CORAL SYSTEMS INC, S-1/A, 1996-12-19

CORAL SYSTEMS INC
S-1/A, 1996-12-19
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1996

REGISTRATION NO. 333-14333
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3

TO
FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CORAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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<S> <C> <C>
DELAWARE 7563 84-11777-92
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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1500 KANSAS AVENUE, SUITE 2E
LONGMONT, COLORADO 80501
(303) 772-5800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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ERIC A. JOHNSON
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
CORAL SYSTEMS, INC.
1500 KANSAS AVENUE, SUITE 2E
LONGMONT, COLORADO 80501
(303) 772-5800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:

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<S> <C>
JAMES C.T. LINFIELD JEFFREY D. SAPER
COOLEY GODWARD LLP J. ROBERT SUFFOLETTA
2595 CANYON BOULEVARD, SUITE 250 WILSON SONSINI GOODRICH & ROSATI, P.C.
BOULDER, COLORADO 80302-6737 650 PAGE MILL ROAD
(303) 546-4000 PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

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

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

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

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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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Common Stock, $0.001 par value........ 3,105,000 Shares $12.00 $37,260,000 $11,290.91
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(1) Includes 405,000 shares of Common Stock issuable upon exercise of the
Underwriters over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.

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

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<PAGE> 2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED DECEMBER 19, 1996

2,700,000 SHARES
[CORAL SYSTEMS LOGO]
COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Coral
Systems, Inc. ("Coral Systems" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $10.00 and
$12.00 per share. See "Underwriting" for the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "CSYS."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE
INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.

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

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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share...................... $ $ $
Total(3)....................... $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting offering expenses payable by the Company estimated at
$1,025,000.

(3) The Company and certain stockholders (the "Selling Stockholders") have
granted to the Underwriters a 30-day option to purchase up to 405,000
additional shares of Common Stock solely to cover over-allotments, if any.
If the Underwriters exercise this option in full, the Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and
$ , respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them, and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1996.

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MONTGOMERY SECURITIES
COWEN & COMPANY
UBS SECURITIES

, 1996
<PAGE> 3

Graphic under the heading "Technological Flexibility for Wireless Applications"
with a relational schematic showing a figure labeled "Coral Systems Core
Technology" at the center connected to a figure labeled "Coral Systems
Applications," including "Future Applications," "FraudBuster(R)" and
"ChurnAlert(R)," and a figure labeled "Multiple Third Party Platforms,"
including "Hardware," "Other Data Interfaces," "Transaction Processors" and
"Databases."

Photographs under the heading "Software Solutions for Wireless Carriers" with
(i) one photograph of the ChurnAlert product splash screen with the Coral
Systems logo and slogan "The Software Standard in Wireless;" (ii) three
photographs of the ChurnAlert graphical user interface; (iii) the following
statement: "ChurnAlert is a software product that enables carriers to use
adjustable analyses to proactively address the needs of subscribers who are
likely to terminate service, or churn;" (iv) one photograph of the FraudBuster
product splash screen with the Coral Systems logo and slogan "The Software
Standard in Wireless;" (v) three photographs of the FraudBuster graphical user
interface and (vi) the following statement: "FraudBuster is a fraud management
software product which includes a fraud profiler and subscription fraud
monitoring techniques and is designed to identify most commonly known types of
wireless fraud."

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

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PROSPECTUS SUMMARY

This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated in such forward-looking statements.

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus:
(i) gives effect to the conversion of each outstanding share of Preferred Stock
into Common Stock upon the closing of this offering, (ii) has been adjusted to
reflect a 1-for-2 reverse stock split of the Common Stock effected on December
5, 1996, and (iii) assumes no exercise of the Underwriters' over-allotment
option.

THE COMPANY

Coral Systems provides client-server software products for the wireless
telecommunications industry to enable carriers to reduce fraud and customer
turnover, or "churn," and increase operating efficiencies. The Company's
products are based upon its proprietary core technology, which provides several
key advantages, including rapid product development, portability, technology
independence and enhanced scalability. The Company's fraud management software,
FraudBuster, incorporates a fraud profiler and subscription fraud monitoring
functionality and is designed to combat most currently identified types of
wireless fraud. Unlike many other fraud prevention techniques which typically
address specific types of fraud, FraudBuster detects multiple types of existing
and emerging fraud, including cloning, subscription fraud, tumbling fraud and
cellular telephone theft. Coral Systems' veRiFier line extension, when released,
will expand the FraudBuster solution by providing interfaces to complementary
fraud prevention products, including radio frequency ("RF") signature detection.
The Company's churn prevention product, ChurnAlert, allows carriers to analyze
and identify potential churn candidates before they seek customer service
assistance or deactivate service. The Company's Home Location Register ("HLR")
networking product facilitates seamless roaming and enhanced services and
optimizes switch capacity with minimal capital outlays. The Company's Data
Message Handler ("DMH") networking product, when released, will enable carriers
to capture and distribute data on a near real-time basis to facilitate billing,
wireless fraud detection, churn prevention and customer service applications.

Wireless telecommunications is one of the fastest growing segments of the
telecommunications industry and has become increasingly competitive as a result
of a number of recent regulatory and technological changes, causing increasing
pressure on carrier profitability. Subscriber growth, new market entrants,
declining revenue per subscriber and the transition to a mass market subscriber
base have created significant challenges for wireless carriers, including rising
losses from fraud and churn, growing strains on network capacity and increasing
demand for enhanced services. Industry sources estimate that in the U.S. the
total revenue lost to wireless telecommunications fraud was approximately $650
million in 1995, up from $482 million in 1994. Wireless carriers are also
focusing on improving customer retention to reduce subscriber churn as the cost
of acquiring new subscribers increases. Wireless carriers in the U.S. have
recently experienced average annual subscriber churn at rates of 26% to 36%.
Fraud and churn also pose significant problems for carriers in many
international markets.

The Company's objective is to become a leading provider of software
solutions for a broad range of challenges facing wireless carriers by
capitalizing on the growth of the wireless telecommunications industry,
leveraging its proprietary core technology to develop new products and enhanced
versions of existing products, and maximizing its recurring revenue stream
through a per subscriber license fee model. Coral Systems licenses its products
pursuant to agreements that typically provide for an initial license fee and an
annual maintenance fee for a defined number of subscribers, as well as
additional license and maintenance fees for net subscriber additions. The
Company has entered into strategic development and distribution relationships
with manufacturers and providers of switching equipment and billing services,
including Cincinnati Bell Information Systems, Inc. ("CBIS"), Ericsson Radio
Systems AB ("Ericsson"), Lucent Technologies Inc. ("Lu-

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cent") and Nortel. Wireless carriers using the Company's products include
AirTouch Communications, Inc. ("AirTouch"), BellSouth PCS, Cox Communications,
Orange Personal Communications Services and Sprint Spectrum.

The Company was incorporated in Colorado in August 1991 and reincorporated
in Delaware in April 1995. The Company's executive offices are located at 1500
Kansas Avenue, Suite 2E, Longmont, Colorado 80501, and its telephone number is
(303) 772-5800.
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The Company intends to furnish its stockholders with annual reports
containing audited financial statements and an opinion thereon expressed by
independent certified public accountants and with quarterly reports for the
first three quarters of each fiscal year containing interim unaudited financial
information.

FraudBuster(R), ChurnAlert(R) and veRiFier(TM) are trademarks of the
Company. All other brand names and trademarks appearing in this Prospectus are
the property of their respective holders.

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THE OFFERING

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Common Stock to be offered............... 2,700,000 shares
Common Stock to be outstanding after the
offering............................... 9,930,137 shares(1)
Use of proceeds.......................... For working capital and other general corporate purposes
Proposed Nasdaq National Market symbol... CSYS
</TABLE>

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

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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue....................................... $ 504 $ 1,417 $ 3,890 $ 3,093 $ 6,183
Cost of revenue..................................... 244 508 1,909 1,542 1,474
------- ------- ------- ------- -------
Gross profit........................................ 260 909 1,981 1,551 4,709
Operating expenses:
Research and development.......................... 414 573 2,160 1,496 1,953
Sales and marketing............................... 158 645 1,870 1,427 2,629
General and administrative........................ 677 886 1,351 1,066 1,765
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Total operating expenses.................... 1,249 2,104 5,381 3,989 6,347
------- ------- ------- ------- -------
Loss from operations................................ (989) (1,195) (3,400) (2,438) (1,638)
Other income (expense), net......................... (61) (33) 9 15 (31)
------- ------- ------- ------- -------
Loss before extraordinary item...................... (1,050) (1,228) (3,391) (2,423) (1,669)
Extraordinary item:
Gain on extinguishment of debt and other
liabilities(2).................................. -- -- -- -- 243
------- ------- ------- ------- -------
Net loss............................................ $(1,050) $(1,228) $(3,391) $(2,423) $(1,426)
======= ======= ======= ======= =======
Pro forma net loss per common share before
extraordinary item................................ $ (.21)
=======
Pro forma net loss per common share................. $ (.48) $ (.18)
======= =======
Pro forma weighted average number of shares
outstanding....................................... 7,097 8,096
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QUARTER ENDED
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SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1996 1996 1996
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Total revenue....................................... $ 274 $ 796 $ 1,029 $1,557 $3,598
Cost of revenue..................................... 251 366 257 393 823
------- ------ ------- ------ ------
Gross profit........................................ 23 430 772 1,164 2,775
Operating expenses:
Research and development.......................... 540 663 699 585 668
Sales and marketing............................... 464 443 659 829 1,142
General and administrative........................ 288 285 399 651 716
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Total operating expenses.................... 1,292 1,391 1,757 2,065 2,526
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Income (loss) from operations....................... (1,269) (961) (985) (901) 249
Other income (expense), net......................... 7 (7) (37) 7 (2)
------- ------ ------- ------ ------
Income (loss) before extraordinary item............. (1,262) (968) (1,022) (894) 247
Extraordinary item:
Gain on extinguishment of debt and other
liabilities(2).................................. -- -- -- -- 243
------- ------ ------- ------ ------
Net income (loss)................................... $(1,262) $ (968) $(1,022) $ (894) $ 490
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SEPTEMBER 30, 1996
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $3,374 $ 30,174
Total assets.............................................................................. 6,983 33,783
Long-term debt, non-current portion....................................................... 313 313
Stockholders' equity...................................................................... 2,754 29,554
</TABLE>

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(1) Does not include (i) 1,102,346 shares of Common Stock issuable upon exercise
of stock options outstanding as of September 30, 1996, granted under the
Company's Amended and Restated Stock Option Plan (the "Stock Option Plan")
at a weighted average exercise price of $1.26 per share and (ii) 979,937
shares of Common Stock issuable upon exercise of warrants outstanding as of
September 30, 1996, at a weighted average exercise price of $0.28 per share.
See "Management -- Stock Option Plan" and "Description of Capital Stock."
(2) In September 1996, the Company extinguished a previously recorded net
liability of $658,300. The Company settled this obligation for $415,000,
resulting in a gain of $243,300 which was recorded as an extraordinary item.
(3) Adjusted to reflect the sale of the 2,700,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price at $11.00 and the
application of the estimated net proceeds therefrom.

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RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should consider carefully the following risk
factors in evaluating the Company and its business before purchasing shares of
the Common Stock offered hereby.

LIMITED OPERATING HISTORY; LACK OF PROFITABILITY

The Company was incorporated in August 1991 and first recognized software
license revenue in the fourth quarter of 1993. Prior to that time, the Company
operated as a development stage company with revenue consisting solely of
software development fees. The Company did not begin to generate meaningful
software license revenue until the second quarter of 1995. Accordingly, the
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development. The Company was
not profitable on a quarterly basis until the quarter ended September 30, 1996,
has not achieved profitability on an annual basis and, as of September 30, 1996,
had an accumulated deficit of $7.7 million. In view of the Company's short
operating history, the rapidly changing nature of the wireless
telecommunications market and the uncertainty of market acceptance of the
Company's products, the Company's recent growth in revenue may not be
sustainable and should not be considered indicative of future results or growth.
There can be no assurance that the Company will achieve or sustain profitability
in the future on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

FLUCTUATIONS IN FUTURE OPERATING RESULTS

The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results due to a variety of factors,
including the size and rate of growth of the wireless telecommunications market,
market acceptance of the Company's products and those of its competitors, the
size and timing of customer orders, development and marketing expenses relating
to the introduction of new or enhanced products, the timing and degree of
success of product introductions by the Company and its competitors, changes in
pricing policies by the Company and its competitors, the long sales cycles
associated with the Company's products, the mix of products and services
delivered by the Company, the accuracy of forecasts of carrier demand,
development delays, changes in hardware platforms and general economic
conditions. In response to competitive pressures or otherwise, the Company may
take certain pricing or marketing actions that could materially adversely affect
its business or operating results. Because of the relatively large dollar size
of the Company's typical software license fee, any delay in the closing of a
transaction could adversely impact the Company's operating results for a
particular quarter. The Company may also be required to reduce license fees or
undertake significant custom development without compensation in connection with
its licensing transactions. Further, due in part to the time required to
implement the Company's products, the Company may experience potentially
significant delays in recognizing revenue. The Company's expense levels are
relatively fixed and are based, in part, on its expectations regarding future
sales and, as a result, the Company's business, operating results and financial
condition would be materially and adversely affected by a decrease in sales or a
failure to meet the Company's sales expectations. There can be no assurance that
the Company will achieve or sustain profitability on a quarterly or annual
basis. It is likely that in some future quarter the Company's revenue or
operating results will be below the expectations of stock market securities
analysts and investors. In such event, the price of the Company's Common Stock
would likely decline, perhaps substantially. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON FRAUDBUSTER PRODUCT

To date, the majority of the Company's revenue has been attributable to
license revenue from FraudBuster, the Company's fraud management software
product. During fiscal 1995 and the nine months ended September 30, 1996,
FraudBuster accounted for approximately 51.1% and 62.9%, respectively, of the

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Company's total revenue. In addition, a significant portion of the Company's
service and hardware revenue for these periods was directly attributable to the
licensing of FraudBuster. The Company has realized limited revenue to date from
its other products and services including ChurnAlert and its HLR. The Company
anticipates that FraudBuster will continue to account for a substantial portion
of revenue for the foreseeable future. Accordingly, any significant overall
decline in revenue from FraudBuster would have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future operating results are dependent upon continued market acceptance of
FraudBuster and enhancements thereto. There can be no assurance that FraudBuster
will continue to achieve market acceptance or that the Company will be
successful in marketing enhancements thereto. There can be no assurance that
current revenue or margin levels from this product will be sustained. The
Company anticipates that its existing and new competitors will introduce
additional products that compete with FraudBuster, particularly if the demand
for fraud prevention software products increases. In the event that the
Company's current or future competitors release new products that have more
advanced features, offer better performance or are more price competitive than
FraudBuster, the Company's business, operating results and financial condition
could be materially and adversely affected. See "Business -- Products" and
"-- Product Development."

DEPENDENCE ON CONTINUED GROWTH OF CELLULAR MARKET; UNCERTAIN ACCEPTANCE OF PCS

The Company provides its services primarily to cellular and Personal
Communications Service ("PCS") carriers. Although the cellular market has
experienced significant growth in recent years, there can be no assurance that
such growth will continue at similar rates, if at all, or that cellular carriers
will continue to use the Company's products or services. The Company's future
financial performance will depend to a large extent on the number of carriers
seeking third-party solutions to the problems of fraud and customer churn. There
can be no assurance that the market for these solutions will continue to grow or
that, if such market does grow, there will be continued demand for the Company's
products. Any decline in demand for the Company's products and services or for
cellular service in general, whether as a result of competition, technological
change, general economic conditions or other factors, would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future operating results will depend in large part on
the emergence of the PCS market and the use of the Company's products and
services by PCS carriers. Currently, the PCS market is in its initial stages of
development, and if this market does not grow as expected or if the carriers in
this market do not use the Company's products, the Company's business, operating
results and financial condition would be materially and adversely affected.

COMPETITION

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software market. Tandem Computers is the Company's principal competitor for its
HLR products and services. In addition, with the deployment of its own HLR
products, the Company will begin to compete with vendors who have licensed the
Company's HLR product source code. To the extent that competitors achieve higher
product quality, lower price, greater functionality or other advantages relative
to the Company's products, the Company's business, operating results and
financial condition could be materially and adversely affected. There can be no
assurance that the Company will have the resources required to respond
effectively to market or technological changes or to compete successfully in the
future. Furthermore, increasing competition in the wireless telecommunications
industry may cause prices to fall, which may materially and adversely affect the
Company's business, operating results and financial condition. Current and
potential competitors have established or may in the future establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances may
emerge and rapidly acquire significant market share. If this were to occur, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Business -- Competition."

CUSTOMER CONCENTRATION; DEPENDENCE ON DISTRIBUTORS

To date, a significant portion of the Company's revenue in any particular
period has been attributable to a limited number of customers, comprised of both
distributors and carriers. Comcast Cellular Communications, Pacific Synergy,
Motorola and AirTouch accounted for 22.1%, 22.1%, 11.7% and 11.2%, respectively,
of the Company's total revenue in 1995 and Lucent and DSC Technologies accounted
for 66.5% and 13.7%, respectively, of the Company's total revenue in the nine
months ended September 30, 1996. The Company expects a relatively small number
of customers will continue to represent a significant percentage of its total
revenue for each quarter for the foreseeable future, although the companies that
comprise the largest customers in any given quarter are expected to change from
quarter to quarter. The terms of the Company's agreements with its customers are
generally for periods of five years and although these agreements typically
contain a growth component based on net new subscribers in addition to an
initial license fee, there are no minimum payment obligations to the Company
after the initial licensing fee. Therefore, there can be no assurance that any
of the Company's customers will continue to utilize the Company's services in
amounts similar to previous years, if at all.

The Company's products are currently distributed or marketed in conjunction
with, among others, Lucent, Ericsson, Nortel and CBIS. License revenue from all
distributors accounted for approximately 53.8% and 72.0% of the Company's total
revenue in 1995 and the nine months ended September 30, 1996, respectively. The
Company believes its dependence on distributors will increase in the future.
There are no minimum purchase obligations applicable to any distributor and the
Company generally licenses to these entities on an individual purchase order
basis with no guarantee of continuing orders. The loss of, or significant
reduction in, license revenue through any of the Company's principal
distributors could materially adversely affect the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Sales, Marketing
and Distribution" and "-- Customers and Customer Support."

LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; RISK OF
LITIGATION

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by a court having jurisdiction over a dispute involving such patents. In
addition, since patent applications in the United States are not publicly
disclosed until the patent issues and foreign patent applications generally are
not publicly disclosed for at least a portion of the time that they are pending,
applications may have been filed by entities other than the Company which, if
issued as patents, may relate to the Company's products. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future based on existing patents or future patents or that such
claims will not be successful.

The Company does not include in its products any mechanism to prevent or
inhibit unauthorized copying. Unauthorized copying is common within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be materially and adversely affected. Furthermore, the Company
may enter into transactions in countries where intellectual property laws are
not well developed and where legal protection of the Company's rights may be
ineffective. Also, as the number of software products in the industry increases,
and the possibility for overlapping functionality increases, software developers
may increasingly become subject to infringement claims. There can be no
assurance that third parties will not assert infringement claims against the
Company with respect to current or future products. From time to time, the
Company receives notices from third parties claiming infringement of
intellectual property rights of such parties. The Company investigates these
claims and responds as it deems appropriate. However, there can be no assurance
that the Company's response will satisfy the party sending the notice, or that
such party will not institute a claim against the Company. The scope of
protection accorded to patents covering software-related inventions is evolving
and is subject to a significant degree of uncertainty. Any claims or litigation,
with or without merit, could be costly, time-consuming and could result in a
diversion of management's attention, which could have a material adverse effect
on the Company's business, operating results and financial condition. In
addition, such claims could cause product shipment delays or require the Company
to enter into royalty or licensing agreements which may not be available on
terms acceptable to the Company or at all, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. There has been substantial litigation regarding copyright, trademark
and other intellectual property rights involving computer software companies and
there can be no assurance that the Company will not be subject to litigation
regarding these matters in the future. Adverse determinations in such claims or
litigation could also have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Intellectual
Property."

RISK OF PATENT INTERFERENCE ACTION

The Company's one issued U.S. patent relates to specific aspects of its
fraud detection and profiling technology, including aspects that have been or
may in the future be used in FraudBuster or other Company products. The Company
has filed a continuation application for this issued patent to pursue additional
claims. The Company received notice from the United States Patent and Trademark
Office that the issued patent and the continuation application are being
reviewed to determine if an interference action should be declared between the
Company and another party. Such an interference action may be declared if there
is interfering subject matter in the Company's patent or patent application and
the other party's patent or patent application to determine whether the Company
or the other party is entitled to a patent claiming such subject matter.
Interference actions may be complex and expensive, and the outcome of such
actions is often difficult to predict. Accordingly, in the event that an
interference action is declared, the Company may consider opportunities to
settle the interference action on terms acceptable to the Company. Any such
settlement may require licensing of the Company's patent rights which may
diminish their value to the Company. In addition, there can be no assurance that
the Company will pursue a settlement or that a settlement would be reached on
terms acceptable to the Company. In the event that the Company could not settle
any such interference action and were declared to have interfered, it could lose
some or all of the claims in the Company's existing patent and/or the
continuation application and be subject to patent infringement claims for its
use of the technology

9
<PAGE> 11

in question. Any such action or claim could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Intellectual Property."

LENGTHY SALES CYCLE

A carrier's decision to license one of the Company's products typically
involves a significant commitment of capital by the customer, with the attendant
delays frequently associated with significant capital expenditures. In addition,
purchases of the Company's products involve multilevel testing, integration,
implementation and support requirements. For these and other reasons, the sales
cycle associated with the licensing of the Company's products typically ranges
from 6 to 18 months and is subject to a number of risks over which the Company
has little or no control, including customers' budgetary and capital spending
constraints and the internal purchasing approval processes of the customer.
Because of this lengthy sales cycle and the relatively large size of a typical
software license, if revenue forecasted from a specific customer for a
particular quarter is not realized in that quarter, the Company's operating
results for that quarter could be materially and adversely affected. See
"-- Fluctuations in Future Operating Results" and "Business -- Sales, Marketing
and Distribution."

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS AND RISK OF SOFTWARE
ERRORS OR FAILURES

The Company's success depends in part on the timely introduction and
success of new products or product enhancements. A significant delay in the
introduction of, or the presence of a defect in, one or more new products or
product enhancements could have a material adverse effect on the ultimate
success of such products or product enhancements and on the Company's business,
operating results and financial condition. Further, because of the revenue
typically associated with initial shipments of a new product or product
enhancement, delaying the introduction of a new product or product enhancement
expected near the end of a fiscal quarter may materially and adversely affect
operating results for that quarter or beyond. The process of developing software
products such as those offered by the Company is extremely complex and is
expected to become more complex and expensive in the future as new platforms and
technologies emerge. In the past, the Company has experienced significant delays
in the introduction of certain new products and product enhancements and the
Company anticipates that there will be similar delays in developing and
introducing new products and product enhancements in the future. There can be no
assurance that new products or product enhancements will be introduced on
schedule or at all or that they will achieve market acceptance or generate
significant revenue. Software products as complex as those offered by the
Company may contain undetected errors when first introduced or when new versions
are released. There can be no assurance that, despite testing by the Company,
errors will not be found in new products or product enhancements after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Technology."

CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS

The wireless telecommunications industry is undergoing rapid changes,
including evolving industry standards, frequent new product introductions and
changes in carrier requirements and preferences. The introduction of new
technologies might render some of the Company's existing products obsolete or
unmarketable. There can be no assurance that the current demand for the
Company's products will continue or that the mix of the Company's future product
offerings will keep pace with technological changes or satisfy evolving customer
preferences or that the Company will be successful in developing and marketing
products for any future operating system or industry standard. Failure to
develop and introduce new products and product enhancements in a timely fashion
could result in a loss of the Company's customers and could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Products," "-- Product Development" and
"-- Technology."

10
<PAGE> 12

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

While most of the Company's operations are not directly regulated, the
Company's customers are subject to a variety of governmental regulations. Such
regulations may decrease the growth of the wireless telephone industry,
adversely affect the development of the PCS market, limit the number of
potential customers for the Company's products or impede the Company's ability
to offer competitive products and services to the wireless telephone market or
otherwise have a material adverse effect on the Company's business, operating
results and financial condition. At the same time, recently enacted legislation
deregulating the telecommunications industry may cause changes in the industry,
including entrance of new competitors and industry consolidation, which could in
turn subject the Company to increased pricing pressures, decrease the demand for
the Company's products, increase the Company's cost of doing business or
otherwise have a material adverse effect on the Company's business, operating
results and financial condition. If the recent trend toward privatization and
deregulation of telecommunications markets outside of the U.S. were to
discontinue, or if currently deregulated international markets were to
reinstitute comprehensive government regulation of telecommunications services,
the Company's business, operating results and financial condition could be
materially and adversely affected.

ABILITY TO MANAGE GROWTH

The Company is currently experiencing a period of rapid growth that has
placed, and could continue to place, a significant strain on the Company's
operational, financial, management, administrative and other resources. The
Company's ability to manage its growth effectively will require it to continue
to improve its operational, financial and management information systems and to
attract, train, motivate, manage and retain key employees. There can be no
assurance that the Company's systems, procedures, controls and existing
facilities will be adequate to support expansion of the Company's operations. If
the Company is unable to manage its growth effectively, the Company's business,
operating results and financial condition could be materially and adversely
affected. See "Business -- Employees" and "Management."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent on the performance
and continued service of its senior management and certain key employees. In
particular, the loss of the services of Eric Johnson, the Company's Chairman of
the Board, President and Chief Executive Officer, could have a material adverse
effect on the Company. The Company maintains key-man life insurance policies on
Mr. Johnson as well as certain other management personnel, however, such
policies are not designed to fully compensate the Company for the loss of these
persons' services. Competition for highly skilled employees with technical,
management, marketing, sales, product development and other specialized training
is intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. Specifically, the Company may
experience increased costs in order to attract and retain skilled employees. The
loss of any of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to competitors,
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's failure to attract additional
qualified employees or to retain the services of key personnel could materially
and adversely affect the Company's business, operating results and financial
condition. See "Business -- Employees" and "Management."

DEPENDENCE ON THIRD-PARTY PRODUCTS AND SERVICES

Many of the Company's products incorporate or rely on products developed
and owned by third parties, including computer hardware, telecommunications
switching equipment, databases and on-line transaction monitors. Consequently,
the Company must rely upon third parties to develop and introduce products that
enhance the Company's current products and enable the Company, in turn, to
develop its own products on a timely and cost-effective basis to meet changing
customer needs and technological trends in the telecommunications industry. Any
impairment or termination of the Company's relationship with any vendor,
developer or licensor of third-party products would force the Company to seek
alternative sources for these products. There can be no assurance that the
Company will be able to obtain access in a timely manner to

11
<PAGE> 13

third-party products and development services necessary to enable the Company to
develop and introduce new and enhanced products, that the Company will obtain
third-party products and development services on commercially reasonable terms
or that the Company will be able to replace third-party products in the event
such products become unavailable, obsolete or incompatible with future versions
of the Company's products. The absence, or any significant delay in the
replacement, of third-party products could have a material adverse effect on the
Company's business, operating results and financial condition.

RISKS ASSOCIATED WITH REVENUE FROM INTERNATIONAL CUSTOMERS

Revenue from international customers accounted for approximately 27.2%,
34.7% and 4.8% of the Company's total revenue in 1994 and 1995 and the nine
months ended September 30, 1996, respectively, and the Company expects that
revenue from international customers may, in the future, account for a
significant portion of the Company's total revenue. The Company expects to
expand its sales efforts outside of the U.S., which will require significant
management attention and financial resources. Revenue from international
customers is subject to inherent risks, including unexpected changes in
regulatory requirements, tariffs and other trade barriers, political and
economic instability in foreign markets, difficulties in staffing and management
and integration of foreign operations, longer payment cycles, greater difficulty
in accounts receivable collection, currency fluctuations and potentially adverse
tax consequences. In particular, the Company recorded deferred revenue of
$308,000 in the second quarter of 1996 due to the receipt of a cash payment from
a foreign distributor representing partial payment under a contract with such
distributor to provide FraudBuster software that was intended for resale to a
single end user. The distributor is disputing payment of the remaining portion
of the license fee due under the contract and is claiming that the entire
license fee is conditioned upon the Company satisfying certain software
performance criteria which are specific to the end user. The Company believes
that satisfaction of these performance criteria is covered by the Company's
maintenance agreement with the distributor and that the Company's satisfaction
of such criteria is entirely independent of the distibutor's obligation to pay
the full amount of the license fee to the Company. While the Company intends to
vigorously pursue this matter, there can be no assurance that the Company will
be able to recognize any revenue from this transaction. Since most of the
Company's foreign sales are denominated in U.S. dollars, the Company's products
may also become less price competitive in countries in which local currencies
decline in value relative to the U.S. dollar. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"; "Business -- Sales,
Marketing and Distribution" and Note 9 to the Financial Statements.

CONCENTRATION OF SHARE OWNERSHIP; ANTI-TAKEOVER PROVISIONS

Based on the number of shares of Common Stock outstanding as of September
30, 1996, upon completion of this offering, the directors and officers of the
Company, together with certain entities affiliated with them, will own an
aggregate of 26.3% of the Company's outstanding Common Stock, assuming no
exercise of outstanding stock options or warrants (24.7% assuming the exercise
in full of the Underwriters' over-allotment option). As a result, these
stockholders will retain significant voting power in the election of all
directors and with respect to other matters requiring approval by the
stockholders of the Company. See "Management -- Directors and Executive
Officers" and "Principal and Selling Stockholders."

Upon the completion of this offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of undesignated preferred
stock and to determine the designations, preferences and rights and the
qualifications or restrictions of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate actions, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue shares of
preferred stock. In addition, the Company will, upon consummation of the
offering, be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, this statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period

12
<PAGE> 14

of three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Furthermore, certain other provisions of the Company's
Certificate of Incorporation and Bylaws, such as classification of the Board of
Directors and prohibitions against stockholders acting by written consent or
calling special meetings of stockholders, may have the effect of discouraging,
delaying or preventing a merger, tender offer or proxy contest, or other
transaction, even if such transaction could provide a premium to the market
price of the Company's Common Stock. See "Management" and "Description of
Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Company's Common Stock. In addition to the 2,700,000 shares of Common Stock
offered hereby, immediately after the closing of this offering and based upon
the number of shares outstanding as of September 30, 1996, there will be
7,230,137 shares of Common Stock outstanding, all of which are "restricted"
shares (the "Restricted Shares") under the Securities Act of 1933, as amended
(the "Securities Act"). Approximately 40,000 Restricted Shares will be eligible
for sale in the public market immediately following the date of the final
prospectus (the "Effective Date") pursuant to Rule 144(k) promulgated under the
Securities Act. In addition, based upon the number of shares outstanding as of
September 30, 1996, approximately 3,240,000 Restricted Shares will become
eligible for sale 180 days after the Effective Date, and approximately 250,000
shares will become eligible for sale 90 days after the Effective Date, upon
expiration of certain lock-up agreements with the Underwriters and pursuant to
Rules 144 and 701, subject in some cases to certain volume and other resale
restrictions pursuant to Rule 144. In addition, the Company intends to register
on Form S-8, within 90 days after the Effective Date, a total of 2,622,111
shares of Common Stock subject to certain outstanding warrants, outstanding
options or reserved for issuance under the Company's Stock Option Plan and the
Employee Stock Purchase Plan (the "Purchase Plan"). Following the filing of such
registration statement on Form S-8, approximately 109,000 shares issuable upon
the exercise of stock options will become eligible for sale in the public
market. Upon expiration of the lock-up agreements referred to above, holders of
approximately 5,138,000 shares of Common Stock and holders of warrants to
purchase approximately 251,000 shares of Common Stock will be entitled to
certain registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. See "Shares
Eligible for Future Sale."

NO SPECIFIC PLAN FOR PROCEEDS; PROCEEDS MAY NOT BE INVESTED TO YIELD SIGNIFICANT
RETURN

The Company currently has no specific plans for the net proceeds of this
offering other than for working capital and general corporate purposes.
Consequently, the Company's management will have the discretion to allocate a
significant portion of the net proceeds of this offering, and there can be no
assurance that these proceeds can or will be invested to yield a significant
return. Pending any such uses, the Company plans to invest the net proceeds in
investment-grade, interest-bearing securities. See "Use of Proceeds."

BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS AND SENIOR MEMBERS OF
MANAGEMENT

Immediately after the closing of this offering, based upon shares
outstanding as of September 30, 1996, the existing stockholders of the Company
will hold 7,230,137 shares of Common Stock, or approximately 72.8% of the total
number of shares of Common Stock then outstanding. This offering will create a
public market for the resale of shares held by the existing stockholders. The
existing holders of Common Stock will benefit from the conversion of all
outstanding preferred stock into shares of Common Stock due to the termination
of the senior rights, preferences and privileges of the outstanding preferred
stock. Upon the conversion of the outstanding shares of preferred stock at the
closing of this offering, the preferred stockholders will hold Common Stock with
a market value of approximately $43.9 million (at an assumed public offering
price of $11.00 per share). At the closing of this offering, senior members of
management will hold approximately 1,140,000 shares of Common Stock with a
market value of approximately $12,540,000 million (at an assumed public offering
price of $11.00 per share) and approximately 878,000 shares issuable upon
exercise of outstanding options and warrants, with a market value of

13
<PAGE> 15

approximately $9,658,000 million (at an assumed public offering price of $11.00
per share). The price per common equivalent share paid by the holders of the
Company's outstanding preferred stock and the price per share paid by the senior
members of management is significantly less than the proposed initial public
offering price for the Common Stock offered hereby. The total consideration paid
for the outstanding shares of preferred stock was approximately $10.7 million
and the total consideration paid by the senior members of management for their
outstanding shares of Common Stock was approximately $4,400. All of the shares
of Common Stock offered hereby are being sold by the Company. However, in the
event that the underwriters' over-allotment option is exercised in full, certain
senior members of management will sell an aggregate of 115,000 shares. See
"Dilution" and "Principal and Selling Stockholders."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after this offering. The initial
public offering price will be determined by negotiations between the Company and
the Representatives of the Underwriters and may not be indicative of future
market prices. The market price of the Company's Common Stock could be subject
to significant fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of new products by the Company
or its competitors and changes in earnings estimates or recommendations by
securities analysts or other events. Moreover, the stock market has experienced
extreme volatility that has particularly affected the market prices of equity
securities of many high technology companies and that has often been unrelated
or disproportionate to the operating performance of such companies. Broad market
fluctuations, as well as economic conditions generally and in the software
industry specifically, may materially and adversely affect the market price of
the Company's Common Stock. There can be no assurance that the market price of
the Common Stock will not decline below the initial public offering price. See
"Underwriting."

DILUTION

Investors participating in this offering will incur immediate and
substantial dilution of net tangible book value per share of $8.02. To the
extent that outstanding options and warrants to purchase Common Stock are
exercised, there will be further dilution. See "Dilution" and "Underwriting."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered by the Company hereby are estimated to be $26,800,000
($29,767,000 if the Underwriters' over-allotment option is exercised in full),
based on an assumed initial public offering price of $11.00 per share and after
deducting the estimated underwriting discount and offering expenses payable by
the Company.

The Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes. The amounts actually
expended by the Company for working capital purposes will depend upon a number
of factors, including future revenue growth, the amount of cash generated by the
Company's operations and the progress of the Company's product development
efforts. The Company may also use a portion of such net proceeds to acquire or
invest in businesses, products and technologies that are complementary to those
of the Company, although no specific acquisitions are planned as of the date of
this Prospectus, and no portion of the net proceeds has been allocated for any
particular acquisition.

Pending the uses described above, the Company intends to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends and currently intends
to retain any future earnings to finance the growth and development of its
business.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth at September 30, 1996 (i) the long-term debt
and capitalization of the Company and (ii) the long-term debt and capitalization
of the Company, as adjusted to give effect to conversion of all outstanding
preferred stock into Common Stock and the sale of the 2,700,000 shares of Common
Stock being offered by the Company hereby at an assumed initial public offering
price of $11.00 per share, and the application of the estimated proceeds
therefrom.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt...................................... $ 380 $ 380
======= =======
Long-term debt, non-current portion.................................... $ 313 $ 313
Stockholders' equity:
Preferred stock, $0.001 par value; 15,000,000 shares authorized and
5,908,253 outstanding, actual; and 5,000,000 shares authorized, no
shares outstanding, pro forma and as adjusted..................... 6 --
Common stock, $0.001 par value; 30,000,000 shares authorized and
3,234,433 shares outstanding, actual; and 25,000,000 shares
authorized and 9,930,137 shares outstanding, pro forma and as
adjusted(1)....................................................... 3 10
Additional paid-in capital............................................. 10,467 37,266
Accumulated deficit.................................................... (7,722) (7,722)
------- -------
Total stockholders' equity................................... 2,754 29,554
------- -------
Total capitalization.................................... $ 3,067 $29,867
======= =======
</TABLE>

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

(1) Does not include (i) 1,102,346 shares of Common Stock issuable upon exercise
of stock options outstanding as of September 30, 1996, granted under the
Company's Stock Option Plan at a weighted average exercise price of $1.26
per share and (ii) 979,937 shares of Common Stock issuable upon exercise of
warrants outstanding as of September 30, 1996, at a weighted average
exercise price of $0.28 per share. See "Management -- Stock Option Plan" and
"Description of Capital Stock."

15
<PAGE> 17

DILUTION

The net tangible book value of the Company at September 30, 1996, was
approximately $2,754,200, or $0.38 per share of Common Stock. Net tangible book
value per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding and
assuming conversion of all outstanding preferred stock into Common Stock. After
giving effect to the sale by the Company of 2,700,000 shares of Common Stock
offered hereby (at an assumed initial public offering price of $11.00 per share
and after deducting the estimated underwriting discount and offering expenses)
as well as the conversion of all outstanding preferred stock into Common Stock,
the pro forma net tangible book value of the Company at September 30, 1996 would
have been approximately $29,554,200, or $2.98 per share, representing an
immediate increase in such net tangible book value of $2.60 per share to
existing stockholders and an immediate dilution in net tangible book value of
$8.02 per share to purchasers of Common Stock in the offering. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $11.00
------
Net tangible book value per share before offering................. $0.38
Increase per share attributable to new investors.................. 2.60
-----
Pro forma net tangible book value per share after offering.......... 2.98
------
Dilution per share to new investors................................. $ 8.02
======
</TABLE>

The following table summarizes on a pro forma basis as of September 30,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid, the average price paid per share by the existing
stockholders and by the investors purchasing shares of the Common Stock in the
offering, as well as the conversion of all outstanding preferred stock into
Common Stock, (at an assumed initial public offering price of $11.00 per share
before deducting the estimated underwriting discount and offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 7,230,137 72.8% $10,476,300 26.1% $ 1.45
New investors............ 2,700,000 27.2 29,700,000 73.9 11.00
--------- ------ ----------- ------
Total.......... 9,930,137 100.0% $40,176,300 100.0%
========= ====== =========== ======
</TABLE>

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

Assuming full exercise of the Underwriters' overallotment option, the
percentage of shares held by existing stockholders would be 69.8% of the total
number of shares of Common Stock to be outstanding after this offering, and the
number of shares to be held by new stockholders would be increased to 3,105,000
shares, or 30.2% of the total number of shares of Common Stock to be outstanding
after this offering. See "Management -- Stock Option Plan," "Principal and
Selling Stockholders" and "Description of Capital Stock."

16
<PAGE> 18

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

The following table sets forth selected financial data of the Company. The
statement of operations data for each of the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1996, and the balance sheet
data at December 31, 1994 and 1995, and for the nine months ended September 30,
1996 are derived from, and are qualified by reference to, the Company's
Financial Statements included elsewhere in this Prospectus which have been
audited by Price Waterhouse LLP, independent accountants. The statement of
operations data for the years ended December 31, 1991 and 1992 and the balance
sheet data at December 31, 1991, 1992 and 1993 are derived from the Company's
financial statements not included herein. The statement of operations data for
the nine months ended September 30, 1995 have been derived from the unaudited
financial statements of the Company included elsewhere in the Prospectus. The
data should be read in conjunction with the Financial Statements, related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses................................ $ -- $ -- $ 215 $ 1,036 $ 2,485 $ 1,935 $ 5,212
Services and other............................... -- 699 179 240 625 532 356
Hardware......................................... -- -- 110 141 780 626 615
----- ----- ------- ------- ------- ------- -------
Total revenue.................................. -- 699 504 1,417 3,890 3,093 6,183
----- ----- ------- ------- ------- ------- -------
Cost of revenue:
Software licenses................................ -- 58 122 526 422 419
Services and other............................... 140 75 258 645 513 585
Hardware......................................... -- 111 128 738 607 470
----- ----- ------- ------- ------- ------- -------
Total cost of revenue.......................... -- 140 244 508 1,909 1,542 1,474
----- ----- ------- ------- ------- ------- -------
Gross profit....................................... -- 559 260 909 1,981 1,551 4,709
Operating expenses:
Research and development......................... 37 514 414 573 2,160 1,496 1,953
Sales and marketing.............................. 2 133 158 645 1,870 1,427 2,629
General and administrative....................... 86 417 677 886 1,351 1,066 1,765
----- ----- ------- ------- ------- ------- -------
Total operating expenses....................... 125 1,064 1,249 2,104 5,381 3,989 6,347
----- ----- ------- ------- ------- ------- -------
Loss from operations............................... (125) (505) (989) (1,195) (3,400) (2,438) (1,638)
Other income (expense), net........................ -- 3 (61) (33) 9 15 (31)
----- ----- ------- ------- ------- ------- -------
Loss before extraordinary item..................... (125) (502) (1,050) (1,228) (3,391) (2,423) (1,669)
Extraordinary item:
Gain on extinguishment of debt and other
liabilities(1)................................. -- -- -- -- -- -- 243
----- ----- ------- ------- ------- ------- -------
Net loss........................................... $(125) $(502) $(1,050) $(1,228) $(3,391) $(2,423) $(1,426)
===== ===== ======= ======= ======= ======= =======
Pro forma net loss per common share before
extraordinary item............................... $ (.21)
=======
Pro forma net loss per common share................ $ (.48) $ (.18)
======= =======
Pro forma weighted average number of shares
outstanding...................................... 7,097 8,096
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
----- ----- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 25 $ 215 $ 62 $ 83 $ 1,023 $ 3,374
Total assets....................................... 35 312 355 1,092 2,958 6,983
Long-term debt, non-current portion................ -- 167 500 22 146 313
Stockholders' equity (deficit)..................... 2 (450) (1,518) (754) 138 2,754
</TABLE>

- ---------------
(1) In September 1996, the Company extinguished a previously recorded net
liability of $658,300. The Company settled this obligation for $415,000,
resulting in a gain of $243,300 which was recorded as an extraordinary item.

17
<PAGE> 19

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

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and related notes thereto included elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, in "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

Coral Systems was founded in 1991 and develops, markets and supports
software solutions for the wireless telecommunications industry. Prior to the
fourth quarter of 1993, the Company operated as a development stage company with
revenue consisting solely of software development fees. The Company did not
begin to generate significant revenue until the second quarter of 1995. During
1995 and the nine months ended September 30, 1996, approximately 51.1% and
62.9%, respectively, of the Company's total revenue was attributable to licenses
of FraudBuster, the Company's fraud profiling software product. In addition, a
significant portion of the Company's service and hardware revenue for these
periods was directly attributable to the licensing of FraudBuster.

The Company generates revenue from software licenses, services (including
maintenance, installation and training), development and consulting contracts,
and certain hardware sold in conjunction with software licenses. The Company's
software license agreements typically provide for an initial license fee and an
annual maintenance fee for a defined number of subscribers, as well as
additional license and maintenance fees for net subscriber additions. This
provides a potential ongoing revenue stream, which enables the Company to
benefit from growth in the subscriber base of its customers. The Company also
has entered into license agreements that provide for either a one-time license
fee or a monthly license fee, each of which has an annual maintenance fee with
no additional fee based on incremental subscriber growth. Revenue from initial
license fees with end users is recognized when the product has been delivered
and the Company has satisfied all significant performance obligations, unless
terms of the sales arrangement provide for customer acceptance that is based on
non-standard performance or other terms. In the latter case, revenue is
recognized when the customer accepts the product pursuant to those terms.
Revenue for incremental subscriber growth, if any, is recognized at the date
subscriber growth is calculated and the revenue is earned pursuant to the terms
of the relevant software license agreement. Monthly license fees are recognized
as earned on a monthly basis. Maintenance revenue is recognized ratably over the
term of the maintenance agreement. Service revenue for installation and training
is recognized as the service is performed. Revenue from development and
consulting contracts is generally recognized as the services are performed,
using the percentage of completion method. Hardware is sold only in conjunction
with software licenses when required by the customer and such revenue is
deferred until the related license revenue is recognized.

The Company licenses its software products through a direct sales force,
international sales agents and distributors. Distributors include vendors of
telecommunications switching equipment, computer hardware and database software.
Sales agreements with distributors typically do not include any rights of return
or provisions for the future adjustment of the selling price. The Company
recognizes revenue from these transactions at the time the products are shipped
to the distributor, unless payment terms are contingent on the distributor's
subsequent resale or other significant matters. In those latter cases, revenue
is not recognized until the contingencies are resolved. To date, a significant
portion of the Company's revenue in any particular period has been attributable
to a limited number of customers which are comprised of both distributors and
carriers that purchased products and services directly from the Company. The
Company expects a relatively small number of customers will continue to
represent a significant percentage of its total revenue for the foreseeable
future, although the companies that comprise the largest customers in any given
quarter are expected to change from quarter to quarter. License revenue from all
distributors accounted for approximately 53.8% and 72.0% of the Company's total
revenue in 1995 and the nine months ended September 30, 1996, respectively.
Revenue from international customers accounted for approximately 34.7% and 4.8%
of the Company's total revenue in 1995 and the nine months ended September 30,
1996, respectively, and the

18
<PAGE> 20

Company expects that revenue from international customers may, in the future,
account for a significant portion of the Company's total revenue. Revenue from
international customers is subject to a number of inherent risks, including
increased practical and legal difficulties in accounts receivable collection.

Cost of software license revenue primarily includes fees paid to third
party software vendors, as well as costs associated with implementation of the
application software when necessary. Cost of service revenue consists primarily
of expenses for personnel engaged in customer support, installation, training
and consulting services. Cost of hardware consists of hardware purchased from
third party vendors plus shipping costs. The Company's gross margin has varied
significantly in the past and may vary significantly in the future, depending
primarily on the mix of services and products licensed or sold by the Company.
The Company's software licenses have a substantially higher gross margin than
its services and hardware revenue. Therefore, to the extent the Company's total
revenue for any particular period includes a higher proportion of lower margin
services or hardware, there will be a material adverse effect on the Company's
operating results.

The sale of the Company's software products to wireless carriers typically
involves a lengthy sales cycle ranging from 6 to 18 months. The length of the
sales cycle for the Company's products has caused, and may continue to cause,
material fluctuations in the Company's revenue and operating results on a
quarterly and annual basis. As a result, period-to-period comparisons on a
quarterly or annual basis are not necessarily meaningful and should not be
relied upon as indications of the Company's future performance.

The Company has received notice from Tadiran Corporation regarding an
alleged trademark infringement by the Company's use of the name Coral Systems,
Inc. The Company believes that it can settle such matter on terms acceptable to
the Company. In the event that the Company could not settle this matter on terms
acceptable to the Company, the Company may be required to change its name and,
as the costs involved in changing the Company's name could be significant, such
a name change could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Intellectual
Property."

19
<PAGE> 21

RESULTS OF OPERATIONS

The following table presents certain items from the Company's statement of
operations expressed as a percentage of total revenue for the respective
periods.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses......................... 42.7% 73.1% 63.9% 62.6% 84.3%
Services and other........................ 35.5 16.9 16.1 17.2 5.8
Hardware.................................. 21.8 10.0 20.0 20.2 9.9
------ ----- ----- ----- -----
Total revenue........................... 100.0 100.0 100.0 100.0 100.0
------ ----- ----- ----- -----
Cost of revenue:
Software licenses......................... 11.5 8.6 13.5 13.6 6.8
Services and other........................ 14.9 18.2 16.6 16.6 9.4
Hardware.................................. 22.0 9.1 19.0 19.7 7.6
------ ----- ----- ----- -----
Total cost of revenue................... 48.4 35.9 49.1 49.9 23.8
------ ----- ----- ----- -----
Gross profit................................ 51.6 64.1 50.9 50.1 76.2
Operating expenses:
Research and development.................. 82.1 40.4 55.5 48.4 31.7
Sales and marketing....................... 31.4 45.5 48.1 46.1 42.5
General and administrative................ 134.3 62.5 34.7 34.4 28.5
------ ----- ----- ----- -----
Total operating expenses................ 247.8 148.4 138.3 128.9 102.7
------ ----- ----- ----- -----
Loss from operations........................ (196.2) (84.3) (87.4) (78.8) (26.5)
Other income (expense)...................... (12.1) (2.4) 0.2 0.5 (0.5)
------ ----- ----- ----- -----
Loss before extraordinary item.............. (208.3) (86.7) (87.2) (78.3) (27.0)
Extraordinary item:
Gain on extinguishment of debt and other
liabilities............................. -- -- -- -- 3.9
------ ----- ----- ----- -----
Net loss.................................... (208.3)% (86.7)% (87.2)% (78.3)% (23.1)%
====== ===== ===== ===== =====
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

Revenue. Total revenue increased 100.0% from $3.1 million in the nine
months ended September 30, 1995 to $6.2 million in the nine months ended
September 30, 1996 due to a significant increase in software license revenue.

Software Licenses. Revenue from software licenses increased
173.7% from $1.9 million in the nine months ended September 30, 1995
to $5.2 million in the nine months ended September 30, 1996 and
represented 62.6% and 84.3%, respectively, of total revenue in these
periods. The increase in software license revenue for the nine months
ended September 30, 1996 was primarily attributable to increased
revenue from FraudBuster licenses and, to a lesser extent, to a
license of the Company's HLR product during this period.

Services and Other. Service revenue decreased 33.1% from $532,000
in the nine months ended September 30, 1995 to $356,000 in the nine
months ended September 30, 1996 and represented 17.2% and 5.8%,
respectively, of total revenue in these periods. Service revenue was
higher in the 1995 period due to revenue from a development agreement
for the Company's ChurnAlert product.

Hardware. Hardware revenue decreased slightly from $626,000 in
the nine months ended September 30, 1995 to $615,000 in the nine
months ended September 30, 1996 and represented 20.2% and 9.9%,
respectively, of total revenue in these periods. While hardware
revenue in aggregate terms remained relatively flat during the period,
it decreased as a percentage of total revenue as the Company's
software license revenue significantly increased during the period.

Cost of Revenue. Cost of revenue was $1.5 million for each of the nine
months ended September 30, 1995 and 1996. Overall gross profit as a percentage
of total revenue increased from 50.1% in the nine months ended

20
<PAGE> 22

September 30, 1995 to 76.2% in the nine months ended September 30, 1996. This
increase was primarily attributable to a significant increase in software
licenses as a percentage of total revenue.

Software Licenses. Cost of software licenses decreased slightly
from $422,000 in the nine months ended September 30, 1995 to $419,000
in the nine months ended September 30, 1996. Software license gross
profit as a percentage of software license revenue increased from
78.2% in the nine months ended September 30, 1995 to 92.0% in the nine
months ended September 30, 1996. This increase was primarily
attributable to an increase in the average license fee of the
Company's application software licenses as well as a decrease in third
party software expenses as a percentage of total software license
revenue. This increase was also attributable, to a lesser extent, to
improved margins on third party software sold in conjunction with
licensing the Company's FraudBuster product.

Services and Other. Cost of services increased from $513,000 in
the nine months ended September 30, 1995 to $585,000 in the nine
months ended September 30, 1996, and increased as a percentage of
service revenue from 96.4% in the nine months ended September 30, 1995
to 164.3% in the nine months ended September 30, 1996. This increase
was due primarily to increased customer support expenses related to
the hiring and training of personnel in anticipation of new customer
installations and future support requirements. In addition, in the
1996 period the Company recognized a lower proportion of development
fee revenue, which has a higher gross margin than maintenance fee
revenue.

Hardware. Cost of hardware decreased from $607,000 in the nine
months ended September 30, 1995 to $470,000 in the nine months ended
September 30, 1996, and decreased as a percentage of hardware revenue
from 97.0% in the nine months ended September 30, 1995 to 76.4% in the
nine months ended September 30, 1996. This decrease was due to the
Company's ability to obtain improved margins on hardware revenue.

Research and Development. Research and development costs primarily consist
of salaries and other personnel-related expenses, supplies, depreciation for
development equipment and third party contract resources used in the development
of the Company's software products. Research and development expenses increased
from $1.5 million in the nine months ended September 30, 1995 to $2.0 million in
the nine months ended September 30, 1996, primarily due to costs related to
enhancing existing products and the development of new products. Research and
development expenses represented 48.4% and 31.6% of total revenue in the nine
months ended September 30, 1995 and 1996, respectively. The Company has not
capitalized any software costs to date. The Company believes that it will
continue to devote substantial resources to product development and that
research and development expenses will continue to increase in absolute dollars.

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other personnel-related expenses including commissions, promotional
activities, public relations, consulting services and travel expenses related to
sales and marketing activities. Sales and marketing expenses increased from $1.4
million in the nine months ended September 30, 1995 to $2.6 million in the nine
months ended September 30, 1996. This increase was primarily due to increased
personnel and related costs, increased revenue from international customers, and
increased promotional spending. Sales and marketing expenses represented 46.1%
and 42.5% of total revenue in the nine months ended September 30, 1995 and 1996,
respectively. The Company believes that sales and marketing expenses will
increase in absolute dollars due to increased promotional activities and the
costs associated with increasing international sales activities.

General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related expenses, as well as
occupancy, insurance and professional services expenses. General and
administrative expenses increased from $1.1 million in the nine months ended
September 30, 1995 to $1.8 million in the nine months ended September 30, 1996.
This increase was primarily due to the addition of executive management and
support personnel to manage operations, legal fees associated with an
extraordinary gain from the extinguishment of debt, as well as facility
expansion and other related expenses necessary to support the Company's growth.
General and administrative expenses represented 34.4% and 28.5% of total revenue
in the nine months ended September 30, 1995 and 1996, respectively. The Company
believes that general and administrative expenses will increase in absolute
dollars as the Company expands its operations and becomes a public company.

21
<PAGE> 23

Extraordinary Gain on Extinguishment of Debt and Other Liabilities. During
the nine months ended September 30, 1996 the Company extinguished a previously
recorded net liability of $658,000. The Company settled the above obligation for
$415,000, resulting in a $243,000 extraordinary gain. The Company incurred
$127,000 in legal fees associated with this transaction that was included in
general and administrative expenses.

Provision (Benefit) for Income Taxes. Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109. Due to the
Company's history of pre-tax losses and uncertainty surrounding the timing of
realizing the benefits of its favorable tax attributes, the Company has recorded
a valuation allowance against all of its net deferred tax assets as of September
30, 1996.

YEARS ENDED DECEMBER 31, 1993, 1994, 1995

Revenue. Total revenue increased from $504,000 in 1993 to $1.4 million in
1994 and to $3.9 million in 1995, due to significant increases in software
license revenue during such periods.

Software Licenses. Software license revenue was $215,000, $1.0
million and $2.5 million in 1993, 1994 and 1995, respectively. In
1993, software license revenue consisted primarily of a sale of the
Company's HLR product design. In 1994 and 1995, software license
revenue consisted primarily of licenses of the Company's FraudBuster
product.

Services and Other. Service revenue was $179,000, $240,000 and
$625,000, in 1993, 1994 and 1995, respectively. In 1993, service
revenue consisted solely of product development fees for FraudBuster.
In 1994 and 1995, respectively, service revenue consisted of product
development fees for both FraudBuster and ChurnAlert of $203,000 and
$373,000. The remaining service revenue in 1994 and 1995 was primarily
from maintenance, installation and training fees derived from the
Company's software product licenses. In 1993, 1994 and 1995, the
portion of service revenue derived from product development fees was
100%, 84.6% and 59.7%, respectively.

Hardware. Hardware revenue was $110,000, $141,000 and $780,000 in
1993, 1994 and 1995, respectively. The increase in hardware revenue in
1993 and the substantial increase from 1994 to 1995 was the result of
increased customer demand for the Company to provide hardware in
conjunction with its software product licenses.

Cost of Revenue. Cost of revenue was $244,000, $508,000 and $1.9 million in
1993, 1994 and 1995, respectively. Overall gross profit as a percentage of
revenue increased from 51.6% in 1993 to 64.1% in 1994 and decreased to 50.9% in
1995. Overall gross profit fluctuated as a percentage of total revenue due to
changes in the amount of lower margin hardware sold as a percentage of total
revenue.

Software Licenses. The cost of software licenses increased from
$58,000 in 1993 to $122,000 in 1994 and increased to $526,000 in 1995,
each as a direct result of increased revenue from software licenses.
Software license gross profit increased as a percentage of software
license revenue from 73.0% in 1993 to 88.2% in 1994, and decreased to
78.8% in 1995. The changes in gross profit of software licenses were
primarily due to the cost of third party software associated with
specific software application licenses.

Services and Other. Cost of services increased from $75,000 in
1993 to $258,000 in 1994, and increased to $645,000 in 1995. Cost of
services as a percentage of service revenue increased from 41.9% in
1993 to 107.5% in 1994, and decreased to 103.2% in 1995. The increase
in cost of services as a percentage of service revenue from 1993 to
1994 was due to an increase in customer support personnel and related
maintenance expenses as well as the recognition of a lower proportion
of development fee revenue, which has a higher gross margin than
maintenance fee revenue. Higher margin product development revenue
decreased as a percentage of service revenue from 1994 to 1995.
However, due to improved margins on maintenance services, cost of
services as a percentage of service revenue decreased slightly from
1994 to 1995.

Hardware. Cost of hardware increased from $111,000 in 1993 to
$128,000 in 1994, and increased to $738,000 in 1995, primarily due to
increased levels of hardware sold in conjunction with software
licenses. Cost of hardware as a percentage of hardware revenue
decreased from 100.9% in 1993 to 90.8% in 1994, and increased to 94.6%
in 1995.

22
<PAGE> 24

Research and Development. Research and development expenses were $414,000,
$573,000 and $2.2 million in 1993, 1994 and 1995, respectively, and represented
82.1%, 40.4% and 55.5% of the Company's total revenue in such periods. The
increase in absolute dollars in 1994 was primarily attributable to increased
personnel and related expenses for the enhancement of the Company's FraudBuster
product. The increase in absolute dollars in 1995 was the result of increased
personnel and related expenses for the development of the Company's core
technology, its new ChurnAlert and veRiFier products, as well as additional
enhancements to FraudBuster. During 1995, the Company also incurred $460,000 in
third party contract development costs for veRiFier.

Sales and Marketing. Sales and marketing expenses were $158,000, $645,000
and $1.9 million in 1993, 1994 and 1995, respectively, and represented 31.4%,
45.5% and 48.1% of the Company's total revenue in such periods. Prior to 1994,
the Company relied primarily on reseller and distribution channels for the
marketing and sale of the Company's products. In 1994, the Company began
building a direct sales force as well as an infrastructure to manage
distribution channels, which significantly contributed to the increase in sales
and marketing expenses from 1993 to 1994. The increase in sales and marketing
expenses from 1994 to 1995 was a result of increased personnel and related
expenses for the Company's continued development of a direct sales force and
distribution channels, which in 1995 began to expand into international markets.

General and Administrative. General and administrative expenses were
$677,000, $886,000 and $1.4 million in 1993, 1994 and 1995, respectively, and
represented 134.3%, 62.5% and 34.7% of the Company's total revenue in such
periods. The increase in general and administrative expenses in each period
primarily resulted from increased personnel, facilities, professional services
and other expenses necessary to manage and support the Company's growth.

Provision (Benefit) for Income Taxes. The Company did not report any tax
provision (benefit) during any of three years ended December 31, 1993, 1994 or
1995. The Company recorded a valuation allowance against all of its net deferred
tax assets as of each of these respective year ends.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following tables present the Company's results of operations for each
of the last five quarters and the percentage relationship of certain items to
total revenue for the respective periods. The quarterly information is unaudited
but the Company believes that the information regarding each of these quarters
has been prepared on the same basis as the audited Financial Statements
appearing elsewhere in the Prospectus. In the opinion of management, all
necessary adjustments (consisting only of normal recurring adjustments) have
been included to present fairly the unaudited quarterly results when read in
conjunction with the Financial Statements and Notes thereto appearing elsewhere
in the Prospectus. The results of operations for any quarter are not necessarily
indicative of the results of any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1996 1996 1996
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses............................... $ 71 $ 549 $ 877 $1,288 $ 3,047
Services and other.............................. 129 93 111 91 154
Hardware........................................ 74 154 41 178 397
------- ------- ------- ------ ------
Total revenue................................. 274 796 1,029 1,557 3,598
------- ------- ------- ------ ------
Cost of revenue:
Software licenses............................... 35 104 51 131 237
Services and other.............................. 148 132 185 134 266
Hardware........................................ 68 130 21 128 320
------- ------- ------- ------ ------
Total cost of revenue......................... 251 366 257 393 823
------- ------- ------- ------ ------
Gross profit...................................... 23 430 772 1,164 2,775
Operating expenses:
Research and development........................ 540 663 699 585 668
Sales and marketing............................. 464 443 659 829 1,142
General and administrative...................... 288 285 399 651 716
------- ------- ------- ------ ------
Total operating expenses...................... 1,292 1,391 1,757 2,065 2,526
------- ------- ------- ------ ------
Income (loss) from operations..................... (1,269) (961) (985) (901) 249
Other income (expense), net....................... 7 (7) (37) 7 (2)
------- ------- ------- ------ ------
Income (loss) before extraordinary item........... (1,262) (968) (1,022) (894) 247
Extraordinary item:
Gain on extinguishment of debt and other
liabilities(1)................................ -- -- -- -- 243
------- ------- ------- ------ ------
Net income (loss)................................. $(1,262) $ (968) $(1,022) $ (894) $ 490
======= ======= ======= ====== ======
</TABLE>

23
<PAGE> 25

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1996 1996 1996
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses............................... 25.9% 69.0% 85.2% 82.8% 84.7%
Services and other.............................. 47.1 11.7 10.8 5.8 4.3
Hardware........................................ 27.0 19.3 4.0 11.4 11.0
------- ------- ------- ------ ------
Total revenue................................. 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------ ------
Cost of revenue:
Software licenses............................... 12.8 13.1 5.0 8.4 6.6
Services and other.............................. 54.0 16.6 18.0 8.6 7.4
Hardware........................................ 24.8 16.3 2.0 8.2 8.9
------- ------- ------- ------ ------
Total cost of revenue......................... 91.6 46.0 25.0 25.2 22.9
------- ------- ------- ------ ------
Gross profit...................................... 8.4 54.0 75.0 74.8 77.1
Operating expenses:
Research and development........................ 197.1 83.3 67.9 37.6 18.6
Sales and marketing............................. 169.3 55.6 64.0 53.2 31.7
General and administrative...................... 105.1 35.8 38.8 41.8 19.9
------- ------- ------- ------ ------
Total operating expenses...................... 471.5 174.7 170.7 132.6 70.2
------- ------- ------- ------ ------
Income (loss) from operations..................... (463.1) (120.7) (95.7) (57.8) 6.9
Other income (expense), net....................... 2.5 (0.9) (3.6) 0.4 --
------- ------- ------- ------ ------
Income (loss) before extraordinary item........... (460.6) (121.6) (99.3) (57.4) 6.9
Extraordinary item:
Gain on extinguishment of debt and other
liabilities(1)................................ -- -- -- -- 6.7
------- ------- ------- ------ ------
Net income (loss)................................. (460.6)% (121.6)% (99.3)% (57.4)% 13.6%
======= ======= ======= ====== ======
</TABLE>

The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results due to a variety of factors,
including the size and rate of growth of the wireless telecommunications market,
market acceptance of the Company's products and those of its competitors, the
timing of orders from major customers, development and marketing expenses
relating to the introduction of new or enhanced products, the timing and degree
of success of product introductions by the Company and its competitors, changes
in pricing policies by the Company and its competitors, the long sales cycles
associated with the Company's products, the mix of products and services
delivered by the Company, the accuracy of forecasts of carrier demand,
development delays, changes in hardware platforms and general economic
conditions. In response to competitive pressures or otherwise, the Company may
take certain pricing or marketing actions that could materially adversely affect
its business or operating results. Because of the relatively large dollar size
of the Company's software licenses, any delay in the closing of a transaction
could adversely impact the Company's operating results for a particular quarter.
The Company may also be required to reduce license fees or undertake significant
custom development without compensation in connection with its licensing
transactions. Due in part to the time required to implement the Company's
products, the Company may experience potentially significant delays in
recognizing revenue. The Company's expense levels are relatively fixed and are
based, in part, on its expectations regarding future sales and, as a result, the
Company's business, operating results or financial condition would be materially
and adversely affected by a decrease in sales or a failure to meet the Company's
sales expectations. There can be no assurance that the Company will achieve or
sustain profitability on a quarterly or annual basis. It is likely that in some
future quarter the Company's revenue or operating results will be below the
expectations of stock market securities analysts and investors. In such event,
the price of the Company's Common Stock would likely decline, perhaps
substantially.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through the private
placements of equity and debt securities, capital equipment leases, and, to a
lesser extent, bank borrowings. Since inception, the Company has raised $10.9
million of gross proceeds from the sale of its capital stock. Net cash used in
operations for 1993, 1994, 1995, and the nine months ended September 30, 1996,
totaled $952,000, $1.3 million, $3.0 million and $727,000, respectively.

24
<PAGE> 26

Net cash used in investing activities for 1993, 1994, 1995, and the nine
months ended September 30, 1996, totaled $95,000, $195,000, $316,000 and
$337,000, respectively. Investment activities have been primarily for the
purchase of hardware and software used in product development, as well as
fixtures and equipment to support the Company's operations. During 1995, the
Company secured a $750,000 capital equipment lease line, of which $694,000 had
been drawn as of September 30, 1996. The lease line requires monthly payments
over three years, commencing from the date of the funding of each equipment
schedule. As the Company expands its operations, it expects to incur capital
expenditures for additional computer equipment for product development, fixtures
and equipment for new employees and expansion of the Company's facilities. The
Company may utilize a portion of the net proceeds of this offering for such
expenditures.

In addition to the capital equipment lease line, the Company has a $750,000
revolving variable rate note with a bank. At September 30, 1996, the Company had
drawn down $150,000 on the note. The note matures on April 26, 1997 and provides
for monthly interest payments at the bank's prime rate plus 1.25%, with the
principal due at maturity. The note is secured by all cash, accounts receivable,
furniture and equipment, inventory and all transferable third party software
rights of the Company and includes a requirement that the Company maintain a
minimum deposit balance of $250,000 at the bank when the outstanding balance on
the note exceeds $500,000.

The Company may, on occasion, receive advance payments prior to delivery
and acceptance of its products and services. Such advance payments are treated
as deferred revenue until such time as performance requirements and customer
acceptance are achieved. In particular, the Company recorded deferred revenue of
$308,000 in the second quarter of 1996 due to the receipt of a cash payment from
a foreign distributor. See "Risk Factors -- Risks Associated with Revenue from
International Customers" and Note 9 to the Financial Statements.

A hardware manufacturer advanced the Company $400,000 in 1992 for the
development of one of the Company's products to operate on the manufacturer's
hardware. The Company has an agreement with the hardware manufacturer by which
the Company earns revenue based on a percentage of the sales price of the
manufacturer's hardware sold by the Company. Any revenue earned by the Company
from the sale of the manufacturer's hardware will first be applied to this
advance. The $400,000 advance has been recorded as deferred revenue until earned
from the sale of the manufacturer's hardware. At September 30, 1996, deferred
revenue related to this agreement was $385,000.

The Company believes that the net proceeds from this offering, together
with existing cash and cash equivalents as well as amounts available under
existing credit facilities, will be sufficient to finance the Company's needs
through at least the next 12 months.

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<PAGE> 27

BUSINESS

Coral Systems provides client-server software products for the wireless
telecommunications industry to enable carriers to reduce fraud and customer
turnover, or "churn," and increase operating efficiencies. The Company's
products are based upon its proprietary core technology, which provides several
key advantages, including rapid product development, portability, technology
independence and enhanced scalability. The Company's fraud management software,
FraudBuster, includes a fraud profiler and subscription monitoring techniques
and is designed to combat most currently-identified types of wireless fraud.
Unlike many other fraud prevention techniques which typically address specific
types of fraud, FraudBuster detects multiple types of existing and emerging
fraud, including cloning, subscription fraud, tumbling fraud and cellular
telephone theft. Coral Systems' veRiFier line extension, when released, will
expand the FraudBuster solution by providing interfaces to complementary fraud
prevention products, including radio frequency ("RF") signature detection. The
Company's churn prevention product, ChurnAlert, allows carriers to analyze and
identify potential churn candidates before they seek customer service assistance
or deactivate service. The Company's Home Location Register ("HLR") networking
product facilitates seamless roaming and enhanced services and optimizes switch
capacity with minimal capital outlays. The Company's Data Message Handler
("DMH") networking product, when released, will enable carriers to capture and
distribute data on a near real-time basis to facilitate billing, wireless fraud
detection, churn prevention and customer service applications.

INDUSTRY BACKGROUND

Over the past decade, wireless telecommunications has been one of the
fastest growing segments of the U.S. telecommunications industry. According to
the CTIA, the number of cellular subscribers in the U.S. increased 207%, from 11
million in December 1992 to 34 million in December 1995, representing
approximately 13% of the U.S. population. A number of factors have contributed
to this growth, including the increased mobility of the U.S. population, greater
acceptance of wireless telephone use and more widespread availability of
incentive pricing plans for cellular phones and service. Industry sources
estimate that worldwide cellular subscribers grew from 52 million in 1994 to 86
million in 1995, with a predicted increase in worldwide subscribers to 284
million by the year 2001. The rapid growth in international wireless services is
attributable to the lower relative cost and faster implementation time of
deploying wireless technology in countries without an adequate wireline
infrastructure, deregulation of communications services and privatization of
state-run enterprises.

The wireless telecommunications industry is becoming increasingly
competitive and complex as a result of a number of recent regulatory and
technological changes resulting in increasing pressure on the profitability of
carriers. Cellular carriers originally licensed by the Federal Communications
Commission ("FCC") are facing increased competition from new digital wireless
services being offered by Personal Communications Services ("PCS") and Enhanced
Specialized Mobile Radio ("ESMR") carriers, which offer increased capacity and
service capabilities. Wireless carriers are facing pressure on profitability due
to high marketing costs and lower average revenue per subscriber associated with
a shift from predominantly high-usage business subscribers to a "mass market"
service. In this regard, an increasing number of wireless phones are being
distributed through mass market techniques, including retail sales channels,
resulting in reduced carrier control over the quality of subscribers and
increased cost of acquiring new subscribers. The lower usage rates of the new
mass market subscribers have resulted in a reduction in average revenue per
subscriber of 40% from 1989 to 1995. As a result, carriers must retain
subscribers for longer periods to recoup their marketing investment and, in the
case of new entrants, to recoup the high costs of spectrum acquisition that
resulted from the FCC's auction process. In order to combat new entrants,
existing wireless carriers seek to improve subscriber satisfaction by increasing
system capacity, offering enhanced services, such as voice-activated dialing,
one number service and location services, and improving network security.
Subscriber growth, increased competition, declining revenue per subscriber and
the transition to a mass market subscriber base have created significant
challenges for wireless telecommunications carriers, including rising losses
from fraud and churn, growing strains on network capacity and increasing demand
for enhanced services.

Industry sources estimate that in the U.S. the total revenue lost to
wireless telecommunications fraud was approximately $650 million in 1995, up
from $482 million in 1994. In addition to lost revenue, carriers are

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forced to incur significant operating costs associated with the creation of
internal fraud management departments, customer service efforts to retain
subscribers who have been affected by fraud and infrastructure costs to replace
capacity used by fraud. The major types of fraud are cloning, subscription
fraud, tumbling fraud and cellular telephone theft. Cloning fraud, which
industry sources estimate comprised 50% of U.S. fraud losses in 1995, occurs
when cellular thieves capture the mobile identification number and electronic
serial number ("MIN/ESN") of a valid subscriber's cellular phone by using a
MIN/ESN reader to monitor the airwaves and then reprogram the internal chip in
other phones using the stolen information. When a cloned phone is used, the
valid subscriber may be billed for the fraudulent usage. Subscription fraud,
which industry sources estimate comprised 30% of U.S. fraud losses in 1995, is
the activation and use of cellular service with no intent to pay for the
service, and often involves use of stolen or forged identification. Wireless
carriers are increasingly concerned with subscription fraud as competitive
pressures lead carriers to acquire subscribers through mass market distribution
channels which permit less control over the quality of new subscribers. Tumbling
fraud, where a cellular phone is altered so that it tumbles through a number of
MINs or ESNs to disguise the fraudulent user, comprised 15% of U.S. fraud losses
in 1995. Theft of cellular phones comprised the remaining 5% of U.S. fraud
losses. These types of fraud are also expected to pose a significant problem for
carriers in many international markets.

To address these different types of wireless telecommunications fraud, a
number of fraud prevention techniques have been developed, including fraud
profilers, subscription fraud monitoring techniques, personal identification
numbers ("PINs"), RF fingerprinting, voice recognition and authentication. A
fraud profiler monitors subscriber calling patterns and creates a profile of the
subscriber's characteristics, such as average number and length of calls and
location of calls. If calling activity becomes unusual when compared with the
subscriber profile, the carrier is notified that fraud is suspected.
Subscription fraud monitoring techniques include credit checks, credit limits,
monitoring suspicious calling activity and alerts on high usage for new users.
PINs involve the use of a password that must be dialed by the subscriber before
the call can be connected. RF fingerprinting involves the use of hardware
installed in the carrier's base stations which captures the unique electronic
characteristics of a phone to differentiate between the valid phone and cloned
phone. With RF fingerprinting, a call identified as originating from a cloned
phone may be terminated. Voice recognition technology has been viewed as an
adjunct to the PIN method of fraud prevention and requires each subscriber to
select a spoken password which is provided whenever a PIN is required.
Authentication is a complex signaling and data protection technique based on
encryption and requires a phone to prove that it is the valid phone before
service is granted and would require that most currently available analog phones
be serviced to add this feature. Carriers have tried to reduce fraud by
implementing one or more of these techniques. However, with the exception of
fraud profilers, these techniques have been unable to provide a long-term
solution to multiple types of fraud. As technology advances, fraud also is
expected to evolve into new and different forms, requiring carriers to seek a
solution that monitors and identifies all currently known and emerging types of
fraud.

In addition to fraud management, wireless carriers are focusing increasing
attention on improved customer retention in order to reduce subscriber turnover,
or churn, as the cost of acquiring new subscribers continues to increase.
According to an industry report published in October 1995, wireless carriers in
the U.S. have recently experienced average annual subscriber churn at rates of
26% to 36%, which represents 6 to 9 million subscribers lost per year. At an
average acquisition cost of $500 per subscriber, churn costs the U.S. cellular
industry over $3.5 billion per year. Churn is also expected to pose a
significant problem in international markets as governmental deregulation opens
such markets to competing carriers. Factors that lead to churn include
competitive pricing and, to a lesser extent, lack of geographic coverage,
customer service problems, poor voice quality and inaccurate billing. Current
techniques for reducing churn are limited to taking corrective action once it is
known that a subscriber is terminating service. Carriers are expected to look
for systems that will assist them in predicting churn so steps may be taken to
prevent subscriber turnover before it occurs.

As the number of wireless subscribers grows and competition intensifies,
carriers are seeking ways to increase the efficiency and capacity of their
systems with minimal capital outlays. Carriers are also expected to adopt
products and systems that provide open interfaces to ensure they have the
flexibility to purchase new

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<PAGE> 29

network equipment from various network providers. By relocating functionality
from the wireless telecommunications switch to a stand-alone platform, carriers
free up overloaded switches, increase operating efficiency and create a platform
for enhanced services, such as voice-activated dialing, one number service and
location capabilities. To further increase operating efficiency, reduce costs
and provide differentiated services, carriers must be able to implement near
real-time billing.

THE CORAL SYSTEMS SOLUTION

Coral Systems provides client-server software products for the wireless
telecommunications industry to enable carriers to reduce fraud and customer
churn and increase operating efficiencies. The Company's products are based upon
its proprietary core technology, which provides several key advantages,
including rapid product development, portability, technology independence and
enhanced scalability. The Company's fraud management software, FraudBuster,
includes a fraud profiler and subscription monitoring techniques and is designed
to combat most currently identified types of wireless fraud. FraudBuster
software utilizes proprietary algorithms to enable wireless carriers to focus on
usage patterns by creating individual subscriber profiles that are continuously
updated, referenced and analyzed on a near real-time, call-by-call basis.
FraudBuster also incorporates subscription monitoring techniques to detect
fraudulent subscriptions. These techniques include usage limit checks,
identification of suspicious calling activity and high usage fraud alerts for
new subscribers. Unlike many other fraud prevention techniques which typically
address specific types of fraud, FraudBuster detects multiple types of existing
and emerging fraud, including cloning, subscription fraud, tumbling fraud and
cellular telephone theft. Coral Systems' veRiFier line extension, when released,
will expand the FraudBuster fraud management solution by providing interfaces to
complementary fraud prevention products, including RF signature detection. The
Company's churn prevention product, ChurnAlert, allows carriers to analyze and
identify potential churn candidates before they seek customer service assistance
or deactivate service. Coral Systems' HLR networking product facilitates
seamless roaming and enhanced services and optimizes switch capacity with
minimal capital outlays. Coral Systems' DMH networking product, when released,
will enable carriers to capture and distribute data on a near real-time basis to
facilitate billing, wireless fraud detection, churn prevention and customer
service applications.

BUSINESS STRATEGY

The Company's strategy includes the following key elements:

Leverage Proprietary Core Technology. The Company intends to leverage its
proprietary core technology, which enables the Company to reduce development
times for new applications, to rapidly port Coral Systems applications to
various third party software platforms and to offer carriers
technology-independent solutions that are scalable for rapid growth. Once
installed, the Company's core technology provides a platform on which additional
Company applications can be installed with increased efficiency and at reduced
customer costs.

Expand Products and Services for Wireless Carriers. The Company plans to
expand the products and services it offers to wireless carriers to provide
comprehensive solutions which address a broad range of carriers' needs. New
applications will be based on the Company's proprietary core technology,
allowing for flexible configuration and reduced development times for new
applications that can be deployed in a wide variety of hardware environments.
The Company is developing its DMH product and an enhanced version of its HLR
product to compliment and enhance the performance of FraudBuster and ChurnAlert.

Capitalize on Growth of Wireless Markets. The Company's goal is to
capitalize on the growth of the wireless telecommunications industry in order to
become a leading provider of software designed to address a range of problems
confronting wireless carriers. Due to the introduction of new and more complex
technologies that improve the capacity and quality of wireless networks, an
increasing number of carriers are seeking to outsource the software solutions
required to manage these networks in order to enable them to focus on their core
businesses.

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Maximize Recurring Revenue Stream. Coral Systems focuses on offering
products and services that will generate recurring revenue for the Company. The
Company's products are licensed pursuant to agreements that typically provide
for an initial license fee and an annual maintenance for a defined number of
subscribers, as well as additional license and maintenance fees for new
subscriber additions.

Leverage Strategic Relationships. The Company enters into strategic
development and distribution relationships with leading providers of wireless
telecommunications services and equipment in order to accelerate new or enhanced
product introductions, shorten the Company's sales cycle and increase market
penetration. The Company has entered into strategic relationships with Lucent,
CBIS, Ericsson and Nortel and plans to continue to develop relationships with
other companies to achieve synergies with their products, establish interfaces
with a wide range of switches and components and broaden its distribution
network.

PRODUCTS

The following table sets forth information regarding certain of the current
and anticipated Coral Systems product offerings:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PRODUCTS DESCRIPTION DATE OF INTRODUCTION
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Products
FraudBuster Combats most commonly known types of June 1993
fraud by tracking subscriber usage
patterns and alerting the carrier of
suspected fraud.
ChurnAlert Analyzes a carrier's customer base to September 1995
identify subscribers likely to
discontinue service or churn.
HLR Enables a carrier to offer seamless June 1993
roaming and enhanced services and to
free up switch capacity without costly
capital outlays.
- -------------------------------------------------------------------------------------------------
Products Under Development
DMH Enables a carrier to provide near In development
real-time billing, fraud detection and
customer care applications.
veRiFier Integrates FraudBuster with In development
complementary fraud prevention products,
including RF signature detection.
- -------------------------------------------------------------------------------------------------
</TABLE>

FraudBuster. FraudBuster, the Company's principal product, is a fraud
management software product which includes a fraud profiler and subscription
fraud monitoring functionality and is designed to identify most commonly known
types of wireless fraud (e.g., cloning, subscription, tumbling and cellular
theft). FraudBuster collects subscriber account information and call usage data
from telecommunications switches, billing systems and other commonly accepted
data sources to create individual subscriber profiles that are continuously
updated, referenced and analyzed on a near real-time, call-by-call basis. In
addition, for subscription and enhanced clone fraud detection FraudBuster
monitors usage limits and identifies suspicious call activity, including
simultaneous call attempts, calls to suspicious locations, abnormally high usage
and calls from different cities in illogical time sequences. When suspicious
account activity occurs, FraudBuster notifies the carriers with details of the
questionable activity and suggests responses. FraudBuster addresses the evolving
needs of carriers to include more sophisticated customer care capabilities to
proactively manage the impact of fraud on their subscribers. For example,
FraudBuster can enable the carrier's billing system to automatically credit
subscribers for fraudulent calls charged to their account before they are
invoiced. By using a client-server architecture, FraudBuster may be located
anywhere on the carrier's premises, including at the switching center or at the
carrier's business offices. Cellular carriers may locate the servers in a
switching

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center for closer monitoring and management of the application, with the clients
residing in the departments using the applications. FraudBuster was introduced
in June 1993 and is now installed in analog, digital and PCS carriers.

ChurnAlert. ChurnAlert is a software product that enables carriers to use
adjustable analyses to proactively address the needs of subscribers who are
likely to terminate service, or churn. Other churn products currently available
are reactive in that they merely provide information about a subscriber in
response to a query from the customer service representative when the subscriber
calls customer service to deactivate service, which is often too late to prevent
the subscriber from churning. ChurnAlert collects information from multiple data
sources (e.g. switches, billing systems), analyzes key churn indicators, such as
competitive rate plans and quality of service, and assigns a probability "value"
based on the output of various analyses. ChurnAlert also incorporates a customer
evaluation feature which permits a user to assign higher customer care
priorities to specific segments of subscribers, such as heavy users. ChurnAlert
allows carriers to predict the vulnerability of their subscriber bases to
competitor rate plans and promotions and enables carriers to model scenarios for
other key indicators of churn, such as feature usage and network quality. By
utilizing a client-server architecture, ChurnAlert may be located anywhere on
the carrier's premises. For example, cellular carriers may locate the servers in
a switching center for closer monitoring and management of the application, with
the clients residing in the departments using the applications. ChurnAlert was
introduced in September 1995.

Home Location Register (HLR). Home location registers ("HLRs") provide for
the management of roaming and enhanced services, in accordance with
Telecommunications Industry Association ("TIA") Interim Standard 41 ("IS-41").
Carriers can optimize switch capacity and thereby minimize costly capital
outlays for new switches by moving this functionality from the switch to a
standalone HLR architecture. In addition, as new, smaller and scalable
programmable switches gain market acceptance, carriers adopting these lower
capacity switches will require stand-alone HLRs to manage certain switch related
functionality. By providing roamer and enhanced services management, the
Company's stand-alone HLR networking product extends the functionality of the
telecommunications switch while utilizing the open interface defined by IS-41
Revision B. In addition, by utilizing a client-server architecture, the
Company's HLR is designed to offer carriers rapid transaction processing,
reliability and scalability for growth. The Company's initial IS-41 Revision
A-compliant HLR was introduced in June 1993 and the Company is developing a new
version of its HLR product that meets the requirements of IS-41 Revision C.

PRODUCT DEVELOPMENT

The Company believes that its future success will depend on its ability to
maintain and improve its current technologies, enhance its existing products and
develop new products that meet an expanding range of carrier requirements. At
September 30, 1996, the Company's development staff consisted of 29 employees.
For 1993, 1994 and 1995 and the nine months ended September 30, 1996, the
Company's expenditures on research and development were $414,000, $572,700, $2.2
million and $2.0 million, respectively. The Company anticipates that it will
continue to commit substantial resources to product development in the future.
To date, the Company has not capitalized any software development costs.

The Company's principal products under development include its DMH and
veRiFier products:

Data Message Handler (DMH). The DMH network is defined by the TIA Interim
Standard 124 ("IS-124"), which was developed to specify an intersystem protocol
for sharing service, call and subscriber information collected from a variety of
information sources, including different and incompatible manufacturers'
switches. Because the DMH network can distribute details of both the local and
roaming calling activity of a carrier's full subscriber base, the carrier can
track service usage and subscriber activity in near real-time, enabling the
carrier to bill for services more quickly and to use such information to address
fraud and customer service issues. The Company is currently developing its DMH
product which will provide a data generation, collection and distribution
platform for near real-time billing, fraud detection and prevention, churn and
customer service applications. The Company's DMH will comply with industry
standards in the collection and distribution of billing data to facilitate these
multiple downstream applications. By utilizing a client-server

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<PAGE> 32

architecture, the Company's DMH is designed to offer carriers rapid transaction
processing, reliability and scalability for subscriber growth.

veRiFier. The Company's veRiFier product, when released, will extend the
capability of FraudBuster to interface with RF signature products and, in the
future, with other complementary fraud detection products. The Company is
developing an interface to RF signature devices that utilize technology
originally developed for military purposes to differentiate between two wireless
phones (one cloned) by the unique electronic characteristics of each phone. The
veRiFier RF interface augments RF signature detection by using a series of
real-time fraud checks to improve the accuracy of fraud determinations and
distinctions between bona fide and fraudulent calls, thus minimizing valid
subscriber impact. While RF signature devices may distinguish between two cloned
phones, the veRiFier RF interface can assist in the determination of which is
the valid user.

The Company's success depends in part on the timely introduction and
success of new products or product enhancements. A significant delay in the
introduction of, or the presence of a defect in, one or more new products or
product enhancements could have a material adverse effect on the ultimate
success of such products or product enhancements and on the Company's business,
operating results and financial condition. Further, because of the revenue
typically associated with initial shipments of a new product or product
enhancement, delaying the introduction of a new product or product enhancement
expected near the end of a fiscal quarter may materially adversely affect
operating results for that quarter or beyond. The process of developing software
products such as those offered by the Company is extremely complex and is
expected to become more complex and expensive in the future as new platforms and
technologies emerge. In the past, the Company has experienced significant delays
in the introduction of certain new products and product enhancements and the
Company anticipates that there will be similar delays in developing and
introducing new products and product enhancements in the future. There can be no
assurance that new products or product enhancements will be introduced on
schedule or at all or that they will achieve market acceptance or generate
significant revenue. Software products as complex as those offered by the
Company may contain undetected errors when first introduced or when new versions
are released. There can be no assurance that, despite testing by the Company,
errors will not be found in new products or product enhancements after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.

TECHNOLOGY

The Company's products are based upon its proprietary core technology,
which provides several key development advantages, including enabling the
Company to quickly develop new applications, to rapidly port Coral Systems'
applications to alternative third party software platforms and to offer carriers
technology-independent solutions that are scalable for rapid growth. The
Company's core technology allows new applications to be built by using applets
and services that were developed for previous releases of other applications. An
"applet" is a self-contained mini-application that provides complete application
functionality for a given task. The Company's consistent re-use of applets and
services reduces the amount of code that it must develop and maintain, enables
rapid development of new applications and improves the quality of the code
through reuse. In addition, the flexibility of the Company's core proprietary
technology will enable the Company to reduce the development time for native
language versions of its existing products for use in foreign countries. The
Company has encapsulated many of the external links of its core technology in
order to insulate it from changes or obsolescence of third party hardware and
software. Coral Systems' core technology provides enhanced scalability to permit
the rapid and efficient growth of the wireless subscriber bases and the
deployment of new software technologies. The Company believes that these
features (rapid development, portability, protection against technology
obsolescence and enhanced scalability) provide carriers with a significant
development advantage in integrating evolving technologies into the Company's
products for increased application efficiency and performance. The Company's
core technology operates on Hewlett-Packard and Sun Microsystems hardware
platforms, and includes interfaces to Oracle and Informix databases, allowing
for flexible configuration to each customer's environment. In addition, the core
technology enables Coral Systems to offer applications that support all air
interfaces and IS-41 and GSM network protocols,

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permitting multi-national wireless carriers to utilize the Company's products in
diverse technology and standards settings.

SALES, MARKETING AND DISTRIBUTION

The Company markets its products to cellular, PCS and other wireless
carriers domestically and internationally. The Company distributes its products
through its direct sales force, international sales agents and distributors.
Coral Systems licenses its products pursuant to agreements that typically
provide for an initial license fee and an annual maintenance for a defined
number of subscribers, as well as additional license and maintenance fees for
net subscriber additions. The Company's products typically require a significant
investment by the carrier and involve multilevel testing, integration,
implementation and support requirements. As a result, product sales cycles
generally range from 6 to 18 months.

Revenue from international customers accounted for approximately 27.2%,
34.7% and 14.1% of the Company's total revenue in 1994 and 1995 and the nine
months ended September 30, 1996, respectively, and the Company expects that
revenue from international customers will continue to account for a significant
portion of the Company's total revenue. The Company expects to expand its sales
efforts outside of the U.S., which will require significant management attention
and financial resources. Revenue from international customers is subject to
inherent risks, including unexpected changes in regulatory requirements, tariffs
and other trade barriers, political and economic instability in foreign markets,
difficulties in staffing and management and integration of foreign operations,
longer payment cycles, greater difficulty in accounts receivable collection,
currency fluctuations and potentially adverse tax consequences. Since most of
the Company's foreign sales are denominated in U.S. dollars, the Company's
products may also become less price competitive in countries in which local
currencies decline in value relative to the U.S. dollar.

As part of its marketing and distribution strategy, the Company has
established strategic relationships with the following companies:

Cincinnati Bell Information Systems. The Company's marketing license
agreement with CBIS grants CBIS the right to sublicense or exclusively offer in
a service bureau environment the Company's FraudBuster and ChurnAlert products,
provides CBIS with a right of first refusal under similar circumstances for the
Company's future products and further provides for the joint solicitation of
certain customers. CBIS produced approximately 120 million cellular bills in the
U.S. in 1995 and its wireless customers include AT&T Wireless Services, PrimeCo
Personal Communications, Sprint Spectrum and 360 degrees Communications Company.
CBIS generally operates as a service bureau, and charges on a per subscriber
bill, per month basis. By offering FraudBuster and ChurnAlert in a similar
fashion, CBIS can charge an additional per subscriber fee per month for the
benefits of these applications, a portion of which is paid to the Company.

Ericsson Radio Systems. The Company has a joint development and
distribution agreement with Ericsson, a large manufacturer and marketer of
cellular switching equipment, pursuant to which Ericsson offers FraudBuster for
sublicense under the private label of Cellular Fraud Detection Systems ("CFDS").
This agreement provides for Coral Systems and Ericsson to jointly enhance CFDS
to create a customized solution which takes advantage of the unique features of
Ericsson's wireless telecommunications switches.

Lucent Technologies. The Company has a worldwide distribution agreement
with Lucent, which provides Lucent with the ability to sublicense the Company's
FraudBuster product to wireless carriers worldwide.

Nortel. The Company has marketing agreements with Nortel, a worldwide
manufacturer of telecommunications switching equipment. These agreements provide
for the recommendation and promotion by Nortel of FraudBuster and the
customization of FraudBuster for unique Nortel wireless telecommunication
switching features, in exchange for which, Nortel receives a portion of the net
software license fee.

CUSTOMERS AND CUSTOMER SUPPORT

The end users of the Company's products are wireless telecommunications
providers both domestically and internationally. Comcast Cellular
Communications, Pacific Synergy, Motorola, and AirTouch accounted for 22.1%,
22.1%, 11.7% and 11.2%, respectively, of the Company's total revenue in 1995 and
Lucent and DSC

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Technologies accounted for 66.5% and 13.7%, respectively, of the Company's total
revenue in the nine months ended September 30, 1996. Lucent, Motorola and
Pacific Synergy are distributors of the Company's products and sublicense the
Company's products to carriers. See "Risk Factors -- Customer Concentration;
Dependence on Distributors."

The following is a list of wireless carriers who use the Company's
products, each of which has licensed at least $250,000 of the Company's
products:

<TABLE>
<S> <C>
AirTouch Communications Mobikom (Malaysia)
American Personal Communications Orange Personal Communications Services
Austria PTT (United Kingdom)
BellSouth PCS Pilipino Telephone Company
Comcast Cellular Communications (Philippines)
Cox Communications Radiophone
DSC Technologies Corporation Sprint Spectrum
US WEST New Vector Group
Western Wireless
</TABLE>

The Company provides its customers with support including project
management, database navigation and trouble shooting, product training,
technical expertise in network communications and interface development, as well
as hardware and software installation skills. As part of its standard
maintenance services, the Company provides support services five days a week,
eight hours per day, via telephone, remote login, e-mail, and, if necessary,
on-site assistance. The Company offers a range of support packages for
additional fees, including support seven days a week, 24 hours per day. The
Company also offers consulting services to its customers for a separate fee.

COMPETITION

The markets for the Company's software products are new, intensely and
increasingly competitive, rapidly evolving and subject to rapid technological
change. The Company's competitors include computer hardware and software
providers, telecommunications services and billing providers and range from
small companies with limited resources to large companies with substantially
greater financial, technical and marketing resources than those of the Company.
In addition, the Company competes against the internal development efforts of
the Company's customers and potential customers. As a result, some of the
Company's competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than the Company. Further,
existing companies may broaden their product lines or increase their focus to
compete more directly with the Company's current and future products. Currently,
the Company's principal competitors are GTE-TSI in the United States and Digital
Equipment Corporation in international markets. The Company's FraudBuster
product competes with a number of other profiler products and several
alternative technologies, including RF signature systems, PINs and
authentication. In addition, the Company has licensed the source code for
FraudBuster to AirTouch for the purpose of enabling AirTouch to use, reproduce
and develop enhancements to FraudBuster in AirTouch's markets and to sublicense
FraudBuster to cellular carriers in which AirTouch directly owns at least a 10%
equity interest, in exchange for a royalty to the Company on such sublicenses.
As a result, AirTouch could compete with the Company in those markets covered by
cellular carriers in which AirTouch owns such an equity interest. GTE-TSI is
also the Company's primary competitor in the churn prevention software market.
Tandem Computers is the Company's principal competitor for its HLR products and
services. In addition, with the deployment of its own HLR products, the Company
will begin to compete with vendors who have licensed the Company's HLR product
source code. To the extent that competitors achieve higher product quality,
lower price, greater functionality or other advantages relative to the Company's
products, the Company's business, operating results and financial condition
could be materially and adversely affected. There can be no assurance that the
Company will have the resources required to respond effectively to market or
technological changes or to compete successfully in the future. Furthermore,
increasing competition in the wireless telecommunications industry may cause
prices to fall, which may materially and adversely affect the Company's
business, operating results and financial condition.

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Current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. If this were
to occur, the Company's business, operating results and financial condition
would be materially adversely affected.

INTELLECTUAL PROPERTY

The Company regards its software as proprietary and relies primarily on a
combination of patent, trademark, copyright and trade secret laws, employee and
third-party nondisclosure agreements and other methods to protect its
proprietary rights. The Company currently has one issued U.S. patent and five
applications pending in the U.S. Patent and Trademark Office, six applications
for foreign patents pending and two Patent Cooperation Treaty applications
preserving the Company's ability to obtain patent protection in a number of
foreign countries. There can be no assurance that any of such pending patent
applications will result in the issuance of any patents, or that the Company's
current patent or any future patents will provide meaningful protection to the
Company. In particular, there can be no assurance that third parties have not or
will not develop equivalent technologies or products that avoid infringing the
Company's current patent or any future patents or that the Company's current
patent or any future patents would be held valid and enforceable by a court
having jurisdiction over a dispute involving such patents. In addition, since
patent applications in the United States are not publicly disclosed until the
patent issues and foreign patent applications generally are not publicly
disclosed for at least a portion of the time that they are pending, applications
may have been filed by entities other than the Company which, if issued as
patents, may relate to the Company's products. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future based on existing patents or future patents or that such claims will not
be successful.

34
<PAGE> 36

between the Company and another party. Such an interference action may be
declared if there is interfering subject matter in the Company's patent or
patent application and the other party's patent or patent application to
determine whether the Company or the other party is entitled to a patent
claiming such subject matter. Interference actions may be complex and expensive,
and the outcome of such actions is often difficult to predict. Accordingly, in
the event that an interference action is declared, the Company may consider
opportunities to settle the interference action on terms acceptable to the
Company. Any such settlement may require licensing of the Company's patent
rights which may diminish their value to the Company. In addition, there can be
no assurance that the Company will pursue a settlement or that a settlement
would be reached on terms acceptable to the Company. In the event that the
Company could not settle any such interference action and were declared to have
interfered, it could lose some or all of the claims in the Company's existing
patent and/or the continuation application and be subject to patent infringement
claims for its use of the technology in question. Any such action or claim could
have a material adverse effect on the Company's business, operating results and
financial condition.

EMPLOYEES

As of September 30, 1996, the Company had 80 employees, including 29 in
research and development, 7 in customer support, 13 in domestic sales, 2 in
international sales, 6 in consulting services, 8 in marketing and 15 in finance
and administration. The Company also retains consultants from time to time to
assist it with particular software development projects. The Company believes
that its future success will depend in part on its ability to attract, motivate
and retain highly qualified personnel. None of the Company's employees are
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its employee relations to
be good.

FACILITIES

The Company currently leases approximately 14,400 square feet in Longmont,
Colorado as its only office. The lease on the Company's premises will expire in
February 1999. The Company is presently negotiating with its landlord for the
leasing of an additional 9,400 square feet in an adjacent building, which the
Company expects to obtain on commercially reasonable terms. Upon obtaining this
additional space, the Company believes that such facilities will be adequate for
the next 12 months and that additional space will be available in the future on
commercially reasonable terms.

LEGAL PROCEEDINGS

From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the ordinary course of business. As of
the date of this Prospectus, the Company is not a party to any legal
proceedings, the adverse outcome of which would, in management's opinion have a
material adverse effect on the Company's business, operating results and
financial condition.

35
<PAGE> 37

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, their ages as of
September 30, 1996, and their positions with the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------- --- ------------------------------------------------------
<S> <C> <C>
Eric A. Johnson.............. 37 Chairman of the Board, President and Chief Executive
Officer
Kyle D. Hubbart.............. 40 Chief Financial Officer and Treasurer
Howard Kaushansky............ 38 Vice President of Strategic Planning, General Counsel
and Secretary
Thomas E. Fedro.............. 36 Vice President of Sales and Consulting Services
Sunil Prakash................ 39 Vice President of Product Development
Thomas F. Prosia............. 38 Vice President of Marketing
Donald J. Winters, Jr........ 44 Vice President of Business Development
David J. Cowan............... 30 Director
Bruce K. Graham(1)(2)........ 36 Director
Jeffrey R. Hultman(1)(2)..... 57 Director
Robert J. Marino............. 49 Director
William F. Nicklin(1)........ 53 Director
Thomas G. Washing(2)......... 55 Director
</TABLE>

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

Eric A. Johnson has served as President, Chief Executive Officer and a
Director of the Company since July 1991 and as Chairman of the Board since March
1995. Prior to founding the Company, he served as Director of Marketing and
Strategic Planning for ACI Telecom, a wholly-owned subsidiary of US West, from
January 1991 to July 1991. From 1989 to 1991, he served in several positions at
AirTouch Communications, Inc. (formerly PacTel Cellular), a wireless
telecommunications company, most recently as Director of Business Development.

Kyle D. Hubbart has served as Chief Financial Officer of the Company since
February 1993 and as Treasurer since October 1993. From February 1993 until
March 1995, he also served as Controller of the Company. From 1985 to 1993, he
served as Treasurer and Chief Financial Officer of Round the Corner Restaurants,
Inc. and Good Times Restaurants, Inc., a national restaurant chain headquartered
in Denver, Colorado. He has been a Certified Public Accountant since 1980.

Howard Kaushansky has served as Vice President of Strategic Planning and
General Counsel of the Company since March 1992 and as Secretary since October
1993. From 1990 to 1992, he was an attorney with the law firm of Caplan &
Earnest and, prior thereto, he was an attorney with the law firms of Gray, Cary,
Ames & Frye and Gendel, Raskoff, Shapiro and Quittner.

Thomas E. Fedro has served as the Company's Vice President of Sales and
Consulting Services since February 1996 and was the Company's Vice President of
Sales and Marketing from August 1994 to February 1996. From January 1992 to July
1994, Mr. Fedro served in various sales positions at PI Systems, a mobile
computing software applications and hardware tools company, including Vice
President of Sales beginning in September 1992. From August 1986 to December
1991, he served as a Sales Manager for Grid Systems, a computer software
company.

Sunil Prakash has served as the Company's Vice President of Product
Development since December 1994. From January 1993 to December 1994, Mr. Prakash
was the Director of Engineering at XVT Software, a computer software company.
From July 1993 to December 1993, he was the Director of Engineering at APEX Data
Services, Inc., a software company. From November 1989 to July 1993, he served

36
<PAGE> 38

in various project management and engineering positions at Autotrol Technology
Corporation, a software company.

Thomas F. Prosia has served as the Company's Vice President of Marketing
since February 1996. From October 1990 to January 1996, Mr. Prosia served in
various marketing and sales positions at Covia Technologies, a software and
services company and a division of Galileo International, including Vice
President of Sales from July 1994 to January 1996.

Donald J. Winters, Jr. has served as the Company's Vice President of
Business Development since April 1996. From April 1991 to April 1996, Mr.
Winters held various management positions at AirTouch Communications, a wireless
telecommunications company, including Managing Director of Corporate Technology,
Director of Technology Transfer and Director of Network Management Systems. From
1978 to 1991, Mr. Winters held various management and engineering positions in
the telecommunications industry at PacTel Cellular, Pacific Bell and PacTel
Spectrum Services.

David J. Cowan has served as a director of the Company since March 1995.
Since July 1996, Mr. Cowan has been a general partner of certain venture capital
funds affiliated with Bessemer Venture Partners, a venture capital firm. From
July 1992 to June 1996, Mr. Cowan was an associate with Bessemer Venture
Partners. He currently serves on the Board of Directors of Worldtalk
Communications Corporation.

Bruce K. Graham has served as a director of the Company since March 1995.
Mr. Graham has been a Vice President with Vertex Management Inc., an investment
management company, since July 1994. From 1991 to June 1994, he was an associate
with Vertex Management Inc. From 1982 to 1991, he held various technical,
management and consulting positions in the U.S., Asia and Europe with Intel
Corporation, Siemens AG and the Boston Consulting Group.

Jeffrey R. Hultman has served as a director of the Company since December
1995. From 1991 to 1996, Mr. Hultman was the President, Chief Executive Officer
and a Director of Dial Page, Inc., a provider of wireless telecommunications
throughout the Southeast that merged with Nextel Communications, Inc. in January
1996. From 1987 to 1991, Mr. Hultman was the President and Chief Executive
Officer of AirTouch Communications, Inc., a wireless telecommunications company.

Robert J. Marino has served as a director of the Company since March 1996.
Mr. Marino has served as President and Chief Executive Officer of CBIS, an
information management company and a wholly-owned subsidiary of Cincinnati Bell,
Inc., since September 1996. From October 1995 to August 1996, he served as the
Chief Operating Officer of CBIS. From October 1993 to October 1995, he served as
the President of the Northeast Region for Nextel Communications, Inc., and from
November 1990 through October 1993, he served as the President of Houston
Cellular Telephone Company.

William F. Nicklin has served as a director of the Company since March
1994. Mr. Nicklin has been a Managing Director at Alex. Brown & Sons
Incorporated, an investment banking firm, since January 1991. Prior to joining
Alex. Brown & Sons in 1978, Mr. Nicklin was an officer in several brokerage
firms, including Spencer Trask & Company, White Weld & Company and Merrill
Lynch, Pierce, Fenner & Smith, Incorporated. He currently serves on the Board of
Directors of Baltek Corporation and Carco Electronics.

Thomas G. Washing has served as a director of the Company since December
1994. Since 1994, Mr. Washing has served as President of Sanitas Capital
Management, a firm providing strategic and financial assistance to emerging
growth technology companies. From 1986 to 1994, he served as a general partner
of Hill, Carman & Washing, a venture capital firm. Prior thereto, he was a
founding general partner of Horsley Keogh Associates, a venture capital firm. He
currently serves on the Board of Directors of Exabyte Corporation.

Each officer is elected at the discretion of the Board of Directors and
serves at the discretion of the Board of Directors and the President. There are
no family relationships among any of the directors, officers or key employees of
the Company.

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<PAGE> 39

BOARD COMPOSITION

The Company currently has seven authorized directors. Upon the closing of
this offering, the terms of office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 1997, Class II, whose term will expire at the annual
meeting of stockholders to be held in 1998 and Class III, whose term will expire
at the annual meeting of stockholders to be held in 1999. The Class I directors
are Bruce K. Graham and David J. Cowan, the Class II directors are William F.
Nicklin and Robert J. Marino and the Class III directors are Eric A. Johnson,
Jeffrey R. Hultman and Thomas G. Washing. At each annual meeting of stockholders
beginning with the 1997 annual meeting, the successors to directors whose terms
will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election and until their
successors have been duly elected and qualified.

Mr. Nicklin was elected to the Board of Directors as the representative of
the holders of Series A Preferred Stock, Messrs. Cowan and Graham were elected
to the Board of Directors as the representatives of the holders of Series B
Preferred Stock and Mr. Marino was elected to the Board of Directors as the
representative of the holder of Series C Preferred Stock pursuant to certain
arrangements entered into at the time such classes of stock were purchased. All
such arrangements regarding the election of directors shall terminate upon the
consummation of this offering. See "Certain Transactions."

BOARD COMMITTEES

The Audit Committee was formed in March 1994 and presently consists of
Messrs. Nicklin, Graham and Hultman. The Audit Committee makes recommendations
to the Board of Directors regarding the selection of independent accountants,
reviews the results and scope of the audit and other services provided by the
Company's independent accountants and reviews and evaluates the Company's audit
and control functions.

The Compensation Committee was formed in October 1992 and presently
consists of Messrs. Hultman, Graham and Washing. The Compensation Committee
administers the Company's employee stock plans and makes decisions concerning
salaries and incentive compensation for the Company's employees and consultants.

DIRECTOR COMPENSATION

Directors are reimbursed for certain expenses in connection with attendance
at Board and committee meetings. In addition, Messrs. Washing, Hultman and
Nicklin receive $1500 per month in consideration for their services as
directors. In February 1995, each of Messrs. Nicklin and Washing was granted an
option to purchase 56,501 shares of Common Stock at an exercise price of $0.20
per share. In December 1995, Mr. Hultman was granted an option to purchase
56,501 shares of Common Stock at an exercise price of $0.22 per share. All of
such options vest in four equal annual installments beginning on the date one
year from the date of grant. In May 1995, Mr. Washing exercised his option prior
to full vesting and the unvested shares are subject to the Company's right to
repurchase such unvested shares at the exercise price upon the termination of
his service to the Company. Each such grant was made pursuant to the Company's
Stock Option Plan. See "Management -- Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to the formation of the Company's Compensation Committee in October
1992, the Board of Directors made all determinations with respect to executive
officer compensation. The Compensation Committee is currently comprised of
Messrs. Hultman, Graham and Washing. No member of the Compensation Committee has
served as an officer or employee of the Company. No member of the Compensation
Committee serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee. See "Certain
Transactions" for a description of transactions between the Company and members
of the Compensation Committee, or entities affiliated with such members.

38
<PAGE> 40

EXECUTIVE COMPENSATION

Summary Compensation. The following table sets forth the compensation paid
by the Company in 1995 to the Company's Chief Executive Officer and the one
other executive officer whose total annual salary and bonus exceeded $100,000
for services rendered to the Company during 1995 (collectively, the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS
-------------------- ---------------------
SALARY BONUS OPTIONS GRANTED
NAME AND PRINCIPAL POSITION(1) ($) ($) (#)
--------------------------------------------- -------- ------- ---------------------
<S> <C> <C> <C>
Eric A. Johnson.............................. 127,500 -- --
Chairman of the Board, President and Chief
Executive Officer
Thomas E. Fedro.............................. 86,900 44,136(2) 25,000
Vice President of Sales and
Consulting
</TABLE>

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

(1) In July 1996, the Company granted options to Mr. Johnson to purchase 50,000
shares of Common Stock at an exercise price of $6.00 per share and to Mr.
Fedro to purchase 37,500 shares of Common Stock at an exercise price of
$6.00 per share. Such options were granted at an exercise price equal to the
fair market value of the Company's stock, as determined by the Board of
Directors on the date of grant, and vest in four equal annual installments
with the first such installment vesting in July 1997. Messrs. Johnson and
Fedro have the right to immediately exercise such options, subject to
repurchase of the shares acquired upon such exercise by the Company at the
original exercise price paid per share upon their respective termination of
service to the Company prior to the vesting of such shares.

(2) Comprised of sales commissions.

39
<PAGE> 41

Option Grants. The following table sets forth each grant of stock options
made during 1995 to each of the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME(1) GRANTED FISCAL YEAR(2) ($/SH)(3) DATE 5% 10%
- -------------------------------- --------- -------------- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Johnson................. -- -- -- -- -- --
Thomas E. Fedro................. 25,000(5) 13.6% .22 07/26/05 $3,459 $8,766
</TABLE>

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

(1) In July 1996, the Company granted options to Mr. Johnson to purchase 50,000
shares of Common Stock at an exercise price of $6.00 and to Mr. Fedro to
purchase 37,500 shares of Common Stock at an exercise price of $6.00. Such
options vest in four equal annual installments, with the first such
installment vesting in July 1997. Messrs. Johnson and Fedro have the right
to immediately exercise such options, subject to repurchase of the shares
acquired upon such exercise by the Company at the original exercise price
paid per share upon their respective termination of service to the Company
prior to the vesting of such shares.

(2) Based on an aggregate of 183,500 shares subject to options granted in 1995,
excluding options to purchase 75,000 shares due to the termination of such
options pursuant to their terms.

(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.

(4) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and is calculated by assuming that the stock
price on the date of grant as determined by the Board of Directors
appreciates at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the last day
of its term for the appreciated price. The 5% and 10% assumed rates of
appreciation are derived from the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. The potential realizable value of the options
held by Mr. Fedro, at an assumed initial public offering price of $11.00 per
share and annual rates of stock price appreciation of 5% and 10% from the
date of grant through the expiration date of the options would be $442,446
and $707,779, respectively.

(5) Options vest in four equal annual installments with the first such
installment vesting in July 1996.

40
<PAGE> 42

AGGREGATE OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised in-the-money options held
as of December 31, 1995. Neither of the Named Executive Officers exercised
options during the fiscal year ended December 31, 1995.

FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995(#)(1) DECEMBER 31, 1995($)(2)
-------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ---------- -------------
<S> <C> <C> <C> <C>
Eric A. Johnson...................... 219,226 -- $2,405,666 --
Thomas E. Fedro...................... 70,000 -- $ 755,500 --
</TABLE>

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

(1) Optionees have the right to immediately exercise such options, subject to
repurchase of the shares acquired upon exercise of such options by the
Company at the original exercise price paid per share upon the optionee's
termination of service to the Company prior to the vesting of such shares.
The options granted to Mr. Johnson vest as follows: (i) ten percent (10%) on
the date of grant, (ii) thirty percent (30%) on the date one year from the
date of grant, (iii) seventy percent (70%) on the date two years from the
date of grant, and (iv) one hundred percent (100%) on the date three years
from the date of grant. The options granted to Mr. Fedro vest in four equal
annual installments beginning on the date one year from the date of grant.

(2) There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, these values have been calculated based on the difference
between an assumed initial public offering price of $11.00 per share and the
exercise price.

STOCK OPTION PLAN

The Company's Stock Option Plan (the "Stock Option Plan") was adopted by
the Board of Directors in October 1992 and was amended and restated in August
1996. A total of 2,089,189 shares of Common Stock have been reserved under the
Stock Option Plan.

The Stock Option Plan provides for the grant of incentive stock options
under the Internal Revenue Code (the "Code"), to employees (including officers
and employee-directors) and nonstatutory stock options to employees, directors
and consultants. The Stock Option Plan is administered presently by the
Compensation Committee, which determines recipients and types of options to be
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof.

The terms of stock options granted under the Stock Option Plan generally
may not exceed 10 years. Shares subject to options that have expired or
otherwise terminated without having been exercised in full shall again become
available for the grant of options under the Stock Option Plan. The exercise
price of options granted under the Stock Option Plan is determined by the
Compensation Committee, provided that the exercise price for an incentive stock
option cannot be less than 100% of the fair market value of the Common Stock on
the date of the option grant and the exercise price for a nonstatutory stock
option cannot be less than 85% of the fair market value of the Common Stock on
the date of option grant. The Compensation Committee has the authority to
reprice outstanding options and to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. Options granted under the Stock Option Plan vest at the rate specified
in the option agreement, which generally provide that options vest in either
three or four equal annual installments. No stock option may be transferred by
the optionee other than by will or the laws of descent and distribution or, in
certain limited instances, pursuant to a domestic relations order, provided that
the Compensation Committee may grant a nonstatutory stock option that is
transferable, and provided further that an optionee may designate a beneficiary
who may exercise the option following the optionee's death. An optionee whose
relationship with the Company or any affiliate ceases for any reason (other than
by death or disability) may exercise options in the three month period following
such cessation

41
<PAGE> 43

(unless such options expire sooner or later by their terms). Options may be
exercised for up to twelve months after an optionee's relationship with the
Company and its affiliates ceases due to death or disability (unless such
options expire sooner or later by their terms).

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the option
does not exceed five years from the date of grant. The aggregate fair market
value, determined at the time of grant, of the shares of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year (under all such plans of the Company and
its affiliates) may not exceed $100,000. Upon expiration of the transition rule
under Code section 162(m) for newly public companies, no optionee shall be
eligible for option grants in a calendar year covering more than 500,000 shares.

Upon certain changes in control of the Company, all outstanding options
under the Stock Option Plan shall be continued, assumed or substituted by the
surviving entity. In the event that a change in control is not approved by the
Board of Directors, the outstanding options of employees, directors or
consultants shall be fully vested immediately prior to the consummation of such
change in control. In addition, options of employees terminated other than for
cause within the 12 months following a change of control shall be fully vested.
If the surviving entity determines not to continue, assume or substitute such
options, and with respect to persons then performing services as employees,
directors or consultants, outstanding options shall be fully vested, the time
during which such options may be exercised shall be accelerated and the options
terminated if not exercised prior to the change of control.

As of September 30, 1996, 184,534 shares of Common Stock had been issued
upon the exercise of options granted under the Stock Option Plan, options to
purchase 1,102,346 shares of Common Stock at a weighted average exercise price
of $1.26 per share were outstanding and 802,309 shares remained available for
future grant. The Stock Option Plan will terminate in August 2006 unless sooner
terminated by the Board of Directors.

EMPLOYEE STOCK PURCHASE PLAN

In August 1996, the Company's Board of Directors approved the Employee
Stock Purchase Plan (the "Purchase Plan") with an aggregate of 450,000 shares of
Common Stock reserved for issuance thereunder. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the adoption of the Purchase Plan. The offering period for any
offering will be no more than 27 months. The Board has currently authorized an
offering commencing on the effectiveness of the initial public offering of the
Company's Common Stock and ending June 30, 1997, and sequential 6-months
offerings thereafter.

Employees, other than part-time or seasonal employees and 5% stockholders,
are eligible to participate in the currently authorized offerings if they are
employed by the Company or an affiliate of the Company incorporated in the U.S.
Employees can have up to 15% of their earnings withheld pursuant to the Purchase
Plan and applied on specified purchase dates (the last day of the currently
authorized offerings) to the purchase of shares of Common Stock. The price of
Common Stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the Common Stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering, and participation
ends automatically on termination of employment.

In the event of certain changes of control, the Company and the Board of
Directors 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 an offering and provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's discretion.

42
<PAGE> 44

401(K) PLAN

As of January 1, 1995, the Company adopted a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering the Company's employees.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 20% of their annual compensation or
the statutorily prescribed annual limit ($9,500 in 1996) and have the amount of
such reduction contributed to the 401(k) Plan. The 401(k) Plan does not provide
for matching contributions. The trustees under the 401(k) Plan, at the direction
of each participant, invest the assets of the 401(k) Plan in designated
investment options. The 401(k) Plan is intended to qualify under Section 401 of
the Code, so that contributions to the 401(k) Plan, and income earned on the
401(k) Plan contributions, are not taxable until withdrawn, and so that the
contributions by the Company will be deductible when made.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

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

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

There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.

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<PAGE> 45

CERTAIN TRANSACTIONS

In August 1996, pursuant to authority granted in the Company's Bylaws, the
Company entered into indemnification agreements (the "Indemnification
Agreements") with its directors and executive officers. Pursuant to the
Indemnification Agreements, the Company shall indemnify and advance expenses to
such directors and executive officers in connection with their involvement in
any event or occurrence which arises in their capacity as, or as a result of,
their position with the Company. See "Management -- Limitation of Liability and
Indemnification Matters."

In June 1996, Bessemer Venture Partners III L.P. ("BVP III") and Vertex
Investment (II) Ltd. ("Vertex") purchased 338,425 shares and 338,424 shares,
respectively, of Common Stock of the Company from a former officer of the
Company at a purchase price of $1.50 per share. In accordance with the terms of
a letter agreement dated June 20, 1996 between BVP III, Vertex and the Company
(the "Letter Agreement"), in July 1996, BVP III and Vertex each sold 53,710 of
such shares at a purchase price of $1.50 per share, to the Company pursuant to a
purchase agreement between BVP III, Vertex and the Company. The Company has
subsequently retired such shares. In July 1996, BVP III and Vertex sold 205,045
and 205,046 of such shares, respectively, at a purchase price of $1.50 per
share, to certain stockholders of the Company pursuant to purchase agreements
between BVP III and Vertex and each of such stockholders. The following
directors, 5% stockholders and their affiliates purchased shares from BVP III
and Vertex: (i) BVP Special Situations L.P. (2,897 shares), (ii) Unterberg
Harris Private Equity Partners L.P. (30,019 shares), (iii) Unterberg Harris
Private Equity Partners C.V. (6,412 shares), (iv) P/A Fund (34,012 shares), (v)
Cincinnati Bell Information Systems, Inc. ("CBIS") (85,935 shares), (vi) CVM
Equity Fund III ("CVM") (133,333 shares), (vii) Mr. Nicklin (5,670 shares), and
(viii) Mr. Washing (2,984 shares, of which 2,686 shares were purchased by Mr.
Washing's spouse and children). In addition, BVP III transferred 9,356 of such
shares to certain individuals associated with BVP III, including 248 shares to
Mr. Cowan.

In March 1996, the Company entered into a Marketing License Agreement with
CBIS whereby CBIS was granted the exclusive right in a service bureau
environment to sell the Company's FraudBuster and ChurnAlert products in the
United States, North America, South America, Central America and many European
countries. In addition, CBIS has a right of first refusal to be the exclusive
distributor of the Company's future products in a service bureau environment.

In March 1996, CBIS purchased 1,824,920 shares of Series C Preferred Stock
of the Company, which will convert into 912,453 shares of Common Stock upon the
closing of this offering, at an aggregate purchase price of $4,222,198. Pursuant
to an Amended and Restated Voting Agreement between CBIS, the Company and
certain stockholders of the Company, dated as of March 21, 1996, and the
Company's Restated Certificate of Incorporation, CBIS has the right to designate
one director of the Company. Mr. Marino has been elected to the Board of
Directors as the CBIS representative. The terms of such voting agreement and
such provisions of the Company's Restated Certificate of Incorporation shall
terminate upon the closing of this offering.

In March 1995, the Company issued an aggregate of 2,083,333 shares of
Series B Preferred Stock (the "Series B Stock"), which will convert into
2,083,290 shares of Common Stock upon the closing of this offering, at $2.16 per
share, for $4,096,821 in cash and cancellation of indebtedness in the amount of
$403,178. In connection with such financing, the Company issued the following
number of shares of Series B Stock (expressed on an as-converted to Common Stock
basis) to certain directors, 5% stockholders and their respective affiliates:
(i) 489,654 shares to BVP III, (ii) 21,042 shares to BVP III Special Situations
L.P., (iii) 67,986 shares to several individuals associated with BVP III,
including 1,799 shares to Mr. Cowan, who became a director of the Company in
connection with such financing, (iv) 578,699 shares to Vertex, (v) 307,784
shares to Unterberg Harris Private Equity Partners L.P., (vi) 77,861 shares to
Unterberg Harris Private Equity Partners C.V., (vii) 360,037 shares to P/A Fund,
and (viii) 9,999 shares to Mr. Nicklin, a director of the Company. All such
purchasers of Series B Stock acquired their stock in exchange for cash with the
exception of BVP III who purchased its shares for $654,481 in cash and the
cancellation of $403,178 of indebtedness in connection with a bridge loan from
BVP III to the Company made in February 1995. In connection with such financing,
the holders of Series B Stock were entitled to elect two members of the Board of
Directors of the Company to be designated by BVP III and Vertex. Mr. Cowan was
elected as the designee

44
<PAGE> 46

of BVP III and Mr. Graham was elected as the designee of Vertex. The right of
the holders of Series B Stock to elect directors of the Company will terminate
upon the closing of this offering.

From January to March 1994, the Company issued an aggregate of 2,000,000
shares of Series A Preferred Stock (the "Series A Stock"), which will convert
into 999,960 shares of Common Stock upon the closing of this offering, at a
price of $1.00 per share. Mr. Nicklin purchased 42,498 shares of Series A Stock
(expressed on an as-converted to Common Stock basis) in exchange for
approximately $55,000 cash and the cancellation of approximately $30,000 of
indebtedness. He also was elected to the Board of Directors of the Company as
the representative of the holders of Series A Stock. Mr. Washing, who became a
director of the Company in December 1994, purchased 24,999 shares of Series A
Stock (expressed on an as-converted to Common Stock basis). The right of the
holders of Series A Stock to elect a director of the Company will terminate upon
the closing of this offering.

In August 1993, certain persons provided bridge loans to the Company
totaling $300,000, of which Mr. Nicklin contributed $30,000. In January 1994,
the Company paid to Mr. Nicklin $1,019 as accrued interest on the $30,000 loan
and the principal of such loan was canceled in exchange for Mr. Nicklin's
purchase of 42,498 shares of Series A Stock. In connection with the bridge
financing, Mr. Nicklin received warrants to purchase 22,601 shares of Common
Stock at an exercise price of $0.66 per share.

From September 1994 through March 1995, Mr. Washing provided certain
financial consulting services to the Company. The Company paid Mr. Washing
$54,000 in cash and issued him 14,000 shares of Common Stock in exchange for
such services.

In July 1993, CVM provided a bridge loan to the Company of $130,000, which
CVM converted into 195,872 shares of Common Stock in March 1994 at a conversion
price of $0.66 per share. In connection with such bridge loan, CVM received
warrants to purchase 48,968 shares of Common Stock of the Company at an exercise
price of $0.66 per share. R. D. Bloomer, who is a partner of CVM, served as a
director of the Company from November 1993 to March 1996.

The Company believes that the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.

45
<PAGE> 47

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1996, as
adjusted to reflect the sale of the Common Stock being offered hereby (assuming
no exercise of the Underwriters' over-allotment option) by (i) each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group. This table assumes the conversion of all
outstanding preferred stock into Common Stock upon the completion of this
offering and reflects the 1-for-2 reverse stock split effected on December 5,
1996. Unless otherwise specified, the address of the stockholder is the address
of the Company.

<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED(1)
SHARES -----------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESSES OF BENEFICIAL OWNER OWNED(#)(1) OFFERING OFFERING(2)
- ------------------------------------------------------------ ----------- -------- -----------
<S> <C> <C> <C>
Eric Johnson(3)............................................. 1,236,153 16.5% 12.1%
CVM Equity Fund III(4)...................................... 1,131,525 15.5% 11.3%
4845 Pearl East Circle, Suite 300
Boulder, CO 80301
Cincinnati Bell Information Systems......................... 998,388 13.8% 10.1%
600 Vine Street
Cincinnati, OH 45201
Robert Marino(5)............................................ -- -- --
Vertex Investment (II) Ltd.................................. 658,367 9.1% 6.6%
3 Lagoon Drive, Suite 220
Redwood City, CA 94065
Bruce Graham(6)............................................. -- -- --
Bessemer Venture Partners III L.P.(7)....................... 581,004 8.1% 5.9%
1025 Old Country Road, Suite 205
Westbury, NY 11590
David Cowan(8).............................................. 583,051 8.1% 5.9%
Unterberg Harris Private Equity Partners(9)................. 422,076 5.8% 4.3%
65 East 55th Street, 18th Floor
New York, NY 10022
P/A Fund, L.P............................................... 394,049 5.5% 4.0%
518 Broad Street
Sewickley, PA 15143
William F. Nicklin(10)...................................... 137,269 1.9% 1.4%
Tom Fedro(11)............................................... 107,500 1.5% 1.1%
Thomas G. Washing(12)....................................... 87,289 1.2% *
Jeffrey Hultman(13)......................................... 56,501 * *
All directors and executive officers as a group
(13 persons)(14).......................................... 2,881,215 35.0% 26.3%
</TABLE>

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

* Represents less than one percent of the outstanding shares.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days of September 30,
1996, are deemed outstanding for computing the percentage of the person or
entity holding such securities but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.

46
<PAGE> 48

(2) Percentage ownership is based on 7,230,137 shares of Common Stock
outstanding as of September 30, 1996 and 9,930,137 shares of Common Stock
outstanding after the offering and assumes no exercise of the underwriters'
over-allotment option. In the event such option is exercised in full (i)
Mr. Johnson will sell 60,000 shares in the offering and will beneficially
own 1,176,153 shares, or 11.2% of the Common Stock outstanding after this
offering, and (ii) Mr. Fedro will sell 10,500 shares in the offering
(issued upon exercise of outstanding options) and will beneficially own
97,000 shares, or 1.0% of the Common Stock outstanding after this offering.
Additionally, certain other executive officers will sell 44,500 shares
(issued upon exercise of outstanding options and warrants) in the offering
such that, assuming the over-allotment option is exercised in full, the
directors and executive officers as a group will beneficially own 2,766,215
shares, or 24.7% of the Common Stock outstanding after this offering.

(3) Includes 269,226 shares issuable upon exercise of outstanding options
subject to vesting through July 2000. Also includes 100,000 shares held in
trust for the benefit of Mr. Johnson's two children.

(4) Includes 48,968 shares issuable upon exercise of outstanding warrants.

(5) Mr. Marino, a director of the Company, is the President and Chief Executive
Officer of Cincinnati Bell Information Systems, Inc. ("CBIS"), a principal
stockholder of the Company. Mr. Marino has no beneficial ownership of the
shares owned by CBIS.

(6) Mr. Graham, a director of the Company, is a Vice President of Vertex
Management Inc., which provides investment advice to Vertex Investment (II)
Ltd. ("Vertex"). Mr. Graham has no beneficial ownership of the shares owned
by Vertex.

(7) Represents 557,065 shares held by Bessemer Venture Partners III, L.P. ("BVP
III") and 23,939 shares held by BVP III Special Situations L.P. ("BVP").

(8) Includes 557,065 shares held by BVP III and 23,939 shares held by BVP. Mr.
Cowan, a director of the Company, is a partner of Deer III & Co., which is
the general partner of Bessemer and BVP and, as such, may be deemed to
share voting and investment power with respect to such shares. Mr. Cowan
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.

(9) Represents 337,803 shares held by Unterberg Harris Private Equity Partners
L.P. and 84,273 shares held by Unterberg Harris Private Equity Partners
C.V.

(10) Includes 22,601 shares issuable upon exercise of outstanding warrants. Also
includes 56,501 shares issuable upon exercise of outstanding options
subject to vesting through February 1999.

(11) Represents 107,500 shares issuable upon exercise of outstanding options
subject to vesting through July 2000.

(12) Includes 42,376 shares subject to a repurchase option in favor of the
Company which expires ratably through October 1998. Also includes 13,991
shares held by Mr. Washing's spouse and 2,499 shares held in a trust for
the benefit of Mr. Washing's daughter. Mr. Washing disclaims beneficial
ownership of the shares held by his spouse.

(13) Represents 56,501 shares issuable upon exercise of outstanding options
subject to vesting through December 1999.

(14) Excludes 998,388 shares held by CBIS and 658,367 shares held by Vertex, and
includes 581,004 shares held by BVP III and BVP. See footnotes (5), (6) and
(7) above. Also includes (i) 777,732 shares issuable upon exercise of
outstanding options held by all directors and officers subject to vesting
of such shares on various dates through July 2000; (ii) 42,376 shares held
by Mr. Washing subject to a repurchase option in favor of the Company which
expires ratably through February 1999; and (iii) 235,549 shares issuable
upon exercise of warrants held by all directors and officers. See footnotes
(3) and (10) through (13) above.

47
<PAGE> 49

DESCRIPTION OF CAPITAL STOCK

Following the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding preferred
stock into Common Stock, will consist of 25,000,000 shares of Common Stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share. As of September 30, 1996, there were approximately 80
stockholders of record.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors. Subject to preferences that may be applicable to any then
outstanding shares of preferred stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

WARRANTS

As of September 30, 1996, there were warrants outstanding to purchase an
aggregate of 979,937 shares of Common Stock at a weighted average exercise price
of approximately $0.28 per share. All of such warrants contain provisions for
the adjustment of exercise prices in certain events, including stock dividends,
stock splits, reorganizations, reclassifications or mergers, and warrants to
purchase approximately 251,000 shares contain provisions for adjustment of the
exercise price in the event of sales of Common Stock at less than the exercise
price. The warrants expire at various dates between July 1998 and March 2003.
Holders of warrants to purchase approximately 251,000 shares of Common Stock are
entitled to certain registration rights with respect to the Common Stock issued
upon exercise thereof. See "Description of Capital Stock -- Registration
Rights."

UNDESIGNATED PREFERRED STOCK

Upon the closing of this offering, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by stockholders.
The issuance of preferred stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of preferred stock.

REGISTRATION RIGHTS

After this offering, based upon the number of shares outstanding as of
September 30, 1996, the holders of approximately 5,138,000 shares of Common
Stock (the "Common Stock Holders") and warrants to purchase approximately
251,000 shares of Common Stock (the "Warrant Holders") will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act, pursuant to the Amended and Restated Investors' Rights Agreement
among such holders and the Company, dated March 21, 1996 (the "Investors' Rights
Agreement"). Under the terms of the Investors' Rights Agreement, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of such registration
and are entitled, subject to certain limitations, to include shares therein.
CBIS and/or twenty percent (20%)

48
<PAGE> 50

of the Common Stock Holders may also require the Company to file a registration
statement under the Securities Act with respect to their shares. However, the
Company is not required to effect more than two registrations demanded by CBIS
nor more than two registrations demanded by the twenty percent (20%) of the
Common Stock Holders. Furthermore, the Common Stock Holders may require the
Company to register their shares on Form S-3 when use of such form becomes
available to the Company. Generally, the Company is required to bear all
registration and selling expenses incurred in connection with any such
registrations. These rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration. Such registration rights terminate seven
years after the date following the closing of this offering.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Upon the closing of this offering, the Company's Board of Directors will be
divided into three classes of directors. See "Management-Board Composition." The
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws also require that, effective upon the closing of this offering,
any action required or permitted to be taken by stockholders of the Company must
be effected at a duly called annual or special meeting of the stockholders and
may not be effected by a consent in writing. In addition, special meetings of
the stockholders of the Company may be called only by the Board of Directors,
the Chairman of the Board or the Chief Executive Officer. The Company's Amended
and Restated Certificate of Incorporation also provides that the authorized
number of directors may be changed only by resolution of the Board of Directors.
In addition, directors may not be removed without cause. These provisions could
discourage potential acquisition proposals and may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.

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

TRANSFER AGENT AND REGISTRAR

The First National Bank of Boston has been appointed as the transfer agent
and registrar for the Company's Common Stock.

49
<PAGE> 51

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and assuming no exercise of outstanding
options and warrants after September 30, 1996, and no exercise of the
Underwriters over-allotment option, the Company will have 9,930,137 shares of
Common Stock outstanding. Of these shares, the 2,700,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except for any shares held by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act
("Affiliates"), which shares will be subject to the resale limitations of Rule
144. The remaining 7,230,137 shares of Common Stock held by existing
stockholders (the "Restricted Shares") were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act.
These shares may be sold in the public market only if registered or pursuant to
an exemption from registration such as Rules 144, 144(k), or 701 under the
Securities Act, which are summarized below.

In the absence of the restrictions contained in the agreements not to sell
described below, approximately 388,000 of these Restricted Shares reflected as
of September 30, 1996 will be eligible for sale in the public market upon the
date of this Prospectus pursuant to Rule 144(k). In the absence of the
restrictions contained in the agreements not to sell described below,
approximately 3,417,000 additional Restricted Shares will be eligible for sale
beginning 90 days after the date of this Prospectus pursuant to Rule 144 and
Rule 701. Holders of approximately 6,638,000 of the Restricted Shares are
subject to agreements not to sell or otherwise transfer their shares for 180
days following the date of this Prospectus, and holders of approximately 250,000
of the Restricted Shares are subject to agreements not to sell or otherwise
transfer their shares for 90 days following the date of this Prospectus (the
"Lock-up Shares"). Of such Lock-up Shares, approximately 5,308,000 will become
available for sale in the public market 180 days after the date of this
Prospectus and approximately 250,000 will become available for sale in the
public market 90 days after the date of this Prospectus, although 4,625,000 of
the Lock-up Shares will still be subject to certain volume and other
restrictions on resale under Rule 144 at the expiration of such lock-up period.
The remaining 1,080,718 shares held by existing shareholders will become
eligible for sale at various times over a period of less than two years and
could be sold earlier if the holders exercise registrations rights. Montgomery
Securities may, in its sole discretion and at any time without notice, release
any or all of the holders of the Lock-up Shares from any or all of their
obligations under their respective agreements not to sell.

As of September 30, 1996, there were 1,102,346 shares of Common Stock
issuable upon exercise of outstanding options. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register shares
of Common Stock reserved for issuance under the Stock Option Plan and the
Purchase Plan within 90 days after the date of this Prospectus thus permitting
the sale of such shares by non-Affiliates in the public market without
restriction under the Securities Act. Such registration statement will become
effective immediately upon filing. Upon effectiveness of such registration
statement, holders of vested options to purchase approximately 151,000 shares
will be entitled to exercise such options and immediately sell such shares. In
addition, holders of vested options to purchase approximately 431,000 shares
have entered into agreements not to sell any shares of Common Stock received
upon exercise of such options for 180 days following the date of this offering.
Montgomery Securities, in its sole discretion and at any time without notice,
may release any or all of such option holders from any or all of their
obligations under their respective agreements not to sell.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares that
were not acquired from the Company or an Affiliate of the Company within the
previous two years, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Company's Common Stock (approximately 99,000 shares immediately
after this offering) or (ii) the average weekly trading volume of the Company's
Common Stock in the Nasdaq National Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an Affiliate of the Company at
any time during the 90 days immediately preceding the sale and

50
<PAGE> 52

who beneficially owns Restricted Shares is entitled to sell such shares pursuant
to Rule 144(k) without regard to the limitations described above; provided that
at least three years have elapsed since the later of the date the shares were
acquired from the Company or from an Affiliate of the Company.

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

After the date of this Prospectus, and assuming no exercise of outstanding
warrants after September 30, 1996, warrants to purchase 979,937 shares of Common
Stock will be outstanding. If these warrants are executed by payment of the
applicable exercise price the holding period of such Common Stock for purposes
of Rule 144 will commence on the date any such warrant is exercised as to such
shares, unless such warrant is exercised pursuant to a net exercise provision in
which case the holding period will commence on the date the warrant was
originally issued. In the absence of the restrictions contained in the
agreements not to sell described above, holders of warrants to purchase 480,406
shares of Common Stock will be permitted to sell such shares beginning 90 days
after the date of this Prospectus pursuant to Rule 701.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
As described herein, only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future.

In addition, after this offering, the holders of approximately 5,138,000
shares and warrants to purchase approximately 251,000 shares of Common Stock
will be entitled to certain rights with respect to registration of such shares
under the Securities Act. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. See "Description of
Capital Stock -- Registration Rights."

51
<PAGE> 53

UNDERWRITING

The Underwriters named below, represented by Montgomery Securities, Cowen &
Company and UBS Securities LLC (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions precedent, and that the Underwriters are committed to purchase all of
such shares, if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.....................................................
Cowen & Company...........................................................
UBS Securities LLC........................................................

---------
Total........................................................... 2,700,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this offering, the
price and concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.

The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 405,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,700,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.

The holders of approximately 6,638,000 shares and 250,000 shares of the
Company's Common Stock, including all of the Company's directors and executive
officers, have agreed that, for a period of 180 days and 90 days after the date
of this Prospectus, respectively, they will not, without the prior written
consent of Montgomery Securities, directly or indirectly sell, offer to sell or
otherwise dispose of any such shares of Common Stock or any right to acquire
such shares. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the prior written
consent of Montgomery Securities, issue, offer, sell, grant options to purchase
or otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable for the Common Stock or other equity
security, other than the grant of options to purchase Common Stock or the
issuance of shares of Common Stock under the Stock Option Plan and the Purchase
Plan and the issuance of shares of Common Stock pursuant to the exercise of
outstanding options and warrants.

52
<PAGE> 54

The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.

The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations are the history of, and the prospects for, the
Company and the industry in which it competes, an assessment of the Company's
management, the Company's past and present operations, its past and present
financial performance, the prospects for future earnings of the Company, the
present state of the Company's development, the general condition of the
securities markets at the time of the offering and the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Boulder, Colorado. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.

EXPERTS

The financial statements of Coral Systems, Inc. as of December 31, 1994 and
1995, and September 30, 1996, for each of the three years in the period ended
December 31, 1995 and for the nine month period ended September 30, 1996
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

53
<PAGE> 55

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto,
relating to the shares of Common Stock offered hereby has been filed by the
Company with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus concerning the contents of any contract
or document are necessarily summaries of such contracts or documents. Although
all material elements of such contracts or documents required to be disclosed in
this Prospectus are disclosed, each statement concerning such contracts or
documents is qualified in all respects by reference to the copy of such contract
or document filed as an exhibit to the Registration Statement. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A copy
of the Registration Statement may be inspected by anyone without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from those offices upon the payment of certain fees
prescribed by the Commission. The Registration Statement and such exhibits and
schedules are also available on the Commission's Web site (http://www.sec.gov).

Upon completion of the offering, the Company will be subject to the
informational reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by the Company's independent accountants
and quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information.

54
<PAGE> 56

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants................................ F-2
Balance Sheet.......................................................................... F-3
Statement of Operations................................................................ F-4
Statement of Changes in Stockholders' Equity (Deficit)................................. F-5
Statement of Cash Flows................................................................ F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>

F-1
<PAGE> 57

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and

Stockholders of Coral Systems, Inc.

We have audited the accompanying balance sheet of Coral Systems, Inc. as of
December 31, 1994, December 31, 1995 and September 30, 1996 and the related
statements of operations, of changes in stockholders' equity (deficit) and of
cash flows for each of the three years in the period ended December 31, 1995,
and for the nine-month period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

As more fully discussed in Note 9, the accompanying financial statements as of
and for the nine-month period ended September 30, 1996 have been restated due to
circumstances surrounding the alleged granting of certain concessions by the
Company to a reseller customer. Our report, dated October 17, 1996, on the
previous financial statements was unqualified.

In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Coral Systems, Inc.
at December 31, 1994, December 31, 1995, and September 30, 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995 and the nine-month period ended September 30, 1996, in
conformity with generally accepted accounting principles.

PRICE WATERHOUSE LLP

Boulder, Colorado

December 18, 1996

F-2
<PAGE> 58

CORAL SYSTEMS, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- --------------
(NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 82,900 $ 1,022,500 $ 3,373,500
Accounts receivable, net of allowance for doubtful accounts of
$75,000 at September 30, 1996.................................. 740,800 1,119,300 1,978,200
Other current assets............................................. 2,800 149,300 328,000
---------- ---------- ----------
Total current assets........................................... 826,500 2,291,100 5,679,700
---------- ---------- ----------
Property and equipment, net........................................ 255,400 625,800 1,264,300
Other assets....................................................... 10,000 41,100 39,100
---------- ---------- ----------
$ 1,091,900 $ 2,958,000 $ 6,983,100
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 291,500 $ 412,900 $ 446,800
Accrued liabilities.............................................. 90,000 526,100 1,010,800
Current portion of long-term debt................................ 666,700 796,700 380,100
Deferred revenue................................................. 300,300 463,700 1,692,800
---------- ---------- ----------
Total current liabilities...................................... 1,348,500 2,199,400 3,530,500
---------- ---------- ----------
Deferred revenue and other......................................... 475,200 475,200 385,000
Long-term debt..................................................... 22,000 145,800 313,400
Commitments and contingencies (Notes 3 and 8)
Stockholders' Equity (Deficit)
Series A preferred stock, $.001 par value; 2,000,000 shares
authorized, issued and outstanding; none outstanding pro
forma.......................................................... 2,000 2,000 2,000 --
Series B preferred stock, $.001 par value; 2,083,333 shares
authorized; 2,083,333 shares issued and outstanding at December
31, 1995 and September 30, 1996; none outstanding pro forma.... -- 2,083 2,083 --
Series C preferred stock, $.001 par value; 1,850,000 shares
authorized; 1,824,920 shares issued and outstanding at
September 30, 1996; none outstanding pro forma................. -- -- 1,825 --
Preferred stock $.001 par value; 9,066,667 shares authorized; no
shares issued or outstanding................................... -- -- -- --
Common stock, $.001 par value; 20,000,000 shares authorized at
December 31, 1994 and 1995, 30,000,000 shares authorized at
September 30, 1996; 4,124,358, 4,265,508 and 3,235,183 shares
issued at December 31, 1994, 1995 and September 30, 1996,
respectively and 7,230,887 at September 30, 1996 pro forma..... 4,124 4,265 3,235 7,231
Additional paid-in capital....................................... 2,163,176 6,449,252 10,467,157 10,469,069
Accumulated deficit.............................................. (2,905,100) (6,296,000) (7,721,900) (7,721,900)
Less treasury stock at cost; 676,887, 966,965, and 750 shares at
December 31, 1994, 1995 and September 30, 1996, respectively... (18,000) (24,000) (200) (200)
---------- ---------- ---------- ----------
Total stockholders' equity (deficit)........................... (753,800) 137,600 2,754,200 2,754,200
---------- ---------- ---------- ----------
$ 1,091,900 $ 2,958,000 $ 6,983,100
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 59

CORAL SYSTEMS, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses...................... $ 215,200 $ 1,036,400 $ 2,484,600 $ 1,935,400 $ 5,211,800
Services and other..................... 178,700 239,700 624,700 531,900 356,000
Hardware............................... 110,200 140,800 780,500 626,300 615,300
----------- ----------- ----------- ----------- -----------
Total revenue....................... 504,100 1,416,900 3,889,800 3,093,600 6,183,100
Cost of revenue:
Software licenses...................... 57,600 122,000 526,000 421,800 419,100
Services and other..................... 74,500 258,000 644,700 513,200 584,800
Hardware............................... 111,800 128,300 738,300 607,400 469,600
----------- ----------- ----------- ----------- -----------
Total cost of revenue............... 243,900 508,300 1,909,000 1,542,400 1,473,500
----------- ----------- ----------- ----------- -----------
Gross profit........................ 260,200 908,600 1,980,800 1,551,200 4,709,600
Operating expenses:
Research and development............... 414,000 572,700 2,159,700 1,496,400 1,953,100
Sales and marketing.................... 158,300 645,300 1,869,700 1,427,100 2,628,900
General and administrative............. 677,100 885,600 1,351,000 1,065,700 1,765,400
----------- ----------- ----------- ----------- -----------
Total operating expenses............ 1,249,400 2,103,600 5,380,400 3,989,200 6,347,400
Loss from operations..................... (989,200) (1,195,000) (3,399,600) (2,438,000) (1,637,800)
Other income (expense), net.............. (60,600) (32,800) 8,700 15,100 (31,400)
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item........... (1,049,800) (1,227,800) (3,390,900) (2,422,900) (1,669,200)
Extraordinary item:
Gain on extinguishment of debt and
other liabilities................... -- -- -- -- 243,300
----------- ----------- ----------- ----------- -----------
Net loss................................. $(1,049,800) $(1,227,800) $(3,390,900) $(2,422,900) $(1,425,900)
=========== =========== =========== =========== ===========
Pro forma net loss per common share
before extraordinary item
(unaudited)............................ $ (.21)
===========
Pro forma net loss per common share
(unaudited)............................ $ (.48) $ (.18)
=========== ===========
Pro forma weighted average number of
common shares outstanding
(unaudited)............................ 7,097,479 8,096,439
=========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 60

CORAL SYSTEMS, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------ ------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ --------- ------ --------- ------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992.................. -- -- -- -- -- -- 3,731,728 $ 3,732 $ 173,768
Purchase of treasury
stock.................
Net loss................
--------- ------ --------- ------ --------- ------ ---------- ------- -----------
Balance at December 31,
1993.................. -- -- -- -- -- -- 3,731,728 3,732 173,768
Exercise of stock
options and
warrants.............. 196,758 197 1,303
Conversion of bridge
loan.................. 195,872 195 129,805
Private placement of
Series A preferred
stock, net............ 2,000,000 $2,000 1,858,300
Net loss................
--------- ------ --------- ------ --------- ------ ---------- ------- -----------
Balance at December 31,
1994.................. 2,000,000 2,000 -- -- -- -- 4,124,358 4,124 2,163,176
Private placement of
Series B preferred
stock, net............ 2,083,333 $2,083 4,269,317
Exercise of stock
options and warrants
and other stock issued
for services.......... 141,150 141 16,759
Purchase of treasury
stock.................
Net loss................
--------- ------ --------- ------ --------- ------ ---------- ------- -----------
Balance at December 31,
1995.................. 2,000,000 2,000 2,083,333 2,083 -- -- 4,265,508 4,265 6,449,252
Purchase of treasury
stock.................
Retirement of treasury
stock................. (1,074,400) (1,074) (187,326)
Private placement of
Series C preferred
stock, net............ 1,824,920 $1,825 4,191,275
Exercise of stock
options and
warrants.............. 44,075 44 13,956
Net loss................
--------- ------ --------- ------ --------- ------ ---------- ------- -----------
Balance at September 30,
1996.................. 2,000,000 $2,000 2,083,333 $2,083 1,824,920 $1,825 3,235,183 $ 3,235 $10,467,157
========= ====== ========= ====== ========= ====== ========== ======= ===========

<CAPTION>
TOTAL
TREASURY STOCK STOCKHOLDERS'
ACCUMULATED ---------------------- EQUITY
DEFICIT SHARES AMOUNT (DEFICIT)
----------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Balance at December 31,
1992.................. $ (627,500) -- -- $ (450,000)
Purchase of treasury
stock................. 676,887 $ (18,000) (18,000)
Net loss................ (1,049,800) (1,049,800)
----------- ---------- -------- -----------
Balance at December 31,
1993.................. (1,677,300) 676,887 (18,000) (1,517,800)
Exercise of stock
options and
warrants.............. 1,500
Conversion of bridge
loan.................. 130,000
Private placement of
Series A preferred
stock, net............ 1,860,300
Net loss................ (1,227,800) (1,227,800)
----------- ---------- -------- -----------
Balance at December 31,
1994.................. (2,905,100) 676,887 (18,000) (753,800)
Private placement of
Series B preferred
stock, net............ 4,271,400
Exercise of stock
options and warrants
and other stock issued
for services.......... 16,900
Purchase of treasury
stock................. 290,078 (6,000) (6,000)
Net loss................ (3,390,900) (3,390,900)
----------- ---------- -------- -----------
Balance at December 31,
1995.................. (6,296,000) 966,965 (24,000) 137,600
Purchase of treasury
stock................. 108,185 (164,600) (164,600)
Retirement of treasury
stock................. (1,074,400) 188,400
Private placement of
Series C preferred
stock, net............ 4,193,100
Exercise of stock
options and
warrants.............. 14,000
Net loss................ (1,425,900) (1,425,900)
----------- ---------- -------- -----------
Balance at September 30,
1996.................. $(7,721,900) 750 $ (200) $ 2,754,200
=========== ========== ======== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 61

CORAL SYSTEMS, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................. $(1,049,800) $(1,227,800) $(3,390,900) $(2,422,900) $(1,425,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 38,100 90,100 198,700 145,400 296,100
Provision for doubtful accounts......... -- -- -- -- 75,000
Write-offs of uncollectible
receivables.......................... -- -- -- -- 26,900
Gain on disposal of property and
equipment............................ -- -- (2,600) (1,800) (5,300)
Extraordinary gain...................... -- -- -- -- (243,300)
Changes in:
Accounts receivable.................. (136,800) (604,000) (378,500) (242,100) (1,082,200)
Other assets......................... (2,000) (7,000) (177,600) (213,400) (310,800)
Accounts payable and accrued
liabilities........................ 198,400 158,600 576,900 416,200 719,000
Deferred revenue..................... -- 291,200 163,400 108,100 1,223,200
---------- ---------- ---------- ---------- ----------
Net cash used in operating
activities......................... (952,100) (1,298,900) (3,010,600) (2,210,500) (727,300)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and
equipment............................... -- -- 198,300 176,400 206,400
Property and equipment additions.......... (95,200) (195,400) (514,000) (471,300) (542,900)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities......................... (95,200) (195,400) (315,700) (294,900) (336,500)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock,
net..................................... -- 1,580,300 3,874,500 3,871,400 4,193,100
Proceeds from sale of common stock........ -- 1,500 13,900 13,400 14,000
Purchase of treasury stock................ -- -- (6,000) (6,000) (164,600)
Proceeds from the issuance of bridge loans
and long-term debt...................... 921,500 205,200 760,000 760,000 250,000
Payment on borrowings..................... (27,000) (271,900) (376,500) (350,700) (877,700)
---------- ---------- ---------- ---------- ----------
Net cash from financing activities... 894,500 1,515,100 4,265,900 4,288,100 3,414,800
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................. (152,800) 20,800 939,600 1,782,700 2,351,000
Cash and cash equivalents, beginning of
period.................................. 214,900 62,100 82,900 82,900 1,022,500
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of
period.................................. $ 62,100 $ 82,900 $ 1,022,500 $ 1,865,600 $ 3,373,500
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES AND OTHER CASH FLOW
INFORMATION
Conversion of bridge loans to preferred
stock................................... $ -- $ 280,000 $ 400,000 $ 400,000 $ --
Conversion of accrued liabilities to
debt.................................... -- 36,200 11,600 11,600 5,000
Conversion of bridge loan to common
stock................................... -- 130,000 -- -- --
Capital lease obligations................. -- -- 253,000 196,100 458,700
Issuance of note payable to acquire
stock................................... 18,000 -- -- -- --
Interest paid............................. 3,500 73,700 26,700 14,900 64,600
Transfer of other assets to property and
equipment............................... -- -- -- -- 134,000
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE> 62

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Coral Systems, Inc. (the "Company") was incorporated in August 1991. The
Company develops and provides software solutions for the wireless
telecommunications industry. The solutions enable carriers to reduce fraud and
customer turnover and increase operating efficiencies.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company generates revenue from software licenses; services (including
maintenance, installation and training); development and consulting contracts;
and certain hardware sold in conjunction with software licenses. The Company's
software license agreements typically provide for an initial license fee and
annual maintenance based on a defined number of subscribers, as well as
additional license and maintenance fees for net subscriber additions. The
Company also has entered into license agreements that provide for either a one-
time license fee or a monthly license fee with no additional fees based on
incremental subscriber growth.

Revenue from initial license fees with end users is recognized when the
product has been delivered and the Company has satisfied all significant
performance obligations, unless terms of the sales arrangement provide for
customer acceptance that is based on non-standard performance or other terms. In
the latter case, revenue is recognized when the customer accepts the product
pursuant to those terms. Revenue for incremental subscriber growth, if any, is
recognized at the date subscriber growth is calculated and the revenue is earned
pursuant to the terms of the relevant software license agreement. Monthly
license fees are recognized as earned on a monthly basis. Maintenance revenue is
recognized ratably over the term of the maintenance agreement. Service revenue
for installation and training is recognized as the services are performed.
Revenue from development and consulting contracts is generally recognized as the
services are performed, using the percentage of completion method. Hardware is
sold only in conjunction with software licenses when required by the customer
and such revenue is deferred until the related license revenue is recognized.

Sales agreements with distributors typically do not include any rights of
return or provisions for the future adjustment of the selling price. The Company
recognizes revenue from these transactions at the time the products are shipped
to the distributor, unless payment terms are contingent on the distributor's
subsequent resale or other significant matters. In those latter cases, revenue
is not recognized until the contingencies are resolved.

CONCENTRATION OF CREDIT RISK

Accounts receivable are concentrated in the wireless telecommunications
industry, with both domestic and international customers. During the years ended
December 31, 1993, 1994, 1995 and the nine months ended September 30, 1996, the
Company recognized approximately 100%, 89%, 77% and 82% of its revenue from
three, four, five and three customers, respectively. At September 30, 1996
accounts receivable, net includes $471,000 that is past due from a foreign
distributor. This distributor is disputing payment of this entire amount. The
Company intends to vigorously pursue collection of this receivable from the
distributor, however, it is reasonably possible that collection of any or all of
this amount may not occur. However, any efforts by the Company to collect this
foreign receivable will be subject to significant practical and legal
difficulties. The Company presently believes that no significant loss will be
incurred in connection with the collection of this amount.

Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and cash
equivalents. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company has a cash investment policy which restricts investments to ensure
preservation of principal and maintenance of liquidity.

F-7
<PAGE> 63

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers cash on hand, deposits in banks, and investment
instruments purchased with original maturities of less than three months to be
cash and cash equivalents. Cash equivalents are carried at amortized cost which
approximates fair value.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
respective assets which range from three to seven years. Maintenance and repairs
are expensed as incurred.

SOFTWARE DEVELOPMENT COSTS

Research and development costs are expensed as incurred. Statement of
Financial Accounting Standards No. 86 (SFAS No. 86) requires the capitalization
of certain software development costs once technological feasibility is
established. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenue to total
projected product revenue, whichever is greater. To date, the period between
achieving technological feasibility and the general availability of such
software has been short. Consequently, software development costs qualifying for
capitalization have been insignificant and therefore, the Company has not
capitalized any software development costs to date.

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 liabilities as well as the reported amounts of revenue
and expenses. Actual results could differ from these estimates, making it
reasonably possible that a change in these estimates could occur in the near
term.

UNAUDITED INTERIM FINANCIAL DATA

The interim financial data as of September 30, 1995 and for the nine months
ended September 30, 1995 is unaudited; however, in the opinion of management of
the Company, the unaudited interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim period presented. All data presented in these notes at
such date and for such period is unaudited.

UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

The Board of Directors authorized management of the Company to file a
registration statement with the Securities and Exchange Commission ("SEC") with
respect to sales of shares of its common stock to the public. If the Company's
initial public offering is consummated under the terms presently anticipated,
all of the convertible preferred stock outstanding will automatically convert
into 3,995,704 shares of common stock. Pro forma stockholders' equity as of
September 30, 1996, as set forth on the accompanying balance sheet, is adjusted
for the anticipated conversion of such preferred stock.

PRO FORMA NET LOSS PER COMMON SHARE

The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock concurrent with the closing of the
Company's anticipated initial public offering. Accordingly, historical net loss
per common share is not considered meaningful and has not been presented herein.

Pro forma net loss per share is computed based on the weighted average
number of common shares outstanding and gives effect to certain adjustments
described below. Common equivalent shares are not

F-8
<PAGE> 64

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

included in the per share calculation where the effect of their inclusion would
be antidilutive, except that, in conformity with SEC requirements, common and
common equivalent shares issued during the twelve-month period prior to the
filing of the registration statement related to the Company's proposed initial
public offering have been included in the calculation as if they were
outstanding for all periods, using the treasury stock method and the assumed
initial public offering price. Additionally, all outstanding shares of
convertible preferred stock are assumed to have been converted to common stock
at the time of their issuance.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments, including
cash, short-term trade receivables and payables and long-term debt, approximate
their fair values.

STOCK COMPENSATION PLANS

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its stock option and employee stock purchase plans.
The Company has adopted the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation.

EXPORT SALES

The Company had export sales to the following countries:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
------- --------- -------------
<S> <C> <C> <C>
Sweden........................................... 378,900 43,100 --
Mexico........................................... -- 231,700 25,600
Germany.......................................... -- 266,900 209,500
Puerto Rico...................................... 7,300 118,900 54,000
Malaysia......................................... -- 689,300 6,000
Taiwan........................................... -- -- 669,600
------- --------- -------
386,200 1,349,900 964,700
======= ========= =======
</TABLE>

ADOPTION OF NEW ACCOUNTING STANDARDS

The Company has reviewed Statement of Financial Accounting Standards No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of for applicability. Adoption of this standard did not have a
material effect on the Company's financial position and results of operations.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Furniture and office equipment................. $ 241,100 $ 410,000 $ 738,400
Computer equipment............................. 73,700 293,300 834,300
Purchased software............................. 83,700 210,700 254,300
-------- -------- ----------
398,500 914,000 1,827,000
Less accumulated depreciation and
amortization................................. (143,100) (288,200) (562,700)
-------- -------- ----------
$ 255,400 $ 625,800 $ 1,264,300
======== ======== ==========
</TABLE>

Included in property and equipment at September 30, 1996 is $712,600 of
equipment under capital leases with accumulated amortization aggregating
$180,100. See Note 3.

F-9
<PAGE> 65

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT, EXTRAORDINARY ITEM AND AVAILABLE CREDIT

Long-term debt, including capitalized lease obligations consists of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Line of credit with bank; interest at bank's prime plus 2%
through May 1995, prime plus 1.50% from June 1995 to May
1996, and prime plus 1.25% thereafter (actual rate of
9.5% at September 30, 1996); due April 1997; secured by
all cash, accounts receivable, equipment, inventory and
transferable third-party rights.......................... $ 110,000 $ 207,000 $ 150,000
Note payable to bank; interest at prime plus 2% (actual
rate of 10.5% at December 31, 1995); payable in monthly
installments of $2,744 through May 1996; secured by
equipment................................................ 41,500 11,600 --
Note payable to stockholder; interest at 10%; due April
1995; unsecured.......................................... 24,700 -- --
Note payable to supplier; interest at 10%; payable in
monthly installments of $3,183 through April 1995;
unsecured................................................ 12,500 -- --
Capital lease obligation; interest at 11.55%; payable in
monthly installments of $22,900 through May 1999......... -- 223,900 543,500
Convertible note payable to systems integrator; interest at
8% through May 31, 1995, 18% thereafter; due June 1,
1995; unsecured.......................................... 500,000 500,000 --
--------- --------- ---------
688,700 942,500 693,500
Less current portion....................................... (666,700) (796,700) (380,100)
--------- --------- ---------
$ 22,000 $ 145,800 $ 313,400
========= ========= =========
</TABLE>

Future maturities of long-term debt at September 30, 1996 are as follows:

<TABLE>
<S> <C>
Three months ending December 31, 1996..................................... $ 70,500
1997...................................................................... 432,000
1998...................................................................... 238,400
1999...................................................................... 31,300
--------
772,200
Less amount representing interest......................................... (78,700)
--------
$693,500
========
</TABLE>

In September 1996, the Company extinguished a previously recorded net
liability of $658,300, consisting of a $500,000 note plus accrued interest, and
a separate liability due to a systems integrator, as well as receivables owed to
the Company by the systems integrator. The Company paid $415,000 resulting in a
net gain of $243,300 which was recorded as an extraordinary item. The Company
also paid $127,200 of legal expenses associated with this matter, which were
included in general and administrative expenses.

At September 30, 1996, the Company had $600,000 available to draw on a
$750,000 line of credit with a bank. The line of credit expires on April 26,
1997. The Company is also subject to a compensating balance arrangement of
$250,000 if the loan balance on the line of credit exceeds $500,000.

F-10
<PAGE> 66

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. CAPITAL STOCK, OPTIONS AND WARRANTS

STOCK SPLIT

Subsequent to September 30, 1996, a one-for-two reverse split of the
Company's stock was consummated. All common stock share and per share
information and all preferred stock conversion rates presented in these
financial statements has been restated for all periods presented to reflect the
reverse stock split.

PREFERRED STOCK

In March 1996, the Company's certificate of incorporation was amended to
increase the authorized shares of preferred stock from 5,000,000 shares to
15,000,000 shares consisting of: 2,000,000 shares of Series A preferred stock,
2,083,333 shares of Series B preferred stock, 1,850,000 shares of Series C
preferred stock and 9,066,667 shares undesignated as to series.

Series A and Series C preferred stock are convertible at the option of the
holder into common stock on a one-for-two basis; Series B preferred stock is
convertible on a one-for-one basis. In the event of a qualified public offering,
all preferred shares will automatically convert to common stock. Additionally,
all preferred shares have certain voting rights on an as-converted basis and a
liquidation preference equal to the original purchase price plus a pro rata
portion of remaining liquidation proceeds in excess of the proceeds paid to
common stockholders.

EMPLOYEE STOCK PURCHASE PLAN

In August 1996, the Company's Board of Directors approved the Employee
Stock Purchase Plan (the "Purchase Plan") with 450,000 shares of Common Stock
reserved for issuance thereunder. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the adoption of the Purchase Plan. Employees, other than part-time or
seasonal employees and 5% stockholders, are eligible to participate in the
currently authorized offerings if they are employed by the Company or an
affiliate of the Company incorporated in the U.S. Employees may elect to have up
to 15% of their earnings withheld and applied to the purchase of common stock at
a price equal to 85% of the lower of the fair market value of the Common Stock
on the commencement date of each offering period or the relevant purchase date.
No shares of Common Stock have been issued to participants in the Purchase Plan
to date.

STOCK OPTIONS AND WARRANTS

In October 1992, the Company adopted a stock option plan with 941,690
shares reserved for issuance to employees, directors and consultants of the
Company. Subsequent to 1992, the Board of Directors increased the number of
authorized shares reserved under the Company' 1992 Stock Option Plan to
2,089,189. Options granted under the plan expire ten years from the date of
grant and generally vest over a period of three to four years.

The Company has 979,937 warrants outstanding and fully exercisable at
September 30, 1996. At September 30, 1996, 503,007 of the warrants are held by
an officer, a present director and a former director of the Company. The
warrants have five to ten year terms and expire from 1998 through 2003.

F-11
<PAGE> 67

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of stock option and warrant activity for the
years ended December 31, 1993, 1994, 1995 and for the nine months ended
September 30, 1996:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WARRANTS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1992........... 596,656 $ 0.0026 -- --
Granted............................... 607,580 0.3227 545,045 $ 0.0926
--------- ------- --------- -------
Outstanding December 31, 1993........... 1,204,236 0.1641 545,045 0.0926
Granted............................... 43,002 2.0000 149,500 0.2000
Forfeited............................. (112,852) 0.0027 (52,843) 0.1117
Exercised............................. (146,284) 0.0027 (50,474) 0.0265
--------- ------- --------- -------
Outstanding December 31, 1994........... 988,102 0.2864 591,228 0.1237
Granted............................... 29,000 0.2000 457,753 0.1853
Forfeited............................. -- -- (158,925) 0.2732
Exercised............................. (18,331) 0.0027 (108,819) 0.1238
--------- ------- --------- -------
Outstanding December 31, 1995........... 998,771 0.2891 781,237 0.1326
Granted............................... -- -- 395,500 3.2755
Forfeited............................. -- -- (49,150) 0.2165
Exercised............................. (18,834) 0.6637 (25,241) 0.0585
--------- ------- --------- -------
Outstanding September 30, 1996.......... 979,937 $ 0.2819 1,102,346 $ 1.2582
========= ======= ========= =======
</TABLE>

The weighted average fair value of options granted during the year ended
December 31, 1995 and the nine-month period ended September 30, 1996 was $.03
per share and $.53 per share, respectively. The weighted average fair value of
warrants granted during the year ended December 31, 1995 is $.03 per share.

The following table summarizes information about exercisable stock options
and warrants as of the following dates:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C> <C>
December 31, 1993....................... Options 49,458 $.10
Warrants 327,868 $.04
December 31, 1994....................... Options 162,834 $.11
Warrants 604,336 $.20
December 31, 1995....................... Options 284,009 $.09
Warrants 998,771 $.29
September 30, 1996...................... Options 315,297 $.11
Warrants 979,937 $.28
</TABLE>

F-12
<PAGE> 68

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about stock options and warrants
outstanding at September 30, 1996:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF OUTSTANDING REMAINING
EXERCISE PRICES AT 9/30/96 CONTRACTUAL LIFE
--------------- ----------- ----------------
<S> <C> <C> <C>
Options................................... $ .027 - $6.00 1,102,346 7.92
Warrants.................................. $ .003 - $2.00 979,937 4.51
</TABLE>

At September 30, 1996 there were 802,309 shares available for grant under
the stock option plan.

The Company applies APB Opinion 25 in accounting for its stock compensation
plans, and no compensation expense has been recognized in the financial
statements. Had compensation expense for the Company's stock option plan been
determined based on the fair values at the grant dates for awards under the plan
consistent with the method of accounting prescribed by FASB Statement 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C> <C>
Net loss.................................. As reported $ (3,390,900) $(741,700)
Pro forma (3,398,100) (854,500)
Pro forma net loss per common share....... As reported $ (.48) $ (.09)
Pro forma (.48) (.11)
</TABLE>

In accordance with the guidance provided under SFAS 123, fair values are
based on minimum values. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended December 31, 1995
and the nine-month period ended September 30, 1996: dividend yield of zero;
expected volatility of zero; risk-free interest rates ranging from 5.62% to
7.13%; and an expected term of six years. The risk-free rate used in the
calculation is the yield on the grant date of a U.S. Treasury Strip with a
maturity equal to the expected term of the option.

5. INCOME TAXES

The Company's net deferred tax assets consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards................ $ 898,500 $ 2,146,500 $ 2,367,100
Deferred revenue and other...................... 155,300 163,600 209,600
Tax credit carryforwards........................ 92,400 125,000 125,000
----------- ----------- -----------
Gross deferred tax assets..................... 1,146,200 2,435,100 2,701,700
Less deferred tax asset valuation allowance..... (1,146,200) (2,435,100) (2,701,700)
----------- ----------- -----------
Net deferred tax asset................ $ -- $ -- $ --
=========== =========== ===========
</TABLE>

Based upon the Company's accumulated deficit and history of recurring net
losses, the ultimate realization of the deferred tax asset does not appear to be
more likely than not. Accordingly, a valuation allowance has been provided
against all potential future tax benefits.

F-13
<PAGE> 69

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The benefit for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 34% to loss before income taxes as follows
(in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. federal income tax benefit at
statutory rate....................... $ 356,900 $ 417,500 $ 1,152,900 $ 252,200
Increases (decreases) resulting from:
Unrecognized benefit of net operating
loss carryforwards and future net
deductions........................ (418,500) (492,000) (1,288,800) (266,600)
Non-deductible items and other....... 61,600 74,500 135,900 14,400
--------- --------- ----------- ----------
Benefit for income taxes............... $ -- $ -- $ -- $ --
========= ========= =========== ==========
</TABLE>

At September 30, 1996, the Company has net operating loss carryforwards
aggregating approximately $6,312,100 which expire between 2006 and 2010. The
Internal Revenue Code places certain limitations on the annual amount of net
operating loss carryforwards which can be utilized if certain changes in the
Company's ownership occur. Such defined changes occurred in 1994, 1995 and 1996.
Those changes have substantially limited the amount of net operating loss
benefit that may be utilized in any given taxable year to approximately $30,000
for pre-January 1994 net operating losses, approximately $180,000 for pre-March
1995 net operating losses and approximately $900,000 for pre-June 1996 losses.
Future changes in the Company's ownership may further limit the use of the
carryforward benefits. There can be no assurance that the IRS will not challenge
the Company's factual and legal determination related to ownership changes.

6. RELATED PARTY TRANSACTIONS

During the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996, the Company paid directors of the Company approximately
$85,500, $58,500 and $60,200, respectively, for their services and expenses as
Board members and consultants.

During 1995, the Company paid an additional $54,000 and issued 14,000
shares of common stock to a director of the Company for services performed in
connection with the Series B preferred stock private placement.

7. EMPLOYEE BENEFITS

During 1995, the Company established a 401(k) defined contribution plan
covering substantially all employees meeting minimum age and service
requirements. Participation in the plan is optional. Employer contributions are
made to the plan solely at the discretion of the Board of Directors. To date, no
Company contributions have been made.

F-14
<PAGE> 70

CORAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES

The Company conducts its operations from leased facilities. Future minimum
non-cancelable rental payments for this facilities lease and other equipment
leases are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASE
OBLIGATIONS
-----------
<S> <C>
Three months ended December 31, 1996...................................... $ 30,000
1997...................................................................... 108,200
1998...................................................................... 104,100
1999...................................................................... 8,700
---------
$ 251,000
=========
</TABLE>

Rent expense related to the above operating leases approximated $35,300,
$80,000, $147,500, and $162,000 for the years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1996, respectively.

9. RESTATEMENT OF FINANCIAL STATEMENTS

In October 1996, the Company learned that earlier that month certain
concessions were allegedly granted to a reseller customer with respect to a sale
previously recorded in June 1996 (the Reseller Transaction). Although the
Company believes satisfaction of these concessions, if they are valid, is
covered by the Company's maintenance contract with the reseller, the Company now
believes, as a result of recent actions of the reseller and the existence of the
alleged concessions, it is appropriate to reverse the Reseller Transaction and
to recognize revenue for the deposit received to date from this transaction at
the time when either (a) the alleged concessions are determined to be
unenforceable, or (b) the reseller validates the end user's final acceptance of
the product. The revenue for the remainder of the amount to be received under
the arrangement will be recognized on a cash basis.

The accompanying financial statements as of and for the nine-month period
ended September 30, 1996 are different from those previously issued as follows:
(i) revenue has been decreased by $669,300, and net loss and pro forma net loss
per common share (unaudited) have been increased by $684,200, and $.09,
respectively, and (ii) accounts receivable have been decreased by $471,000 and
deferred revenue has been increased by $213,200.

F-15
<PAGE> 71

[GRAPHIC DEPICTING A CORAL REEF WITH THE CORAL SYSTEMS LOGO AND SLOGAN
"THE SOFTWARE STANDARD IN WIRELESS."]
<PAGE> 72
================================================================================

No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, any Selling Stockholder or any of the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the shares of Common Stock to which it
relates or an offer to, or a solicitation of, any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to the date hereof.

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 26
Management............................ 36
Certain Transactions.................. 44
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 54
Index to Financial Statements......... F-1
</TABLE>

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

Until , 1996 (25 days after the date of this Prospectus) all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.

================================================================================

2,700,000 SHARES

[CORAL SYSTEMS LOGO]

COMMON STOCK

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

PROSPECTUS

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

MONTGOMERY SECURITIES

COWEN & COMPANY

UBS SECURITIES

, 1996

================================================================================
<PAGE> 73

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

<TABLE>
<S> <C>
Registration fee.......................................................... $ 11,291
NASD filing fee........................................................... 4,226
Nasdaq application fee.................................................... 42,325
Blue sky qualification fee and expenses................................... 5,000
Printing and engraving expenses........................................... 175,000
Legal fees and expenses................................................... 275,000
Accounting fees and expenses.............................................. 200,000
Transfer agent and registrar fees......................................... 10,000
Directors and Officers Insurance.......................................... 250,000
Miscellaneous............................................................. 52,158
----------
Total........................................................... $1,025,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").

The Registrant's Amended and Restated Certificate of Incorporation provides
for the elimination of liability for monetary damages for breach of the
directors' fiduciary duty of care to the Registrant and its stockholders. These
provisions do not eliminate the directors' duty of care and, in appropriate
circumstances, equitable remedies such an injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, under
current Delaware law, a director's liability to the Registrant or its
stockholders may not be limited with respect to liability for breach of the
director's duty of loyalty to the Registrant or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.

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

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.

II-1
<PAGE> 74

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since September 30, 1993, the Registrant has issued and/or sold
unregistered securities as set forth below. All share numbers and per share
prices reflect the 1-for-753.3521 stock split effected by the Registrant in
January 1994 and the 1-for-2 reverse stock split effected on December 5, 1996.

(1) During the period, the Registrant granted stock options to purchase common
shares as provided in the following tables:

To officers, employees, directors and consultants under the 1992 Stock
Option Plan:

<TABLE>
<CAPTION>
DATE SHARES PRICE/SHARE
------------------------------------------------------ --------- -----------
<S> <C> <C>
October 1, 1993....................................... 420,746 $ .026
November 10, 1993..................................... 56,501 $ .66
May 17, 1994.......................................... 68,000 $ .20
October 25, 1994...................................... 81,500 $ .20
February 27, 1995..................................... 152,002 $ .20
May 12, 1995.......................................... 158,000 $ .22
July 27, 1995......................................... 54,000 $ .22
September 11, 1995.................................... 37,250 $ .22
December 8, 1995...................................... 56,501 $ .22
March 22, 1996........................................ 178,250 $ .22
June 5, 1996.......................................... 6,750 $1.50
July 24, 1996......................................... 210,500 $6.00
November 13, 1996..................................... 73,750 $9.00
</TABLE>

(2) During the period, the Registrant sold shares of Common Stock pursuant to
the exercise of stock options as follows:

<TABLE>
<CAPTION>
DATE SHARES PRICE/SHARE
------------------------------------------------------ --------- -----------
<S> <C> <C>
October 3, 1994....................................... 41,434 $ .026
December 15, 1994..................................... 9,040 $ .026
May 16, 1995.......................................... 56,501 $ .020
June 16, 1995......................................... 34,385 $ .026
June 16, 1995......................................... 4,500 $ .20
November 27, 1995..................................... 13,433 $ .026
January 25, 1996...................................... 7,533 $ .026
January 29, 1996...................................... 13,183 $ .026
March 18, 1996........................................ 3,400 $ .22
May 29, 1996.......................................... 750 $ .22
September 30, 1996.................................... 375 $ .22
</TABLE>

(3) From January 1994 to March 1994, the Registrant sold 2,000,000 shares of
Series A Preferred Stock, which will convert into 999,960 shares of Common
Stock upon the completion of this offering, to a group of accredited
investors for cash in the aggregate amount of $1,720,000 and cancellation
of indebtedness in the aggregate amount of $280,000.

(4) In January 1994, the Registrant sold 94,169 shares of Common Stock,
pursuant to exercise of a warrant, to an officer of the Registrant for cash
in the aggregate amount of $249.92.

(5) In March 1994, the Registrant issued warrants to purchase 43,002 shares of
Common Stock, at a price of $2.00 per share, to consultants of the
Registrant.

(6) In June 1994, the Registrant sold 48,365 shares of Common Stock, pursuant
to exercise of a warrant, to a former officer of the Registrant for cash in
the aggregate amount of $128.36.

(7) In July 1995, the Registrant issued a warrant to purchase 29,000 shares of
Common Stock, at an exercise price of $.20 per share, to a consultant of
the Registrant.

II-2
<PAGE> 75

(8) In November 1994, the Registrant sold 3,750 shares of Common Stock,
pursuant to exercise of a warrant, to a former director of the Registrant
for cash in the aggregate amount of $9.95.

(9) In March 1995, the Registrant sold 2,083,333 shares of Series B Preferred
Stock, which will convert into 2,083,290 shares of Common Stock upon the
completion of this offering, to a group of accredited investors for cash in
the aggregate amount of $4,096,821.20 and cancellation of indebtedness in
the aggregate amount of $403,178.08.

(10) In July 1995, the Registrant sold 18,331 shares of common stock, pursuant
to exercise of a warrant, to an officer of the Registrant for cash in the
aggregate amount of $48.65.

(11) In March 1996, the Registrant sold 1,824,920 shares of Series C Preferred
Stock, which will convert into 912,453 shares of Common Stock upon the
completion of this offering, to an accredited investor for cash in the
aggregate amount of $4,222,198.

(12) In August 1996, the Registrant sold 18,834 shares of Common Stock, pursuant
to exercise of a warrant, to a former consultant of the Registrant for cash
in the aggregate amount of $12,500.13

With respect to the grant of stock options described in paragraph (1)
above, exemption from Registration under the Securities Act was unnecessary in
that none of such transactions involved a "sale" of securities as such term is
used in Section 2(3) of the Securities Act.

The sales and issuances of securities in the transactions described in
paragraphs (2), (4), (6) and (8) above, were deemed to be exempt from
registration under the Securities Act by virtue of Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to written
compensating benefit plans or pursuant to a written contract relating to
compensation, as provided by Rule 701.

The sales and issuances of securities in the transactions described in
paragraphs (3), (5), (7) and (9) through (12) above were deemed to be exempt
from registration under the Securities Act by virtue of Section 4(2) and/or Rule
506 promulgated under the Securities Act. The purchasers in each case
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends are affixed to
the stock certificates issued in such transactions. Similar legends were imposed
in connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
1.1+ -- Form of Underwriting Agreement.
3(i).1+ -- Amended and Restated Certificate of Incorporation.
3(i).2+ -- Form of Amended and Restated Certificate of Incorporation to be
effective upon the closing of the offering.
3(ii).1+ -- Bylaws of the Registrant.
3(ii).2+ -- Form of Amended and Restated Bylaws to be effective upon the closing
of the offering.
4.1 -- Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2 -- Specimen Stock Certificate.
5.1+ -- Opinion of Cooley Godward LLP.
10.1+ -- Form of Indemnity Agreement to be entered into between the Registrant
and its directors and officers, with related schedule.
</TABLE>

II-3
<PAGE> 76

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
10.2+ -- Registrant's Amended and Restated Stock Option Plan, including forms
of stock option grant notice and stock option agreement.
10.3+ -- Registrant's 1996 Employee Stock Purchase Plan.
10.4+ -- Lease Agreement, dated May 19, 1992, between the Registrant and
Lincoln National Life Insurance Company, Inc., as amended on November
22, 1993 and September 20, 1995.
10.5+ -- Master Lease Agreement, dated August 9, 1995, between the Registrant
and Dominion Ventures, Inc.
10.6+ -- Loan Agreement and Promissory Note, dated April 26, 1996, between the
Registrant and Pioneer Bank of Longmont.
10.7+ -- Form of Warrant entered into between the Registrant and Howard
Kaushansky, CVM Equity Fund III, Ltd. and certain others, with
related schedule.
10.8+ -- Form of Amended and Restated Warrant entered into between the
Registrant and William F. Nicklin and certain others, with related
schedule.
10.9+ -- Letter Agreement, dated June 20, 1996, between the Registrant and
Bessemer Venture Partners III L.P. ("BVP III") and Vertex Investment
(II) Ltd. ("Vertex").
10.10+ -- Stock Purchase Agreement, dated June 21, 1996, between the Jensen
Charitable Remainder Trust, BVP III and Vertex.
10.11+ -- Stock Purchase Agreement, dated June 21, 1996, between Flemming B.
Jensen, BVP III and Vertex.
10.12+ -- Stock Purchase Agreement, dated July 15, 1996, between the
Registrant, BVP III and Vertex.
10.13+ -- Amended and Restated Investors' Rights Agreement, dated March 21,
1996, between the Registrant and certain stockholders and
warrantholders.
10.14+* -- Marketing License Agreement, dated March 21, 1996, between the
Registrant and Cincinnati Bell Information Services, Inc., including
Addendum No. 1, dated August 15, 1996.
10.15+* -- Software License Agreement, dated November 24, 1993, between the
Registrant and QUALCOMM, Inc.
10.16+* -- Software License Agreement, dated January 19, 1996, between the
Registrant and DSC Technologies Corporation.
10.17+* -- Joint Development and Licensing Agreement, dated September 30, 1994,
between the Registrant and AirTouch Communications, Inc.
("AirTouch"), including the First Amendment Agreement, dated June 30,
1995.
10.18+* -- Patent License Agreement, dated December 21, 1995, between the
Registrant and AirTouch.
10.19+ -- Form of Stock Option Grant Notice issued by the Company to certain
officers and directors, with related schedule.
11.1+ -- Statement regarding calculation of net loss per share.
23.1 -- Consent of Price Waterhouse LLP, Independent Accountants. Reference
is made to page II-7.
23.2 -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+ -- Power of Attorney. Reference is made to page II-6.
27 -- Financial Data Schedule.
</TABLE>

- ---------------
+ Previously filed.

* The Company has applied for confidential treatment with respect to portions of
these Exhibits.

II-4
<PAGE> 77

(b) Financial Statement Schedules.

All schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

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

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus as filed as part of the registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the registration statement as of
the time it was declared effective, and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 78

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this Amendment No. 3
to the Registration Statement to be signed on its behalf by the undersigned in
the City of Longmont, State of Colorado, on the 19th day of December, 1996.

CORAL SYSTEMS, INC.

By: /s/ ERIC A. JOHNSON
------------------------------------
Eric A. Johnson
President, Chief Executive Officer
and Chairman of the Board

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- --------------------
<C> <S> <C>
/s/ ERIC A. JOHNSON President, Chief Executive December 19, 1996
- --------------------------------------------- Officer and Chairman of
Eric A. Johnson the Board (Principal
Executive Officer)

/s/ KYLE D. HUBBART Chief Financial Officer and December 19, 1996
- --------------------------------------------- Treasurer (Principal
Kyle D. Hubbart Financial and Accounting
Officer)

/s/ DAVID J. COWAN* Director December 19, 1996
- ---------------------------------------------
David J. Cowan

/s/ BRUCE K. GRAHAM* Director December 19, 1996
- ---------------------------------------------
Bruce K. Graham

/s/ JEFFREY R. HULTMAN* Director December 19, 1996
- ---------------------------------------------
Jeffrey R. Hultman

/s/ ROBERT J. MARINO* Director December 19, 1996
- ---------------------------------------------
Robert J. Marino

/s/ WILLIAM F. NICKLIN* Director December 19, 1996
- ---------------------------------------------
William F. Nicklin

/s/ THOMAS G. WASHING* Director December 19, 1996
- ---------------------------------------------
Thomas G. Washing

*By: /s/ ERIC A. JOHNSON
-----------------------------------------
Eric A. Johnson
Attorney-in-Fact
</TABLE>

II-6
<PAGE> 79

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 18, 1996,
relating to the financial statements of Coral Systems, Inc. appearing in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data." However, it should be noted that Price Waterhouse
LLP has not prepared or certified such "Selected Financial Data."

PRICE WATERHOUSE LLP

Boulder, Colorado

December 18, 1996

II-7
<PAGE> 80

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------------------- ------------------------------------------------------------------------
<S> <C>
1.1+ -- Form of Underwriting Agreement.
3(i).1+ -- Amended and Restated Certificate of Incorporation.
3(i).2+ -- Form of Amended and Restated Certificate of Incorporation to be
effective upon the closing of the offering.
3(ii).1+ -- Bylaws of the Registrant.
3(ii).2+ -- Form of Amended and Restated Bylaws to be effective upon the closing
of the offering.
4.1 -- Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2 -- Specimen Stock Certificate.
5.1+ -- Opinion of Cooley Godward LLP.
10.1+ -- Form of Indemnity Agreement to be entered into between the Registrant
and its directors and officers, with related schedule.
10.2+ -- Registrant's Amended and Restated Stock Option Plan, including forms
of stock option grant notice and stock option agreement.
10.3+ -- Registrant's 1996 Employee Stock Purchase Plan.
10.4+ -- Lease Agreement, dated May 19, 1992, between the Registrant and
Lincoln National Life Insurance Company, Inc., as amended on November
22, 1993 and September 20, 1995.
10.5+ -- Master Lease Agreement, dated August 9, 1995, between the Registrant
and Dominion Ventures, Inc.
10.6+ -- Loan Agreement and Promissory Note, dated April 26, 1996, between the
Registrant and Pioneer Bank of Longmont.
10.7+ -- Form of Warrant entered into between the Registrant and Howard
Kaushansky, CVM Equity Fund III, Ltd. and certain others, with
related schedule.
10.8+ -- Form of Amended and Restated Warrant entered into between the
Registrant and William F. Nicklin and certain others, with related
schedule.
10.9+ -- Letter Agreement, dated June 20, 1996, between the Registrant and
Bessemer Venture Partners III L.P. ("BVP III") and Vertex Investment
(II) Ltd. ("Vertex").
10.10+ -- Stock Purchase Agreement, dated June 21, 1996, between the Jensen
Charitable Remainder Trust, BVP III and Vertex.
10.11+ -- Stock Purchase Agreement, dated June 21, 1996, between Flemming B.
Jensen, BVP III and Vertex.
10.12+ -- Stock Purchase Agreement, dated July 15, 1996, between the
Registrant, BVP III and Vertex.
10.13+ -- Amended and Restated Investors' Rights Agreement, dated March 21,
1996, between the Registrant and certain stockholders and
warrantholders.
10.14+* -- Marketing License Agreement, dated March 21, 1996, between the
Registrant and Cincinnati Bell Information Services, Inc., including
Addendum No. 1, dated August 15, 1996.
10.15+* -- Software License Agreement, dated November 24, 1993, between the
Registrant and QUALCOMM, Inc.
</TABLE>

<PAGE> 81

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------------------- ------------------------------------------------------------------------
<S> <C>
10.16+* -- Software License Agreement, dated January 19, 1996, between the
Registrant and DSC Technologies Corporation.
10.17+* -- Joint Development and Licensing Agreement, dated September 30, 1994,
between the Registrant and AirTouch Communications, Inc.
("AirTouch"), including the First Amendment Agreement, dated June 30,
1995.
10.18+* -- Patent License Agreement, dated December 21, 1995, between the
Registrant and AirTouch.
10.19+ -- Form of Stock Option Grant Notice issued by the Company to certain
officers and directors, with related schedule.
11.1+ -- Statement regarding calculation of net loss per share.
23.1 -- Consent of Price Waterhouse LLP, Independent Accountants. Reference
is made to page II-7.
23.2 -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+ -- Power of Attorney. Reference is made to page II-6.
27 -- Financial Data Schedule.
</TABLE>

- ---------------
+ Previously filed.

* The Company has applied for confidential treatment with respect to portions of
these Exhibits.

<PAGE> 1
[Graphic Depicting a Coral Reef with fish in addition to standard border]
<TABLE>
<S> <C> <C>
NUMBER CYS SHARES
CORAL SYSTEMS, INC.

THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN BOSTON, MA OR NEW YORK, NY INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES

THIS CERTIFIES THAT CUSIP 218060 10 1

IS THE OWNER OF

FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE PER SHARE, OF

CORAL SYSTEMS, INC.

transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the
Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated:
/s/ Howard Kaushansky [SEAL] /s/ Eric A. Johnson

SECRETARY PRESIDENT

COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
By: /s/ Mary Penezic
AUTHORIZED SIGNATURE
</TABLE>

<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ............ Custodian .............
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ................................
in common (State)
COM PROP - as community property UNIF TRF MIN ACT - ....... Custodian (until age ......)
(Cust)
............ under Uniform Transfers
(Minor)
to Minors Act ......................
(State)
</TABLE>

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, ________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------

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

- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

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

_________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_______________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated ______________________
X _________________________________________________
X _________________________________________________
Notice THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.

Signature(s) Guaranteed

By ______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN ANY
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

<ARTICLE> 5
<MULTIPLIER> 1

<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 1,022,500 3,373,500
<SECURITIES> 0 0
<RECEIVABLES> 1,119,300 2,053,200
<ALLOWANCES> 0 75,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,291,100 5,679,700
<PP&E> 914,000 1,827,000
<DEPRECIATION> (288,200) (562,700)
<TOTAL-ASSETS> 2,958,000 6,983,100
<CURRENT-LIABILITIES> 2,199,400 3,530,500
<BONDS> 145,800 313,400
4,265 3,235
0 0
<COMMON> 4,083 5,908
<OTHER-SE> 129,252 3,429,257
<TOTAL-LIABILITY-AND-EQUITY> 2,958,000 6,983,100
<SALES> 3,265,100 5,827,100
<TOTAL-REVENUES> 3,889,800 6,183,100
<CGS> 1,264,300 888,700
<TOTAL-COSTS> 1,909,000 1,473,500
<OTHER-EXPENSES> 5,371,700 6,347,400
<LOSS-PROVISION> 0 101,900
<INTEREST-EXPENSE> 103,856 135,383
<INCOME-PRETAX> (3,390,900) 1,669,200
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,390,900) 1,669,200
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 243,300
<CHANGES> 0 0
<NET-INCOME> (3,390,900) 1,425,900
<EPS-PRIMARY> (.48) (.18)
<EPS-DILUTED> 0 0

</TABLE>