of 73,000 shares of Common Stock for issuance upon exercise of the
assumed options. The transaction was valued at approximately $23,900,000 and was
accounted for as a purchase. The purchase price was allocated to the assets
acquired, including in-process research and development, and liabilities assumed
based on the estimated fair value. The purchase price allocated to in-process
research and development was charged to the Company's operations, resulting in a
non-recurring charge of $23,900,000.

43
<PAGE> 44
In August 1995, the Company merged with SSE by issuing 173,000 shares of its
Common Stock in exchange for all of the outstanding common stock of SSE. The
transaction was valued at approximately $9,764,000 and was accounted for as a
purchase. The purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair value. The purchase price
allocation included a $572,000 allocation to developed technology and an
allocation to in-process research and development that was charged to the
Company's operations, resulting in a non-recurring charge of $9,192,000.

The accompanying consolidated statements of operations include the results of
operations of ICT-Wonderware GmbH, EnaTec and SSE from their respective
acquisition dates. The following unaudited pro forma information presents
results of operations of the Company for the year ended December 31, 1996 as if
the ICT-Wonderware GmbH acquisition had been consummated as of the beginning of
1996. The pro forma information is presented for information purposes only. It
is based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the combined enterprise.

<TABLE>
<CAPTION>
YEAR ENDED
(in thousands, except per share data) DECEMBER 31, 1996
- ----------------------------------------------------------
<S> <C>
Total revenues $ 72,602

Net income (loss) $ (3,434)

Earnings (loss) per share:
Basic $ (0.25)
Diluted $ (0.25)
</TABLE>

In December 1995, the Company acquired certain assets of PTM for $500,000. In
addition, the Company hired six of the former shareholders of PTM, executing
employment and non-competition agreements with each. Pursuant to such employment
agreements, the former PTM shareholders received options to purchase 45,000
shares of common stock at an exercise price of $3.00 per share. The options vest
over a period of three years, contingent on continued employment with the
Company, and resulted in compensation expense equal to the difference between
the option exercise price and the market price of the Company's common stock on
the date of grant. Non-competition payments in the aggregate amount of $330,000
were paid to the former PTM shareholders in February 1996.

14. RESTRUCTURING AND SEVERANCE COSTS

During the fourth quarter of 1996, the Company recorded a charge of $2,350,000
for restructuring costs associated with the closure of its Cupertino,
California, development center and the consolidation of its Manufacturing
Business Systems group into the Company's York, Pennsylvania, development
center. The charge primarily included accruals for severance and real property
lease termination costs. At December 31, 1997, $24,000 is remaining in accrued
liabilities in the accompanying consolidated balance sheet.

During the fourth quarter of 1995, the Company accrued severance costs,
including compensation and benefits expense, incurred in conjunction with the
resignation of seven former executives of the Company. The accrued severance
costs are being paid in accordance with the terms of the severance agreements.
At December 31, 1997, $92,000 is remaining in accrued liabilities in the
accompanying consolidated balance sheet.

44
<PAGE> 45

15. SUBSEQUENT EVENT

On February 24, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") whereby Siebe plc, a company incorporated in the United
Kingdom ("Siebe"), will acquire the Company for $24 per share, or approximately
$375 million in cash. The closing of the Tender Offer is subject to a majority
of the shares being tendered and other customary conditions. If the Tender Offer
is successful, it will be followed as promptly as possible by a Merger in which
any remaining shares of the Company's stock will be converted into the right to
receive $24 per share in cash. In consideration with the Merger, the Company has
amended the Share Purchase Rights Plan to exempt the Tender Offer and Merger
from its application. (See Note 6.)

45
<PAGE> 46
PART III

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

Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Executive Officers of the Company.

The information required by Item 10 with respect to executive
officers of the Company is furnished in a separate item captioned "Executive
Officers" and included in Part I of this Annual Report on Form 10-K.

(b) Directors of the Company.

The following provides information regarding all members of the
Board of Directors, including each persons age as of February 28, 1998. Titles
are as officers of the Company unless otherwise indicated.

NAME AGE PRINCIPAL OCCUPATION
- ------------------ --- ---------------------------------------------
Roy H. Slavin 52 Chairman of the Board of Directors, President
and Chief Executive Officer of the Company

F. Rigdon Currie 67 Special Limited Partner, MK Global Ventures

Harvard H. Hill, Jr. 61 General Partner, Houston Venture Partners, Ltd.

Jay L. Kear 60 Independent management consultant

John E. Rehfeld 57 President and Chief Executive Officer of
ProShot, Inc.

Kenneth M. Smith 48 Chairman and Chief Executive Officer of
International Management & Development
Group, Ltd.

Mr. Slavin became a director of the Company in July 1995. He
currently is Chairman of the Board, President and Chief Executive Officer of the
Company. From October 1993 to June 1995, he was President and Chief Executive
Officer of Siemens Industrial Automations, Inc., a manufacturer of industrial
automation components and systems. From January 1986 to September 1993, he was
President and Chief Executive Officer of Potter & Brumfield Inc. (A Siemens
Company), a manufacturer of electronic components.

Mr. Currie became a director of the Company in September 1989. He
was a General Partner of Pacific Venture Partners, a venture capital investment
firm, from July 1983 to December 1995 and has been a Special Limited Partner of
MK Global Ventures, also a venture capital investment firm, since February 1988.
He currently serves on the Board of Directors of Document Technologies, Inc.,
Document Imaging Systems Corp., QMS, Inc. and several privately held companies.

Mr. Hill became a director of the Company in September 1989. He has
been a General Partner of Houston Venture Partners, Ltd., a venture capital
investment firm, since 1986 and is also the Managing General Partner of Houston
Partners, which is the General Partner of Private Equity Investments, an
investment firm. He currently serves on the Board of Directors of Raymond James
Financial, Inc., and several privately held companies.

Mr. Kear became a director of the Company in September 1989. Since
February 1993, he has been an independent management consultant specializing in
advising high technology companies. From February 1989 to

46
<PAGE> 47
January 1993, Mr. Kear was employed by the Noorda Family Trust to assist in the
management of its investment portfolio. Mr. Kear currently serves on the Board
of Directors of Javelin Systems.

Mr. Rehfeld became a director of the Company in April 1992. He
currently is President and Chief Executive Officer of ProShot, Inc. a golf
course GPS equipment supplier. He was President and Chief Executive Officer and
a director of Proxima Corporation, a supplier of desktop multimedia computer
projection systems, from February 1996 to April, 1997.. From April 1993 to
February 1996, Mr. Rehfeld was President and Chief Executive Officer of Etak,
Inc., a supplier of digital mapping data and a subsidiary of the News
Corporation. From February 1989 to April 1993, Mr. Rehfeld was President of
Seiko Instruments USA Inc., a manufacturer of electronic instruments.

Mr. Smith became a director of the Company in May 1997. He has been
Chairman and Chief Executive Officer of International Management & Development
Group, Ltd., a provider of consulting services in connection with domestic and
international employment, education and economic development matters, since 1978
He also is founder and president of Jobs for America's Graduates, Inc. a
nonprofit corporation that provides youth employment and school-to-work
transition programs.

Section 16(a) of the Exchange Act requires the Company's directors
and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that one
report, covering an aggregate of one transaction, was filed late by Mr. Kenneth
M. Smith, one report, covering an aggregate of one transaction, was filed late
by Mr. John Rehfeld and one report, covering an aggregate of one transaction,
was filed late by Mr. Jeffrey Kissling.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

(a) COMPENSATION OF DIRECTORS

Commencing in April 1994, each Non-Employee Director received a
per-meeting fee of $1,000 for attendance, in person or telephonically, at
regularly scheduled Board meetings; no additional compensation is paid for
committee meetings. In the fiscal year ended December 31, 1997, $30,000 in
aggregate compensation was paid by the Company to directors of the Company who
were not otherwise employed by the Company or any affiliate of the Company
("Non-Employee Directors") for attendance at regularly scheduled meetings. The
members of the Board of Directors are eligible for reimbursement for their
expenses incurred in connection with attendance at Board and committee meetings
in accordance with Company policy.

Non-Employee Directors are also eligible for grants of options under
the 1994 Non-Employee Directors' Stock Option Plan, as amended (the "Directors'
Plan"). The Directors' Plan provides for the granting of stock options only to
Non-Employee Directors. Option grants under the Directors' Plan are intended by
the Company not to qualify as incentive stock options under the Code and are
nondiscretionary. Under the Directors' Plan, on the date of each annual meeting
of stockholders of the Company, each Non-Employee Director is granted an option
to purchase 10,000 shares of Common Stock which vests 25% on the date one year
after the date of grant and 6.25% for each full three-month period thereafter,
provided that the optionee has, during the period beginning on the date of grant

47
<PAGE> 48
for such option and ending on such vesting date, continuously served as a
Non-Employee Director or as an employee of or consultant to the Company or any
affiliate of the Company.

During 1997, the Company granted options covering 10,000 shares of Common Stock
to each eligible Non-Employee Director, each at an exercise price per share of
$9.75, the fair market value of the Common Stock on the date of grant (based on
the closing sales price reported on the NASDAQ National Market for the date of
grant). As of February 28, 1998, options to purchase an aggregate of 102,500
shares were outstanding under the Directors' Plan, and 2,500 options had been
exercised.

In November 1995, Mr. Kear entered into a consulting agreement with
the Company. Pursuant to the agreement, Mr. Kear provides assistance to the
Chief Executive Officer in connection with management reorganization issues, for
which he receives a consulting fee of $1,500 per day. In 1997, Mr. Kear received
$11,400 in consulting fees for services performed for the Company.

(b) COMPENSATION OF EXECUTIVE OFFICERS

The following table shows for the fiscal years ending December 31, 1997, 1996
and 1995, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at December 31, 1997 (collectively, the "Named Executive Officers"):

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------
Long-Term
Compen-
sation
Awards (2)
- -----------------------------------------------------------------------------------------------------------------------
Annual Compensation (1)

Shares All Other
Other Annual Underlying Compensation
Name and Principal Position Year Salary Bonus Compensation Options (3) (10)
- --------------------------- ---- ------ ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Roy H. Slavin 1997 $332,907 $63,360 -- 97 $3,700
Chairman of the Board, President 1996 345,600 37,734 $ 25,000(4) 400,000 2,617
and Chief Executive Officer 1995 103,000 70,645 450,501(5) 200,000 --

Sam M. Auriemma 1997 163,350 26,854 20,000(6) 55,097 1,627
Vice President, Finance, Chief 1996 113,719 14,880 15,000(7) 45,000 775
Financial Officer and Secretary 1995 -- -- -- -- --

Joseph Cowan 1997 147,600 24,255 -- 55,097 1,604
Vice President, Marketing 1996 142,761 13,440 109,521(8) 16,900 1,437
1995 77,147 30,060 -- 16,900 533

Jeffrey Kissling 1997 150,278 24,255 37,664(9) 55,097 979
Vice President, Development 1996 118,333 13,440 -- 35,000 962
1995 23,333 673 -- -- 211

Victoria Stowe 1997 147,600 24,255 -- 20,097 1,604
Vice President, Wonderware Studios 1996 140,600 6,612 -- -- 1,466
1995 83,238 17,826 -- -- 520
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

48
<PAGE> 49
- --------------

(1) Amounts shown include cash and noncash compensation earned and
received by the Named Executive Officers as well as amounts earned but
deferred at the election of the Named Executive Officers under the
Company's 401(K) Retirement Plan or the Nonqualified Deferred
Compensation Plan.

(2) None of the Named Executive Officers held restricted stock at December
31, 1997.

(3) Of the options to purchase an aggregate of 566,000 shares of Common
Stock granted to the Named Executive Officers as a group in 1996,
options to purchase only 185,000 shares of Common Stock were original
option grants, and the remaining option grants were repricings of
options previously granted to such Named Executive Officers. See
"REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION--Option Repricing."

(4) Consists of a signing bonus of $25,000.

(5) Consists of a relocation allowance of $56,081 and $394,420 in loans
forgiven by the Company.

(6) Consists of a signing bonus of $20,000.

(7) Consists of a signing bonus of $15,000.

(8) Consists of a relocation allowance of $21,521 and $88,000 in loans
forgiven by the Company.

(9) Consists of a relocation allowance and living expenses allowance of
$37,664.

(10) Consists of employer matching contributions made by the Company on
behalf of the Named Executive Officer under the Company's 401(k)
Retirement Plan and gross up payments for funds returned to the Named
Executive Officer from the Employee Stock Purchase Plan.

49
<PAGE> 50
STOCK OPTION GRANTS AND EXERCISES

The Company grants options to its executive officers under the 1989
Stock Option Plan, as amended (the "1989 Plan"). As of December 31, 1997,
options to purchase a total of 1,738,823 shares were outstanding under the 1989
Plan and options to purchase 557,790 shares remained available for grant
thereunder.

The following tables show for the fiscal year ended December 31,
1997, certain information regarding options granted to, exercised by and held at
year end by the Named Executive Officers:

<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1997

INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL
NUMBER % OF TOTAL REALIZABLE VALUE AT
OF SHARES OPTIONS ASSUMED ANNUAL RATES
UNDERLYING GRANTED TO OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM (4)
GRANTED IN FISCAL PRICE EXPIRATION ---------------------------
NAME (#) (1) (2) 1997 (3) ($/SH) DATE (2) 5% ($) 10% ($)
---- ----------- --------- ------ ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Roy H. Slavin 97 (*) 9.00 1/03/07 549 1,391
Sam M. Auriemma 10,000 1.42% 8.82 1/02/07 55,469 140,168
97 (*) 9.00 1/03/07 549 1,391
45,000 6.37% 9.57 3/10/07 270,284 685,470
Joseph Cowan 97 (*) 9.00 1/03/07 549 1,391
10,000 1.42% 8.82 1/02/07 55,469 140,168
45,000 6.37% 9.57 3/10/07 270,284 685,470
Jeffrey Kissling 97 (*) 9.00 1/03/07 549 1,391
10,000 1.42% 8.82 1/02/07 55,469 140,168
45,000 6.37% 9.57 3/10/07 270,284 685,470
Victoria Stowe 97 (*) 9.00 1/03/07 549 1,391
10,000 1.42% 8.82 1/02/07 55,469 140,168
10,000 1.42% 9.57 3/10/07 60,063 152,326
</TABLE>

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

* Represents less than one hundredth of one percent.

(1) All options granted to the Named Executive Officers in 1997 and
remaining outstanding at December 31, 1997 vest 50% two years from
the date of grant, and 25% for each full year thereafter.

(2) The Board of Directors may reprice outstanding options under the
terms of the 1989 Plan.

(3) Based on options to purchase an aggregate of 706,331 shares granted
in 1997. (Includes options to purchase an aggregate of 185,485
shares of Common Stock granted to the Named Executive Officers as a
group in 1997). Options for 1,329,180 were granted in 1997, of which
622,849 were repricings and 706,331 were new grants. This number is
not necessarily indicative of the number of shares subject to
options to be granted in the future.

(4) The potential realizable value is calculated based on the term of
the option (ten years) and the fair market value at the time of its
grant (which, in each case, is equal to the exercise price).

50
<PAGE> 51
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND VALUE OF OPTIONS AT END OF FISCAL
1997

<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT END OPTIONS AT END OF
SHARES ACQUIRED VALUE REALIZED OF FISCAL 1997 (#) FISCAL 1997 ($) (2)
NAME ON EXERCISE ($) (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Roy H. Slavin -- -- 0 / 300,097 0 / 1,312,997
Sam M. Auriemma -- -- 0 / 80,097 0 / 367,897
Joseph Cowan -- -- 4,228 / 72,969 1,586 / 332,824
Jeffrey Kissling -- -- 0 / 80,097 0 / 367,897
Victoria Stowe 23,500 / 30,097 330,528 / 142,847
</TABLE>

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

(1) Value realized is based on the fair market value of the Company's
Common Stock on the date of exercise minus the exercise price and
does not necessarily indicate that the optionee sold such stock.

(2) Fair market value of the Company's Common Stock at December 31, 1997
($14.125) minus the exercise price of the options.

EMPLOYMENT AGREEMENTS

Pursuant to an employment agreement between the Company and Roy H.
Slavin entered into in November 1995, Mr. Slavin's annual salary and bonus are
determined by the Compensation Committee of the Board of Directors. To assist
Mr. Slavin in his purchase of a home in connection with his relocation to
Southern California, a loan by the Company to Mr. Slavin in the amount of
$394,420 was made and subsequently forgiven by the Company in 1995. Mr. Slavin
also received a relocation allowance of $56,081 pursuant to the agreement. Under
the terms of the agreement, options to purchase 200,000 shares of the Company's
Common Stock under the 1989 Plan were granted to Mr. Slavin at an exercise price
of $37.75, the market price of the Common Stock as of July 31, 1995 (the "1995
Grant"). Such options originally vested at the rate of 24% one year from the
date of grant and 2 percent per month thereafter. Following his appointment as
Chief Executive Officer, options to purchase 100,000 shares of the Company's
Common Stock under the 1989 Plan were granted to Mr. Slavin at an exercise price
of $15.25, the market price of the Common Stock as of January 26, 1996 (the
"1996 Grant"). On August 31, 1996, the terms of the 1995 Grant and the 1996
Grant were revised such that the exercise price was reduced to $9.75 (the market
price of the Common Stock on August 30, 1996) and the vesting schedule was
revised so that 50 percent of the options vest two years from August 31, 1996
and 25 percent per year thereafter. See "Option Repricing Information." Under
the agreement, as modified in August 1996, if Mr. Slavin ultimately does not
realize a gain of $1,250,000 or more from the 1996 Grant then the Company will
pay him, as additional compensation, the difference between the amount realized
by Mr. Slavin and $1,250,000. Either Mr. Slavin or the Company may terminate
this employment relationship at will.

In October 1997, the Compensation Committee of the Board of
Directors revised severance protection arrangements covering all officers of the
Company. Under the revised arrangements covering the Chief Executive Officer of
the Company, he will receive 2.99 times his average annual compensation over the
last three years if either he is terminated other than with cause, or a change
of control of the Company occurs and he decides not to continue his employment
with the Company. The revised arrangements covering officers other than the
Chief Executive Officer have essentially the same terms as the agreement with
the Chief Executive Officer except that the payment will be 2.0 times his or her
average annual compensation. Under all of the severance arrangements, in the
event of a change of control of the Company, all unvested stock options held by
the officers shall immediately vest and become exercisable.

51
<PAGE> 52
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors (the "Committee") during
1997 was composed of Messrs. Currie, Kear and Rehfeld; Mr. Smith replaced Mr.
Currie on the Compensation Committee in May, 1997. None of the members of the
Committee is a current or former officer or employee of the Company. The
Committee is responsible for setting and administering the Company's policies
governing employee compensation and administering the Company's employee benefit
plans, including the 1989 Plan and the Employee Stock Purchase Plan. Decisions
on compensation of the Company's Executive Officers are made by the Committee
and are reviewed by the full Board, except for decisions regarding awards under
the Company's stock option plans which are made solely by the Committee.

COMPENSATION COMMITTEE REPORT(1)

COMPENSATION PHILOSOPHY

The compensation policies adopted by the Committee are designed to
(i) align compensation with business objectives and performance; (ii) attract,
retain and reward executive officers and other key employees who contribute to
the long-term success of the Company and (iii) align the interests of the
Company's executive officers and other key employees with the interests of
stockholders and to motivate those employees to enhance long-term stockholder
value. Key elements of this philosophy are:

- The Company's salaries must be competitive with leading
software companies with which the Company competes for
highly qualified and experienced executives. To date,
the Committee has relied on its members' experience in
working with other comparable software companies to
ensure executive salaries are competitive. Since
becoming a public company in July 1993, the Company has
utilized salary and compensation survey data prepared by
independent executive compensation consulting firms to
regularly compare the Company's salaries to these
companies and assist the Company in setting its salary
parameters.

- The Company maintains annual incentive programs
sufficient to provide motivation to achieve specific
operating goals and to generate rewards that bring total
compensation to competitive levels.

- The Company provides significant equity-based incentives
for executives and other employees to ensure that they
are motivated over the long term to respond to the
Company's business challenges and opportunities as
stockholders as well as employees.

The Committee's objective is to set executive compensation within a
range which the Committee believes is comparable to the average range of
compensation set by companies of comparable size in the software industry. The
group of comparable companies is not necessarily the same as the companies
included in the market indices included in the performance graph on page 56 of
this Annual Report on Form 10-K. The primary components of executive
compensation are base salary, short-term cash incentives (bonus compensation)
and long-term equity incentives.

Executive Officer Compensation

Base Salary. The Committee annually reviews each executive officer's
base salary. When reviewing base salaries, the Committee considers a number of
subjective criteria, including individual and Company performance, levels of
responsibility, prior experience and competitive pay practices. The Committee
also considers selected

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

(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended (the
"Securities Act") or Exchange Act, whether made before or after the date
hereof and irrespective of any general incorporation language contained in
such filing.

52
<PAGE> 53
objective factors including comparative salary and compensation survey data from
independent compensation consulting firms. The Committee does not make
individual salary decisions according to specific criteria and does not ascribe
specific weights to the factors it considers. The base salary of the Executive
Officers, other than the Chief Executive Officer, is set by the Committee after
consultation with the Chief Executive Officer. The base salary of the Chief
Executive Officer is recommended by the Committee and approved by the Board (see
discussion under "Chief Executive Officer Compensation"). For 1997, the
Committee increased base salaries for the Company's Executive Officers (other
than the Chief Executive Officer) by 5% over 1996.

Annual Cash Incentives (Bonus Compensation). At the beginning of
each fiscal year management prepares a business plan and submits it to the
Board. The Committee, in consultation with the Chief Executive Officer,
established target bonus levels for the Company's Executive Officers. For 1997,
the Committee established a target bonus of 25% of base salary for each
Executive Officer other than Mr. Slavin. The Board established a target bonus of
30% of base salary for Mr. Slavin.

Based upon the approved business plan, the Committee established
specific business objectives to be achieved during 1997, and also established a
target range of net income for 1997. 25% of each Executive's bonus was dependent
upon achievement of the specific business objectives, and 75% was dependent upon
achievement of the target range of net income. If the minimum net income within
the target range was not achieved then the officer would not receive any of the
portion of the bonus attributable to achievement of the target net income range.
If the target net income within the range was achieved then 100% of the portion
of the bonus attributable to achievement of the target net income would be
earned. If more than the minimum but less than the target net income was earned
by the Company, then the bonus amount earned by the executive would be prorated
accordingly. Also, if net income exceeded the target amount then the Executive
Officers could earn up to an additional 100% of the portion of the bonus
attributable to achievement of the target net income. For 1997 the Executive
Officers earned 55% of their target bonus amounts.

Long-Term Incentives. The Company's long-term incentive program
consists principally of options granted under the 1989 Plan. Option grants
include vesting periods to encourage key employees to continue in the employ of
the Company. Through option grants, executives receive significant equity
incentives to build long-term stockholder value by aligning the interests of
management directly and significantly with the interests of stockholders. The
exercise price of option awards are generally set at 100% of fair market value
on the date of grant.

Executive officers receive value from these grants only if the
Common Stock appreciates over the long term. The amount of individual option
grants is determined based in part on competitive practices at comparable
software companies and on the Company's philosophy of significantly linking
executive compensation with stockholder interests. In determining the size of
individual grants, the Committee also considers the number of shares subject to
options previously granted to each executive officer, including the number of
shares that have vested and that remain unvested. In 1997, the Committee granted
options to purchase 185,485 shares of the Company's Common Stock to five
executive officer(s).

The Company also maintains an Employee Stock Purchase Plan under
which participating employees, including Executive Officers, may set aside up to
$25,000 per year from their compensation for the purchase of Company Common
Stock at 85% of the market value on the first or last day of each offering
period, whichever is lower.

The Company also maintains a Nonqualified Deferred Compensation Plan
for its executive officers. Under this plan executive officers may defer a
portion of their salary and bonus income, and at year end may shift deferred
income into their 401(K) retirement plan accounts, up to the legal limit for
such contributions.

Section 162(m) of the Code limits the Company to a deduction for
federal income tax purposes of no more than $1 million of compensation paid to
certain officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code. The Compensation Committee has determined that stock options granted under
the 1989 Plan with an exercise price at least equal to the fair market value of
the Common Stock on the date of grant will be treated as performance-based
compensation under the final Treasury regulations promulgated under Section
162(m) of the Code.

53
<PAGE> 54
CHIEF EXECUTIVE OFFICER COMPENSATION

Base Salary. In reviewing and setting the base salary for Mr.
Slavin, the Committee and the Board takes into account a number of subjective
criteria particularly (i) Mr. Slavin's significant and broad-based experience in
the software industry, (ii) the scope of Mr. Slavin's responsibilities,
including his duties as Chairman of the Board, and (iii) the Board's confidence
in Mr. Slavin to lead the Company's continued growth and development. The
Committee and the Board also consider a number of objective factors including
comparative salary and compensation survey data from independent compensation
consulting firms. Like the compensation decisions for the other executive
officer, the Committee and the Board do not set Mr. Slavin's base compensation
according to specific criteria and do not ascribe specific weights to the
factors they do consider. Mr. Slavin's annual salary was estimated to provide an
annual base compensation level at the average as compared to a selected group of
other software companies. Mr. Slavin's base salary for 1997 as President and
Chief Executive Officer was $320,000, and was unchanged from 1996.

Annual Cash Incentive (Bonus Compensation). As discussed above (see
EXECUTIVE OFFICER COMPENSATION - Annual Cash Incentive (Bonus Compensation)) the
Board established a target bonus for Mr. Slavin of 30% of his base salary. Like
the other executive officers, 25% of his bonus was dependent upon achievement of
specific business objectives established by the Board at the beginning of the
fiscal year and 75% was dependent upon achievement of the target range of net
income set by the Board and based upon the approved business plan for the year.
Based upon his achievement of business objectives and achievement by the Company
of net income within the target range, Mr. Slavin, like the other executive
officers, earned 55% of his target bonus.

Long Term Incentive Compensation. Pursuant to his original
employment agreement, Mr. Slavin received options for 200,000 shares of Company
Common Stock in 1995 and additional options for 100,000 shares of Company Common
Stock in January 1996 following his appointment as Chief Executive Officer by
the Board. These options were repriced or amended in August 1996. The exercise
price was set at the fair market value of the Company's Common Stock on August
31, 1996, and the vesting schedule was extended such that 50% of the options
vest two years from date of the repricing (August 31, 1998) and 25% vest each
full year thereafter. See "--Option Repricing" below and "Option Repricing
Information." See also "EMPLOYMENT AGREEMENTS."

Each year the Committee reviews whether additional options should be
awarded. The Committee considers several subjective factors including individual
and company performance during the preceding year. Option award levels granted
to Chief Executive Officers at comparable software companies are also considered
by the Committee. The Committee also considers whether the Chief Executive
Officer's then current level of option participation couples an appropriate
portion of his overall compensation with the achievement of long-term
enhancement of stockholder value. In 1997 Mr. Slavin did not receive any new
option award, except options to purchase 97 shares of Common Stock under a
Company wide program in which all Company employees received options for 97
shares as part of the Company's ten year anniversary celebration.

OPTION REPRICING

In January 1996, the Company implemented an option exchange program
applicable to all employees of the Company, excluding executive officers. In
August 1996, the Company implemented an option exchange program applicable to
the Company's executive officers other than the Chief Executive Officer.
Concurrently therewith, the Committee amended Mr. Slavin's outstanding option to
purchase 200,000 shares of Common Stock and exchanged Mr. Slavin's outstanding
option to purchase 100,000 shares of Common Stock. As a result of these actions,
the number of shares subject to each exchanged or amended option remained the
same, but in each case the exercise price was reduced to equal the market price
of the Common Stock on the date of such exchange or amendment. In addition, the
vesting of the options was revised so that 50 percent of the options vest two
years from the date of the exchange or amendment of such option and 25 percent
vest each year thereafter. At the times these repricings were effected,
substantially all of the options then outstanding under the 1989 Plan, including
those held by executive officers, had exercise prices significantly above the
current market price of the Company's Common Stock. In light of the decline in
the Company's Common Stock price and because options are a key component of the
Company's long-term incentive program, the Committee determined that repricing
of options held by executive

54
<PAGE> 55
officers was necessary in order to retain such employees. For additional details
regarding the effect of such repricing programs on options held by the Named
Executive Officers, see "Option Repricing Information."

CONCLUSION

Through the programs described above, a significant portion of the
Company's compensation program and the compensation of the Company's Chief
Executive Officer are contingent on Company performance, and realization of
benefits is closely linked to increases in long-term stockholder value. The
Company remains committed to this philosophy of pay for performance, recognizing
that the competitive market for talented executives and the volatility of the
Company's business may result in highly variable compensation for a particular
time period.

COMPENSATION COMMITTEE

Kenneth M. Smith
Jay L. Kear
John E. Rehfeld

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is comprised of Messrs. Kear (Chairman),
Smith and Rehfeld. There are no interlocking relationships between any executive
officers of the Company and any entity whose directors or executive officers
serve on the Company's Board or Compensation Committee.

55
<PAGE> 56
PERFORMANCE MEASUREMENT COMPARISON (1)

The following graph shows a comparison of cumulative total returns
of an investment of $100 in cash for the Company, the Center for Research in
Securities Prices Index for the NASDAQ Stock Market (United States Companies)
(the "CRSP NASDAQ U.S. Index") and the Center for Research in Securities Prices
Index for the NASDAQ Computer and Data Processing Stocks (the "CRSP NASDAQ
Computer Index") for the period that commenced July 23, 1993 (the date on which
the Common Stock was first traded on the NASDAQ National Market System) and
ended on December 31, 1997. The graph assumes that all dividends have been
reinvested.

COMPARISON OF CUMULATIVE TOTAL RETURNS
(WONDERWARE CORPORATION, CRSP NASDAQ U.S. INDEX, CRSP NASDAQ COMPUTER INDEX)

[LINE GRAPH]

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

(1) This Section is not "soliciting material," is not deemed filed with the
SEC, and is not to be incorporated by reference into any filing of the
Company under the Securities Act or the Exchange Act whether made before
or after the date hereof and irrespective of any general incorporation
language in such filing.

56
<PAGE> 57

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of December 31, 1997 by: (i) each director and
nominee for director; (ii) each of the Named Executive Officers; (iii) all
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
Common Stock.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Beneficial Ownership (1)
- --------------------------------------------------------------------------------------------------
Number of Percent of
Beneficial Owner Position with the Company Shares Total
---------------- ------------------------- ------ -----
<S> <C> <C> <C>
Wanger Asset Management, L.P.(2) 1,384,100 9.72%
Rainier Investment Management, 890,300 6.25%
Inc.(3)
Jeffrey Kissling (4) Vice President, Development 50,282 *
Jay L. Kear Director 50,375 *
F. Rigdon Currie (5) Director 32,439 *
John E. Rehfeld Director 22,375 *
Joseph Cowan Vice President, Sales and 6,717 *
Marketing
Harvard H. Hill, Jr. (6) Director 16,875 *
Roy H. Slavin (7) Chairman of the Board, 14,701 *
President and Chief Executive Officer
Victoria Stowe Vice President, Wonderware 28,902 *
Studios
Sam M. Auriemma Vice President, Finance, 97 *
Chief Financial Officer and
Secretary
Kenneth M. Smith Director 4,975 *

All executive officers and
directors as a group 227,738 1.52%
(10 persons)
- --------------------------------------------------------------------------------------------------
</TABLE>

- ----------------
* Less than one percent.

(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise indicated
in the footnotes to this table and subject to community property laws
where applicable, the Company believes that each of the stockholders named
in this table has sole voting and investment power with respect to the
shares indicated as beneficially owned. Applicable percentages are based
on 14,239,585 shares outstanding on December 31, 1997, adjusted as
required by rules promulgated by the SEC. The shares listed in the table
include the following stock options exercisable on or within 60 days after
December 31, 1997: Mr. Kissling -97 shares; Mr. Kear - 50,375 shares; Mr.
Currie - 26,875 shares; Mr. Rehfeld - 4,375 shares; Mr. Cowan - 4,649
shares; Mr. Hill - 6,875 shares; Mr. Slavin - 97 shares; Ms. Stowe -
23,597 shares; Mr. Auriemma - 97 shares; and Mr. Smith - 0 shares. And all
current directors and officers as a group 117,037 shares.

(2) According to a Schedule 13G dated February 5, 1998 and filed with the
Securities and Exchange Commission ("SEC") Wanger Asset Management, L.P.
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606, has shared
voting power and shared dispositive power over 1,384,100 shares.

57
<PAGE> 58
(3) According to a Schedule 13G dated January 12, 1998 and filed with the SEC
Rainier Investment Management, Inc., 2 Union Square, 601 Union Street,
Suite 2801, Seattle, Washington 98101, has shared voting and shared
dispositive power over 890,300 shares.

(4) Includes 600 shares beneficially owned by Mr. Kissling's minor children.

(5) Includes 5,564 shares held in a trust of which Mr. Currie and his wife,
Patricia Johnson, are trustees.

(6) Includes 10,000 shares held by Houston Venture Partners, Ltd., a limited
partnership ("HVP"). Mr. Hill is a general partner of HVP. Mr. Hill
disclaims beneficial ownership of shares held by HVP except to the extent
of his pro rata interest.

(7) Includes 1,000 shares held in a trust of which Mr. Slavin is a trustee.

CHANGES IN CONTROL

On February 24, 1998, the Company, Siebe, Purchaser and Sub entered into
the Merger Agreement. See Business. See also Risk Factors - Pending Acquisition
of the Company. See also Risk Factors - Anti-Takeover Effects of Certain Charter
Provisions, Unissued Preferred Stock and Delaware Law. For more information
concerning the Merger Agreement, the Tender Offer or the Merger, please refer to
the Company's Solicitation/Recommendation Statements on Schedule 14D-9 that was
filed on March 3, 1998, as it may be amended from time to time.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

The Company has entered into indemnity agreements with certain officers
and directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party by
reason of his position as a director, officer or other agent of the Company, and
otherwise to the full extent permitted under Delaware law and the Company's
Bylaws.

Under a promissory note dated March 6, 1997, Mr. Kissling borrowed
$138,000 from the Company in connection with his relocation to the Company's
headquarters in California. The note bears interest at 7% per annum compounded
annually. Provided Mr. Kissling is still employed, all accrued interest and
one-third of the principal of the note will be forgiven on the third anniversary
of the note (March 6, 2000), another one-third and all accrued interest on the
fourth anniversary and the last one-third and all accrued interest on the fifth
anniversary.

In connection with the Merger Agreement, each of the executive officers
entered into consulting agreements (the "Consulting Agreements") that become
effective upon consummation of the Tender Offer, and provide that if the
executive resigns from the Company, he or she agrees to serve as a consultant to
the Company for a period of two years, for a compensation of $25,000 per year in
addition to severance benefits under existing arrangements (see "Executive
Compensation--Employment Agreements"). In order to induce Mr. Kissling to enter
into his Consulting Agreement, his agreement also provides that he will be
entitled to a one-time payment of $60,000 upon consummation of the Tender Offer.
During the term of the consulting arrangements, the executive officer will
not be permitted to directly or indirectly own, manage, operate, join, control,
be employed by, or participate in the ownership, management, operation or
control of, any Competing Enterprise (defined as any person or entity engaged in
the development, marketing and sale of industrial automation in process control
software products or other business conducted by the Company or Siebe Control
Systems division of Siebe plc).

The Company has entered into certain additional transactions with its
directors and executive officers, as described under the captions "Executive
Compensation--Compensation of Directors" and "Executive Compensation--Employment
Agreements."

58
<PAGE> 59
PART IV

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

(a) The following documents are filed as part of this Annual Report.

1. FINANCIAL STATEMENTS

The financial statements listed in Part II, Item 8 on page 24
are filed as part of this Annual Report.

2. FINANCIAL STATEMENT SCHEDULES

Page
Independent Auditors' Report 27
Schedule II - Valuation and Qualifying Accounts 63

Schedules not listed above have been omitted because the
required information is not present or is not present in
amounts sufficient to require submission of the schedule, or
because information required is included in the consolidated
financial statements or the notes thereto.

3. EXHIBITS

See Exhibit Index on page 64.

The following management compensatory plans and arrangements
are required to be filed as exhibits to this Annual Report
pursuant to Item 14(c):

EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.2 Registrant's 1989 Stock Option Plan, as amended (the
"Stock Option Plan")(1)

10.3 Form of Incentive Stock Option grant under the Stock
Option Plan(2)

10.4 Form of Supplemental Stock Option grant under the Stock
Option Plan(2)

10.5 Registrant's Employee Stock Purchase Plan, as amended(3)

10.12 Registrant's 1994 Non-Employee Directors' Stock Option
Plan, as amended (4)

10.14 Form of Consulting Agreement dated February 24, 1998,
entered into between the Company and each of the
Company's Executive Officers (Messrs. Slavin, Auriemma,
Cowan, Kissling, Mody and Ms. Stowe) (5)

10.15 Internal Revenue Code Section 280G Cut Back Agreement
dated February 24, 1998, between Jeffrey L. Kissling and
the Company and Siebe plc (5)

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

(1) Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-94030) and incorporated
herein by reference.

59
<PAGE> 60
(2) Filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-72380) or amendments
thereto and incorporated herein by reference.

(3) Filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.

(4) Filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.

(5) Filed as an Exhibit to the Registrant's Schedule 14D-9
filed March 2, 1998 and incorporated herein by
reference.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the last quarter of the
period covered by this report.

60
<PAGE> 61
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 1998.

WONDERWARE CORPORATION

By: /s/ ROY H. SLAVIN
--------------------------------
Roy H. Slavin
Chairman of the Board, President
and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy H. Slavin and Sam M. Auriemma, or either of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
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>
/s/ ROY H. SLAVIN Chairman of the Board, President and March 25, 1998
- ---------------------------- Chief Executive Officer
Roy H. Slavin (Principal Executive Officer

/s/ SAM M. AURIEMMA Vice President Finance and Chief Financial March 25, 1998
- ---------------------------- Officer
Sam M. Auriemma (Principal Financial and Accounting Officer)

/s/ F. RIGDON CURRIE Director March 25, 1998
- ----------------------------
F. Rigdon Currie

/s/ HARVARD H. HILL, JR. Director March 25, 1998
- ----------------------------
Harvard H. Hill, Jr.

/s/ JAY L. KEAR Director March 25, 1998
- ----------------------------
Jay L. Kear
</TABLE>

61
<PAGE> 62
<TABLE>
<S> <C> <C>
/s/ JOHN E. REHFELD Director March 25, 1998
- ----------------------------
John E. Rehfeld

/s/ KENNETH M. SMITH Director March 25, 1998
- ----------------------------
Kenneth M. Smith
</TABLE>

62
<PAGE> 63
WONDERWARE CORPORATION AND SUBSIDIARY

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Additions
Balance, Charged to Additions Balance,
Beginning Costs and Charged to End of
Description of Period Expenses Revenues Deductions Period
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts $1,132 $ 404 $ (89) $1,447
Sales returns allowance 190 $2,759 (2,659) 290
Year ended December 31, 1996:
Allowance for doubtful accounts $ 904 $ 241 $ (13) $1,132
Sales returns allowance 190 $1,030 (1,030) 190
Year ended December 31, 1995:
Allowance for doubtful accounts $ 402 $ 558 $ (56) $ 904
Sales returns allowance 455 334 (599) 190
</TABLE>

63
<PAGE> 64
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

2.1 Agreement and Plan of Merger among Siebe plc, WDR Acquisition Corp., WDR
Sub Corp., and Wonderware Corporation dated February 24, 1998 (10)

3.1 Registrant's Amended and Restated Certificate of Incorporation(1)

3.2 Registrant's Amended Bylaws(1)

4.1 Reference is made to Exhibits 3.1 and 3.2

4.2 Specimen Stock Certificate(2)

4.3 Specimen Right Certificate(3)

4.4 Rights Agreement, dated February 15, 1996, between the Registrant and the
First National Bank of Boston, as Rights Agent(3)

10.1 Form of Indemnity Agreement entered into between the Registrant and its
directors and officers(2)

10.2 Registrant's 1989 Stock Option Plan, as amended (the "Stock Option
Plan")(4)

10.3 Form of Incentive Stock Option grant under the Stock Option Plan(1)

10.4 Form of Supplemental Stock Option grant under the Stock Option Plan(1)

10.5 Registrant's Employee Stock Purchase Plan(5)

10.6 Form of Registrant's Proprietary Information and Inventions Agreement(2)

10.7 Industrial Lease Agreement between the Registrant and The Irvine Company,
dated April 23, 1993(2)

10.8 Loan and Security Agreement between the Registrant and Silicon Valley
Bank, dated May 29, 1992, as amended(1)

10.9 Registrant's 1994 Non-Employee Directors Stock Option Plan, as amended (7)

10.10 Lease Agreement between the Registrant and Aetna Life Insurance Company,
dated July 24, 1996 (8)

10.11 Employment Agreement between the Registrant and Roy H. Slavin, dated
November 28, 1995 (8)

10.12 First Amendment to Rights Agreement dated February 24, 1998 (9)

10.13 First Amendment to Lease dated January 21, 1998 (11)

10.14 Form of Consulting Agreement dated February 24, 1998, entered into between
the Company and each of the Company's Executive Officers (Messrs. Slavin,
Auriemma, Cowan, Kissling, Mody and Ms. Stowe) (10)

64
<PAGE> 65
10.15 Internal Revenue Code Section 280G Cut Back Agreement dated February 24,
1998, between Jeffrey L. Kissling and the Company and Siebe plc (10)

21.1 Subsidiaries of the Registrant (11)

23.1 Independent Auditors' Consent (11)

24.1 Power of Attorney. See page 61.

27.1 Financial Data Schedule (11)

- ----------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-72380) or amendments thereto and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-63906) or amendments thereto and incorporated herein by reference.

(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
February 15, 1996 and incorporated herein by reference.

(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-94030) and incorporated herein by reference.

(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.

(6) This exhibit was originally filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33-63906) with certain
confidential portions redacted. It was refiled as an exhibit to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 to disclose those portions for which confidential treatment was
previously granted and incorporated herein by reference.

(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.

(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.

(9) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
February 24, 1998 and incorporated herein by reference.

(10) Filed as an exhibit to the Registrant's Schedule 14D-9 filed March 2, 1998
and incorporated herein by reference.

(11) Filed herewith.

<PAGE> 1
EXHIBIT 10.13

FIRST AMENDMENT TO LEASE

I. PARTIES AND DATE.

This First Amendment to Lease (the "First Amendment") dated January 21,
1998, is by and between THE IRVINE COMPANY ("Landlord"), and WONDERWARE
CORPORATION, a Delaware corporation, as successor by merger to Wonderware
Software Development Corporation, a California corporation ("Tenant").

II. RECITALS.

On April 23, 1993, Landlord and Tenant entered into that certain lease
("Lease") for space in a building located at 100 Technology Drive, Irvine,
California ("Premises").

Landlord and Tenant each desire to modify the Lease to extend the Lease
Term, adjust the Basic Rent, and make such other modifications as are set forth
in "III. MODIFICATIONS" next below.

III. MODIFICATIONS.

A. Basic Lease Provisions. The Basic Lease Provisions of the Lease
are hereby amended as follows:

1. Item 5 is hereby deleted in its entirety and the following shall
be substituted in lieu thereof:

"5. Lease Term: The Term of this Lease shall expire at midnight
on August 31, 2000."

2. Effective October 1, 1998, Item 6 shall be deleted in its
entirety and the following shall be substituted in lieu thereof:

"Basic Rent: Thirty-Nine Thousand Five Hundred Four
Dollars ($39,504.00) per month, based on $1.25 per rentable
square foot."

B. Right to Extend the Lease. Paragraph 3 of the Lease Addendum entitled
"Right to Extend the Lease", shall be deleted in its entirety and the following
shall be substituted in lieu thereof:

"3. Section 3.1(b) Right To Extend The Lease. Provided that Tenant
is not in monetary default or material non-monetary default under any
provision of this Lease beyond the applicable cure period, either at the
time of exercise of the extension right granted herein or at the time of
the commencement of such extension, and provided further that Tenant is
occupying the entire Premises and has not assigned or sublet any of its
interest in this Lease, Tenant may extend the Term of this Lease for one
(1) period of eighteen (18) months. Tenant shall exercise its right to
extend the Term by and only by delivering to Landlord, no earlier than
September 1,

1
<PAGE> 2
1999, and no later than December 31, 1999, Tenant's irrevocable written
notice of its commitment to extend (the "Commitment Notice"). The Basic
Rent payable under the Lease during any extension of the Term shall be at
100% of the fair market rental for the Premises. In the event that the
parties are not able to agree on the fair market rental within one hundred
twenty (120) days prior to the expiration date of the Term, then either
party may elect, by written notice to the other party, to cause said
rental, including subsequent adjustments, to be determined by appraisal as
follows.

Within ten (10) days following receipt of such appraisal election, the
parties shall attempt to agree on an appraiser to determine the fair market
rental. If the parties are unable to agree in that time, then each party
shall designate an appraiser within ten (10) days thereafter. Should either
party fail to so designate an appraiser within that time, then the
appraiser designated by the other party shall determine the fair rental
value. Should each of the parties timely designate an appraiser, then two
appraisers so designated shall appoint a third appraiser who shall, acting
alone, determine the fair rental value of the Premises. Any appraiser
designated hereunder shall have an M.A.I. certification with not less than
five (5) years experience in the valuation of commercial industrial
buildings in the Irvine Spectrum area of Orange County, California.

Within thirty (30) days following the selection of the appraiser, such
appraiser shall determine the fair market rental value of the Premises
based on an 18-month term. In determining such value, the appraiser shall
consider rental comparables for the other comparable buildings in the
Project, and shall consider rental rates for other comparable buildings in
the Irvine Spectrum area with appropriate adjustments for differences in
location and quality of project. The fees of the appraiser(s) shall be
shared equally by both parties.

Within twenty (20) days after the determination of the fair market
rental, Landlord shall prepare a reasonably appropriate amendment to this
Lease for the extension period and Tenant shall execute and return same to
Landlord within ten (10) days. Should the fair market rental not be
established by the commencement of the extension period, then Tenant shall
continue paying rent at the rate in effect during the last month of the
initial Term, and a lump sum adjustment shall be made promptly upon the
determination of such new rental.

If Tenant fails to timely comply with any of the provisions of this
paragraph, Tenant's right to extend the Term shall be extinguished and the
Lease shall automatically terminate as of the expiration date of the Term,
without any extension and without any liability to Landlord. Any attempt to
assign or transfer any right or interest created by this paragraph shall be
void from its inception. Tenant shall have no other right to extend the
Term beyond the single eighteen (18) month extension created by this
paragraph. Unless agreed to in a writing signed by Landlord and Tenant, any
extension of the Term, whether created by an amendment to this Lease or by
a holdover of the Premises by Tenant, or otherwise, shall be deemed a part
of, and not in addition to, any duly exercised extension period permitted
by this paragraph.

C. Option to Cancel. Paragraph 4 of the Lease Addendum, entitled "Section
3.1(c) Option To Cancel" is hereby deleted in its entirety, and nothing shall be
substituted in lieu thereof.

2
<PAGE> 3
D. Tenant Improvements. Landlord agrees to provide to Tenant an
allowance of up to Sixty Thousand Forty-Six Dollars ($60,046.00) ("Landlord's
Contribution") for tenant improvement work in the Premises ("Tenant
Improvements"). Any additional cost shall be borne solely by Tenant. Tenant
shall utilize the Landlord's Contribution and submit the invoices therefor (in
accordance with the provisions below) prior to June 30, 1998. Any unused
portion of the Landlord's Contribution shall thereafter be terminated.

Tenant shall be permitted to use its own contractor (subject to
Landlord's prior reasonable approval) in constructing the Tenant Improvements,
which construction shall be undertaken and prosecuted in accordance with
Article VII, Section 7.3 of the Lease. Tenant shall request payment for the
cost of the Tenant Improvements by delivering to Landlord a copy of the
invoices, lien waivers (in the form prescribed by the California Civil Code),
and all other pertinent backup, which invoices shall not exceed Landlord's
Contribution.

It is understood that the Tenant Improvements shall be done during
Tenant's occupancy of the Premises. Therefore Tenant agrees to assume any risk
of injury, loss or damage which may result from such construction; and shall
indemnify, defend and, protect, save and hold harmless Landlord from and
against any and all claims, liabilities, costs and expense arising from such
construction, as more particularly provided in Section 10.3 of the Lease.
Tenant further agrees that no rental abatement shall result while the Tenant
Improvements are being completed in the Premises.

IV. GENERAL.

A. Effect of Amendments. The Lease shall remain unmodified and in full
force and effect, except to the extent that it is modified by this Amendment.

B. Entire Agreement. This Amendment embodies the entire understanding
between Landlord and Tenant with respect to the modifications set forth in "III.
MODIFICATIONS" above and can be changed only by a writing signed by Landlord and
Tenant.

C. Counterparts. If this Amendment is executed in counterparts, each is
hereby declared to be an original; all, however, shall constitute but one and
the same amendment. In any action or proceeding, any photographic, photostatic,
or other copy of this Amendment may be introduced into evidence without
foundation.

D. Define Terms. All words commencing with initial capital letters in
this Amendment and defined in the Lease shall have the same meaning in this
Amendment as in the Lease, unless they are otherwise defined in this Amendment.

E. Corporate and Partnership Authority. If Tenant is a corporation or
partnership, or is comprised of either or both of them, each individual
executing this Amendment for the corporation or partnership represents that he
or she is duly authorized to execute and deliver this Amendment on behalf of
the corporation or partnership and that this Amendment is binding upon the
corporation or partnership in accordance with its terms.

<PAGE> 4
F. Attorneys' Fees. The provisions of the Lease respecting payment of
attorneys' fees shall also apply to this Amendment.

V. EXECUTION.

Landlord and Tenant executed this Amendment on the date as set forth in
"I. PARTIES AND DATE." above.

LANDLORD: TENANT:

THE IRVINE COMPANY [SEAL OF WONDERWARE CORPORATION,
LEGAL APPROVAL] a Delaware corporation

By /s/ Clarence W. Barker By /s/ Roy Slavin
---------------------------------------- -----------------------
Clarence W. Barker, President Name: Roy Slavin
Irvine Industrial Company, a division ------------
of The Irvine Company Title: President
-----------
By /s/ John C. Tsu By /s/ Sam Auriemma
---------------------------------------- --------------------
John C. Tsu, Name: Sam Auriemma
Assistant Secretary ------------
Title: CFO
-----------

<PAGE> 1
EXHIBIT 21.1

WONDERWARE CORPORATION AND SUBSIDIARIES

SUBSIDIARIES OF THE REGISTRANT

NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------ -----------------------------

Wonderware North America Corporation Delaware
Wonderware Europe, Inc. Delaware
Wonderware International, Inc. U.S. Virgin Islands
Wonderware Korea, Ltd. Korea
Wonderware of Singapore, Pte. Ltd. Singapore
Wonderware GmbH Germany
Wonderware Italia Spa Italy
Wonderware of Argentina, Inc. Delaware
Wonderware of Japan, Inc. Delaware
Wonderware of Mexico, Inc. Delaware
Wonderware of Taiwan, Inc. Delaware
Wonderware of the United Kingdom, Inc. Delaware

<PAGE> 1
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement
Nos. 33-66366, 33-77372, 33-77374, 33-94030, 33-95924, 333-03988 and 333-33525
on Form S-8 and 33-96254 and 333-16973 on Form S-3 of our report dated January
26, 1998 (except for Note 15, as to which the date is February 24, 1998)
appearing in the Annual Report on Form 10-K of Wonderware Corporation for the
year ended December 31, 1997.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
March 27, 1998

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,500
<SECURITIES> 28,561
<RECEIVABLES> 18,281
<ALLOWANCES> (1,447)
<INVENTORY> 1,025
<CURRENT-ASSETS> 74,747
<PP&E> 27,712
<DEPRECIATION> (15,291)
<TOTAL-ASSETS> 98,095
<CURRENT-LIABILITIES> 11,640
<BONDS> 0
0
0
<COMMON> 90,390
<OTHER-SE> (3,935)
<TOTAL-LIABILITY-AND-EQUITY> 98,095
<SALES> 82,519
<TOTAL-REVENUES> 82,519
<CGS> 6,536
<TOTAL-COSTS> 6,536
<OTHER-EXPENSES> 71,888
<LOSS-PROVISION> 404
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 5,893
<INCOME-TAX> 1,609
<INCOME-CONTINUING> 4,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,284
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,488
<SECURITIES> 25,682
<RECEIVABLES> 13,319
<ALLOWANCES> (1,132)
<INVENTORY> 1,100
<CURRENT-ASSETS> 70,437
<PP&E> 22,590
<DEPRECIATION> (9,194)
<TOTAL-ASSETS> 93,499
<CURRENT-LIABILITIES> 14,893
<BONDS> 0
0
0
<COMMON> 86,438
<OTHER-SE> (7,832)
<TOTAL-LIABILITY-AND-EQUITY> 93,499
<SALES> 64,924
<TOTAL-REVENUES> 64,924
<CGS> 4,298
<TOTAL-COSTS> 4,298
<OTHER-EXPENSES> 70,625
<LOSS-PROVISION> 241
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (7,526)
<INCOME-TAX> (1,405)
<INCOME-CONTINUING> (6,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,121)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 22,638
<SECURITIES> 44,287
<RECEIVABLES> 8,306
<ALLOWANCES> (904)
<INVENTORY> 461
<CURRENT-ASSETS> 80,913
<PP&E> 10,489
<DEPRECIATION> (4,217)
<TOTAL-ASSETS> 91,362
<CURRENT-LIABILITIES> 9,520
<BONDS> 0
0
0
<COMMON> 83,344
<OTHER-SE> (1,503)
<TOTAL-LIABILITY-AND-EQUITY> 91,362
<SALES> 55,011
<TOTAL-REVENUES> 55,011
<CGS> 2,581
<TOTAL-COSTS> 2,581
<OTHER-EXPENSES> 73,575
<LOSS-PROVISION> 558
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (18,888)
<INCOME-TAX> (4,586)
<INCOME-CONTINUING> (14,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,302)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)

</TABLE>