ON TECHNOLOGY CORP, DEFS14A, 1998-01-09

ON TECHNOLOGY CORP
DEFS14A, 1998-01-09
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SCHEDULE 14A
RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-
6(e)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

ON TECHNOLOGY CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

ON TECHNOLOGY CORPORATION

(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[_] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).

[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11(/1/):

4) Proposed maximum aggregate value of transaction:

5) Total fee paid:

[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

1) Amount Previously Paid: $2,400.00

2) Form, Schedule or Registration Statement No.: Schedule 14A (File No. 0-
26376)

3)Filing Party: ON Technology Corporation

4) Date Filed: November 17, 1997
- --------
(/1/Set)forth the amount on which the filing fee is calculated and state how
it was determined.
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ON TECHNOLOGY CORPORATION
ONE CAMBRIDGE CENTER
CAMBRIDGE, MASSACHUSETTS 02142

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 11, 1998

Dear Stockholder:

You are cordially invited to attend a Special Meeting of Stockholders of ON
Technology Corporation, a Delaware corporation ("ON" or the "Company"), which
will be held at Epstein Becker & Green, P.C., 75 State Street, Boston,
Massachusetts at 10:00 a.m., Eastern Standard Time, on February 11, 1998, for
the following purposes:

1. To approve the sale of certain of the Company's security products and
related assets, pursuant to an Asset Purchase Agreement, between the
Company and Elron Software, Inc.

2. To transact such other business that may properly come before the
meeting or any postponement or adjournment thereof.

Stockholders of record at the close of business on January 5, 1998 are
entitled to notice of, and to vote at, this Special Meeting of Stockholders
and any postponement or adjournment thereof. For ten days prior to this
Special Meeting, a complete list of the stockholders entitled to vote at the
meeting will be available for examination by any stockholder for any purpose
relating to the meeting during ordinary business hours at the principal
offices of the Company.

By Order of the Board of Directors

/s/ John M. Bogdan
JOHN M. BOGDAN
Secretary

Cambridge, Massachusetts
January 12 , 1998

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED REPLY ENVELOPE. BY RETURNING YOUR PROXY CARD, YOU WILL ASSURE
REPRESENTATION OF YOUR SHARES AT THE MEETING. IF YOU ATTEND THE MEETING, YOU
MAY, OF COURSE, VOTE YOUR SHARES IN PERSON EVEN THOUGH YOU HAVE SENT IN YOUR
PROXY. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A
BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST
OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
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ON TECHNOLOGY CORPORATION
ONE CAMBRIDGE CENTER
CAMBRIDGE, MASSACHUSETTS 02142

PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS

FEBRUARY 11, 1998

This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors (the "Board") of proxies to be voted at the Special Meeting
of Stockholders of the Company to be held at Epstein Becker & Green, P.C., 75
State Street, Boston, Massachusetts, at 10:00 a.m., Eastern Standard Time, on
February 11, 1998, and at any adjournment thereof (the "Meeting"), for the
purposes set forth in the accompanying Notice of Special Meeting. This Proxy
Statement and the accompanying proxy card are being mailed on or about January
12, 1998 to the stockholders of record as of the close of business on January
5, 1998 (the "Record Date").

GENERAL INFORMATION

SOLICITATION OF PROXIES

The cost of soliciting proxies from stockholders will be borne by the
Company. Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
common stock beneficially owned by others to forward to such beneficial
owners. The Company may reimburse persons representing beneficial owners of
Common Stock for their costs of forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be
supplemented by telephone, telegram or personal solicitation by directors,
officers or employees of the Company.

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked in writing
(including by delivery of a later dated proxy) or in person by notifying the
Secretary of the Meeting, in writing, at any time prior to the voting of the
proxy.

VOTING OF PROXIES

If the enclosed proxy card is properly executed and returned to the Company,
all shares represented thereby will be voted as indicated therein. If a proxy
is returned without instructions it will be voted FOR the proposal to approve
the Asset Purchase Agreement, dated as of October 29, 1997 (the "Purchase
Agreement"), between the Company and Elron Software, Inc., a Delaware
corporation ("Elron"), and the transactions contemplated thereby (the
"Proposed Transaction").

VOTING RIGHTS AND OUTSTANDING SHARES

On the Record Date there were 12,270,820 outstanding shares of Common Stock,
which is the only class of stock outstanding and therefore entitled to vote at
the Meeting. The holders of such shares will be entitled to cast one vote for
each share held of record as of the Record Date. On the Record Date, the
closing sales price of the Common Stock on the Nasdaq National Market was
$1.50 per share.

The holders of a majority of the shares of Common Stock issued, outstanding
and entitled to vote at the Meeting shall constitute a quorum for the
transaction of business at the Meeting. Shares of Common Stock present in
person or represented by proxy will be counted for purposes of determining
whether a quorum exists at the Meeting.

The affirmative vote of the holders of a majority of the shares of Common
Stock issued, outstanding and entitled to vote at the Meeting is required to
approve Proposal No. 1. Abstentions and shares held by brokers that are
present, but not voted because the brokers do not have the discretionary
authority to vote such shares as to a particular matter, i.e., "broker non-
votes," will be counted as present for purposes of determining if a quorum is
present. Abstentions will have the same effect as negative votes. Broker non-
votes, on the other hand, will have no effect on the outcome of the vote.

IN DETERMINING WHETHER TO APPROVE THE PROPOSED TRANSACTION, THE STOCKHOLDERS
SHOULD CONSIDER ALL OF THE INFORMATION INCLUDED OR INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................ 3
RISK FACTORS............................................................. 3
THE PROPOSED TRANSACTION................................................. 12
General................................................................ 12
USE OF PROCEEDS.......................................................... 12
BACKGROUND OF THE PROPOSED TRANSACTION................................... 12
REASONS FOR THE PROPOSED TRANSACTION..................................... 15
OTHER STRATEGIC OPTIONS.................................................. 16
BUSINESS OF THE COMPANY FOLLOWING THE PROPOSED TRANSACTION............... 16
RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS...................... 17
OPINION OF FINANCIAL ADVISOR............................................. 17
TERMS OF THE PROPOSED TRANSACTION........................................ 20
PURCHASE AND SALE OF PROPOSED ASSETS..................................... 20
MANAGEMENT OF THE PROPOSED BUSINESS PRIOR TO CLOSING..................... 23
CLOSING.................................................................. 24
ACCOUNTING CONSEQUENCES ARISING FROM THE PROPOSED TRANSACTION............ 24
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. 25
REQUIRED APPROVALS....................................................... 25
INTERESTS OF CERTAIN PERSONS............................................. 25
APPRAISAL RIGHTS INAPPLICABLE............................................ 25
EXPENSES................................................................. 25
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................... 26
CERTAIN INFORMATION REGARDING ELRON...................................... 30
PRICE RANGE OF COMMON STOCK; DIVIDENDS................................... 30
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT.............. 31
BUSINESS................................................................. 33
PROPERTIES............................................................... 43
LEGAL PROCEEDINGS........................................................ 43
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 45
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.............................................................. 50
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................ 50
TRANSACTION OF OTHER BUSINESS............................................ 50
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 50
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING............................ 51
AVAILABLE INFORMATION.................................................... 51
OTHER MATTERS............................................................ 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
</TABLE>

ON Technology, Notework, Meeting Maker, ON Technology & Design, ON Location,
Instant Update and Da Vinci Systems are registered trademarks of the Company,
and ON Command CM is a trademark of the Company for which registration has
been applied. This Proxy Statement also includes trademarks of companies other
than the Company. All other company or product names are trademarks or
registered trademarks of their respective owners.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

SOME STATEMENTS CONTAINED IN THIS PROXY STATEMENT THAT ARE NOT HISTORICAL
STATEMENTS (INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING ESTIMATES OF
FUTURE REVENUES, OPERATING EXPENSE LEVELS AND SUCH OPERATING LEVELS RELATIVE
TO THE COMPANY'S TOTAL REVENUES) CONSTITUTE FORWARD-LOOKING STATEMENTS UNDER
THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THE RISK FACTORS DISCUSSED BELOW, AMONG OTHER FACTORS (INCLUDING THE
ACCURACY OF THE COMPANY'S INTERNAL ESTIMATES OF REVENUE AND OPERATING EXPENSE
LEVEL AND THE OTHER RISK FACTORS DISCLOSED FROM TIME TO TIME IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION), MAY CAUSE THE COMPANY'S
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE ESTIMATED RESULTS STATED IN SUCH
FORWARD-LOOKING STATEMENTS.

RISK FACTORS

The following risk factors concern the Proposed Transaction and the business
of the Company to be conducted if the Proposed Transaction is consummated, or
if the Proposed Transaction is not consummated:

CHANGE IN MARKETING STRATEGY

Historically, the Company has marketed all of its products other than its
Comprehensive Client Management ("CCM") products through its Free Trial
Marketing system. See "--Free Trial Marketing" and "THE PROPOSED TRANSACTION--
GENERAL." Pursuant to the Proposed Transaction, the Company is selling, among
other things, its Free Trial Marketing system, subject to a limited license-
back to the Company. This license will allow the Company to continue to use
the Free Trial Marketing system to market its current Groupware products,
including future versions and feature extensions of such products, to existing
customers and identified potential customers, for a period of three years from
the closing date of the Proposed Transaction (the "Closing Date"), subject to
termination in the event of a sale of the Groupware products or a sale of all
or substantially all of the Company's business or assets.

Although the Company will retain limited rights to the Free Trial Marketing
system after the consummation of the Proposed Transaction, the Company's
ability to implement a marketing strategy based on the Free Trial Marketing
system will be severely curtailed because the Company will no longer have the
personnel and infrastructure necessary to support to such a strategy.
Moreover, the Company has made the strategic decision to limit its Groupware
marketing efforts to exclusively selling new seats to its existing customer
base, while focusing the majority of its management, financial and technical
resources on the CCM products. Inasmuch as the Company's historical marketing
strategy has been based primarily on the Free Trial Marketing system, the
Company's decision to sell substantially all of its rights to the Free Trial
Marketing system will significantly limit the marketing strategies available
to the Company.

CCM PRODUCT MARKETING STRATEGY

After the consummation of the Proposed Transaction, the Company will be
focused primarily on its CCM products. The target market for the CCM products
is entirely different from the target market for the products the Company has
marketed and sold through its Free Trial Marketing system. The target market
for the CCM products consists primarily of large corporations such as Deutsche
Telekom and Munich Reinsurance (both existing CCM customers). In addition, CCM
product sales per customer are generally in the range of $20,000 to $500,000,
as opposed to an average sale per customer for the Company's other products of
approximately $2,000. Sales of CCM products pose significantly greater
financial risks, and require greater up-front investments in marketing,
technical and financial resources, than sales of the Company's historical
products. As a result, the Company is adopting a new and untested marketing
strategy using a direct sales force and in-field service organization. This
marketing strategy requires significant investments in additional marketing
and technical personnel, retraining of existing personnel, ongoing product
development and creation of an in-field service organization. To date,
substantially all of the Company's marketing of CCM products has been in
Europe. While

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the Company has developed valuable experience and expertise in Europe, there
can be no assurance that the Company will be able to transfer such experience
and expertise to the North American market.

If the Proposed Transaction is consummated, the Company will rely on fewer
large customers for its revenue since the target market for CCM products is
primarily large corporations. Currently, only one customer accounts for more
than 10% of net revenue from the products that are not being sold as part of
the Proposed Transaction. For the nine months ended September 30, 1997,
Deutsche Telekom accounted for $4.5 million, or 22.2%, of net revenue for such
products. It is possible that the Company's change in marketing strategy will
result in other customers accounting for more than 10% of the Company's net
revenues.

TECHNOLOGICAL REQUIREMENTS OF THE CCM PRODUCTS; PRODUCT DEVELOPMENT

The technological demands of the CCM products require a commitment of
significant ongoing financial, technical and personnel resources to product
development, training of service technicians and customer training. Because
the Company's historical products are not as technologically demanding as the
CCM products, the Company has not to date made the required investment and has
not proven that it can develop and maintain the organization required to
support such products. The Company believes that its experience with the CCM
products in Europe will provide a valuable base on which to build the
necessary financial, technical and personnel resources to sell, market,
develop and support the CCM products in North America; however, there can be
no assurance that the Company will be able to expand and develop its resources
to support CCM products in North America.

After the consummation of the Proposed Transaction, the Company will focus
primarily on its CCM product. The CCM product is typically larger and more
complex than the products that the Company has previously developed. The
Company's ability to continue to enhance the CCM product to meet customer and
market requirements will depend substantially on its ability to effectively
manage its development effort, to attract and retain the required development
personnel in Cambridge, Massachusetts and Starnberg, Germany and to coordinate
and manage geographically remote development efforts.

FINANCIAL RESOURCES REQUIRED BY THE CCM PRODUCTS

The Company has estimated that the product development, marketing and sales
costs of the CCM products are approximately $1.0 to $1.5 million per month.
The Company believes that it will have sufficient financial resources to fund
these costs through March 1998, whether or not the Proposed Transaction is
consummated. If the Proposed Transaction is consummated, the Company believes
that it will have sufficient financial resources to fund these costs through
at least December 1998. If the Proposed Transaction is not consummated, the
Company will have to seek additional sources of capital to fund CCM product
costs beyond March 1998. There can be no assurance that the Company's estimate
of the marketing, sales and product development costs of the CCM products will
prove correct, that such costs will not increase beyond the Company's
available financial resources, or that additional sources of capital, if and
when needed, will be sufficient or available.

MANAGEMENT AGREEMENT; TRANSFERRED EMPLOYEES

Contemporaneously with the execution and delivery of the Purchase Agreement,
the Company and Elron entered into a Management Agreement (the "Management
Agreement") pursuant to which Elron is managing the assets being acquired by
Elron pursuant to the Purchase Agreement (the "Proposed Assets") for its
benefit and at its risk and expense. Pursuant to the Management Agreement,
Elron, has, subject to certain covenants regarding extraordinary transactions,
complete discretion to operate the business of the Company with regard to the
Proposed Assets. In the event that the Proposed Transaction is not
consummated, Elron will be obligated to return the Proposed Assets to the
Company, subject to the terms and conditions of the Management Agreement. See
"TERMS OF THE PROPOSED TRANSACTION--MANAGEMENT OF PROPOSED BUSINESS PRIOR TO
CLOSING--The Management Agreement." There can be no assurance that the
Proposed Assets would upon

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return by Elron have at least the same value as such assets had at the time
the Management Agreement was executed. Any diminution in value of the Proposed
Assets could have a material adverse effect on the Company's business,
condition (financial and otherwise), prospects and results of operations.

Pursuant to the Purchase Agreement, certain employees of the Company will
continue to be employed by the Company, but will from the date of the Purchase
Agreement until the Closing Date, to the extent allowed by law, be subject to
the complete supervision, direction and control of Elron (the "Transferred
Employees"). The Company has been advised that the Transferred Employees have
been offered various benefits and incentives to be granted by Elron after the
consummation of the Proposed Transaction. In the event that the Proposed
Transaction is not consummated, and as a result such benefits and incentives
are not provided, the performance of the Transferred Employees could be
materially adversely affected and a significant portion of such employees may
seek employment elsewhere.

FAILURE OF THE COMPANY TO OBTAIN CERTAIN THIRD-PARTY CONSENTS

Although the only conditions to closing the Proposed Transaction (the
"Closing") are that the Purchase Agreement and Proposed Transaction be
approved by the stockholders of the Company and that the Company deliver
$3,000,000 of guaranteed receivables to Elron, the Company is obligated to
obtain certain third-party consents on or prior to the Closing. In the event
that the Company does not obtain such consents, it will be obligated to pay
certain specified financial damages. The payment of such financial penalties
may have a material adverse effect on the Company's business, condition
(financial and otherwise), prospects and results of operations.

INTERNATIONAL REVENUE

In fiscal 1996 and the nine-month period ending September 30, 1997, total
revenue from international licenses (license revenue from outside the United
States) represented approximately 17% and 35%, respectively, of the Company's
total revenue. For the fourth quarter of 1997 and thereafter (assuming the
Proposed Transaction is consummated), the Company expects that international
revenue will constitute a significantly greater portion of the Company's total
revenue. Accordingly, a greater percentage of the Company's total revenue will
be subject to the risks inherent in international sales, including the impact
of fluctuating exchange rates on demand for its products, longer payment
cycles, greater difficulty in protecting intellectual property, greater
difficulty in accounts receivable collection, unexpected changes in legal and
regulatory requirements, seasonality due to the slowdown of European business
activity in the third quarter and tariffs and other trade barriers. There can
be no assurance that these factors will not have a material adverse effect on
the Company's future international license revenue.

LOSS OF KEY MANAGEMENT PERSONNEL

Ivan O'Sullivan and Chadwick Roll, Vice President--Worldwide Marketing and
Vice President of Inside Sales of the Company, respectively, are among the
Transferred Employees. Messrs. O'Sullivan and Roll are key employees of the
Company. The loss of their services may have a material adverse effect on the
Company's business, condition (financial or otherwise), prospects and results
of operations.

The Company's success depends to a significant extent upon a number of key
technical and management employees. While the Company's employees are required
to sign standard agreements concerning confidentiality and ownership of
inventions, the employees, with the exception of Messrs. Herman DeLatte, Loren
Platzman and John Bogdan, are generally not otherwise subject to employment
agreements or noncompetition covenants. The loss of the services of any of the
Company's key employees could have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operation. The Company does not maintain life insurance policies on key
employees. The Company's success also depends in large part upon its ability
to attract and retain highly skilled technical, managerial, sales and
marketing personnel.

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Competition in the software industry for such personnel is intense. There
can be no assurance that the Company will be successful in retaining its
existing key personnel and in attracting and retaining the personnel it
requires.

GROUPWARE BUSINESS

After the consummation of the Proposed Transaction, the Company's products
will consist of the CCM and the Groupware products. The Company has made the
strategic decision to limit its Groupware marketing efforts to exclusively
selling new seats to its existing customer base, while focusing the majority
of its management, financial and technical resources on the CCM products. The
Company believes that in the short-term the Company can significantly reduce
the costs associated with the Groupware products while continuing to generate
cash flow from the sale of these products. However, there can be no assurance
that cash flow from the sale of the Groupware products will not decrease
faster than expected. In addition, over the longer term, the Company's
strategic decision to cease marketing the Groupware products to new customers
will lead to an erosion of the customer base and a reduction of revenue from
such products.

The Company's ability to attract and retain the employees needed to service
the Groupware products may be materially adversely affected by the Company's
strategic decision to de-emphasize the Groupware products. Any loss of revenue
from the Groupware products may have a material adverse effect on the
Company's business, condition (financial and otherwise), prospects and results
of operation.

STRATEGIC REORGANIZATION

On July 29, 1997, the Company reorganized and restructured its operations.
On October 29, 1997, additional restructuring actions were implemented. These
actions were designed to focus the Company on the Comprehensive Client
Management business (the "CCM Business"). To date, implementation of this new
corporate strategy has included hiring a new Chief Executive Officer, electing
a new Chairman of the Board of Directors, deemphasizing the acquisition of new
customers in the Company's Groupware and Network Management and Security
businesses, discontinuing sales of the Company's virus protection software,
closing or reducing the Company's offices in Sydney, Australia; Paris, France;
London, United Kingdom; and Munich, Germany while building up the Company's
office in Starnberg, Germany and laying off approximately 160 employees. There
can be no assurance that the Company's new corporate strategy will be
successfully implemented. Furthermore, there can be no assurance that the
Company will not engage in further reorganizations or restructurings in the
future.

VARIABILITY OF QUARTERLY OPERATING RESULTS

The Company's licensing activity and results of operations can fluctuate
significantly on a quarterly basis. Causes of such fluctuations may include,
among other factors, the volume and timing of new and repeat orders, the
introduction or announcement of new products or product enhancements by ON or
third parties, failure to ship trials, changes in response rates to the
Company's mailings and telemarketing programs, interruption in the Company's
overnight delivery, telephone or internal networks and databases, work
stoppages, changes in product prices, changes in operating expenses, changes
in product mix, increase in international sales as a percentage of total
revenue, seasonality, trends in the computer industry, unavailability of
product, potential software viruses and perceived threats thereof, customer
order deferrals, general economic conditions, extraordinary events such as
acquisitions or litigation and the occurrence of unexpected events. While to
date, the Company has not experienced any significant failure to ship trials,
work stoppages or unavailability of products, there can be no assurance any of
such events will not occur in the future. The occurrence of any such event
could have a material adverse effect on the Company's business, condition
(financial or otherwise), prospects and results of operations. Because of the
nature of its distribution methods for its Groupware and Network Management
and Security products, the Company has virtually no backlog with respect to
such products and generally cannot predict when users will license such
products. As a result of the longer enterprise sales and product rollout cycle
for CCM, the Company will be better able to assess anticipated customer orders
for CCM. Historically, repeat orders have

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accounted for a significant portion of the Company's total revenue; however,
there can be no assurance that the Company will be able to sustain current
repeat order rates in the future, especially after consummation of the
Proposed Transaction and in light of the de-emphasis in marketing efforts for
the Groupware and Network Management and Security products. Furthermore, since
the Company's cost of total revenue is relatively low and its operating
expenses are relatively fixed, any revenue shortfall in a quarter will result
in a substantially similar shortfall in net income. In addition, significant
quarterly fluctuations in licensing activity will cause significant
fluctuations in the Company's cash flows and the cash and cash equivalents,
accounts receivable and deferred revenue accounts on the Company's balance
sheet.

The Company's business has experienced and is expected to continue to
experience seasonality, due in part to customer buying patterns. In recent
years, the Company generally has had greater demand for its products in the
fourth quarter and has had weaker demand for its products during the first
quarter. These fluctuations are caused primarily by customer budgeting and
purchasing patterns. The Company believes this pattern will continue.

The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance.

RAPID TECHNOLOGICAL CHANGE

The Groupware, Network Management and Security and Client Management
software markets are characterized by rapid technological developments,
changes in customer requirements, evolving industry standards and frequent new
product introductions. The Company's future success will depend, in part, upon
its ability to enhance its existing applications, develop and introduce new
products that take advantage of technological advances, and respond promptly
to new customer requirements and evolving industry standards. As discussed
above, the Company has made a strategic decision to limit its Groupware
marketing efforts to exclusively selling new seats to its existing customer
base and has agreed to sell, subject to stockholder approval, its Network
Management and Security products. The Company has identified a number of
enhancements to CCM which it believes are important to its continued success
in the Client Management software market. There can be no assurance that the
Company will be successful in developing and marketing, on a timely basis,
enhancements to its existing products or new products, or that its new
products will adequately address the changing needs of the marketplace.
Failure by the Company in any of these areas could materially and adversely
affect the Company's business, condition (financial or otherwise), prospects
and results of operations. In addition, from time to time the Company or its
competitors may announce new products with capabilities or technologies that
could have a potential to replace or shorten the life cycles of the Company's
existing products or render such products obsolete. There can be no assurance
that announcements by the Company or its competitors of new products will not
cause customers to defer purchasing the Company's existing products. In
addition, there can be no assurance that future changes in DOS, Windows,
Windows NT, Unix, NetWare or other popular operating systems would not result
in incompatibility with the Company's products. The Company's failure to
introduce new products on a timely basis that are compatible with operating
systems and environments preferred by desktop computer users would have a
material adverse effect on the Company's business, condition (financial or
otherwise), prospects and results of operations.

COMPETITION

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factors; however, there can be no assurance that the Company will be able to
continue to compete successfully against current and future competitors.
Certain of the Company's competitors have been in the market longer than the
Company, and other competitors are larger and may have greater name
recognition than the Company. As is the case in many segments of the software
industry, the Company may encounter increasing price competition in the
future. This could reduce average selling prices and, therefore, profit
margins. Competitive pressures could result not only in sustained price
reductions but also in a decline in sales volume, which could have a material
adverse effect on the Company's business, condition (financial or otherwise),
prospects and results of operations. There can be no assurance that the
Company will continue to compete effectively against existing and potential
competitors in these markets, many of whom have substantially greater
financial, technical, marketing and support resources and name recognition
than the Company.

The Groupware, Network Management and Security and Client Management
software markets are highly fragmented, with products offered by many vendors.
In the e-mail market, the Company competes with offerings from software,
shareware and freeware developers. Shareware is software that is made
available electronically on bulletin boards systems. Shareware users are
encouraged to evaluate the software for a short period of time and then either
cease using it or pay a license fee. In the group scheduling market, the
Company also competes with personal information manager products ("PIMs") that
have been enhanced to include some group scheduling features. In addition, the
trend toward enterprise-wide communications software solutions may result in a
consolidation of the communications software market around a smaller number of
vendors who are able to provide all of the necessary software and support
capabilities.

In the Client Management market, the Company faces competition from large
and established companies, such as Microsoft, Intel and IBM/Tivoli, which
offer client management capabilities as part of their systems, network and/or
desktop management systems. Moreover, Microsoft has announced the Zero
Administration Initiative for Windows ("ZAW"), which includes a set of
technologies that address some of the same client management issues as CCM.
Microsoft has described components of ZAW as being available for future
versions of the Windows NT and Windows 95 operating systems, as well as the
Microsoft Systems Management Server product. There can be no assurance that
the Company can continue to compete effectively against Client Management
software which is included free with operating system software. See
"BUSINESS--Competition."

PRODUCT DEVELOPMENT

The Company has in the past experienced delays in software development, and
there can be no assurance that it will not experience further delays in
connection with its current or future product development activities. The
Company puts all of its products through alpha and beta test cycles and makes
significant efforts to debug all products before commercial release. The
Company makes well-marked alpha and beta versions of its software available
for evaluation and testing and solicits and responds to input from evaluators.
However, there can be no assurance that the Company's products will not
contain undetected errors or version compatibility issues, particularly when
first introduced or when new versions are released, resulting in loss of or
delay in market acceptance. Delays and difficulties associated with new
product introductions or product enhancements could have a material adverse
effect on the Company's business, condition (financial or otherwise),
prospects and results of operations.

In addition to developing new products, the Company's internal development
staff is focused on developing upgrades and updates to existing products and
modifying, enhancing and completing any acquired products and incomplete
projects. Future enhancements may, among other things, include additional
functionality, respond to user problems or address issues of compatibility
with changing operating systems and environments. Failure to release such
enhancements on a timely basis could have a material adverse effect on the
Company's business, condition (financial or otherwise), prospects and results
of operation. There can be no assurance that the Company will be successful in
these efforts.

If the Company believes that a licensed product continues to be valuable
after the expiration of the initial license term, it will seek to extend the
term of the license. There can be no assurance that the Company will be

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able to extend the term of expiring licenses, or that the economic
arrangements for such extensions would be comparable to the arrangements in
effect during the initial license term.

INCLUSION OF CCM, GROUPWARE, NETWORK MANAGEMENT AND SECURITY SOFTWARE IN
SYSTEM SOFTWARE AND APPLICATION SUITES

In the future, vendors of operating system software and applications sold
for a single price (generally referred to as application suites) may continue
to enhance their products to include certain functions that are currently
provided most often by CCM, Groupware, Network Management and Security
software or may bundle these products in their application suites at no
additional charge. The widespread inclusion of the functions provided by the
Company's products as standard features of operating system software could,
particularly if the quality of such functions were comparable to that of the
Company's products, render the Company's products obsolete and unmarketable.
Furthermore, even if the CCM, Groupware, Network Management and Security
software functions provided as standard features by operating systems are more
limited than those of the Company's products, there is no assurance that a
significant number of customers would not elect to accept such functions in
lieu of purchasing additional software. If the Company were unable to develop
new CCM, Groupware, Network Management and Security software products to
further enhance operating systems and to replace successfully any obsolete
products, the Company's business, condition (financial or otherwise),
prospects and results of operations would be materially and adversely
affected.

FREE TRIAL MARKETING

If the Proposed Transaction is not consummated and the rights to the Free
Trial Marketing system revert to the Company and, in any event, to the extent
the Company retains certain limited rights to the Free Trial Marketing system
pursuant to the Purchase Agreement, the Company would be exposed to the risks
associated with the Free Trial Marketing system set forth below.

As part of the Free Trial Marketing system, customers are provided with 30-
day free trials of certain of the Company's principal products. The trials are
full featured versions of the product that are internally designed to cease
operation in 30 days. The Company depends on direct mail, trade shows and
telemarketing to find prospects and install trials. There can be no assurance
that this strategy will continue to be effective in the future for either
current or new products. The failure of this strategy to continue to
effectively generate license revenue would have a material adverse effect on
the Company's business, condition (financial or otherwise), prospects and
results of operations. In addition, as mailings are mailed repeatedly to the
same customers, customers' responsiveness to particular offers and products
declines. There can be no assurance that the Company will be able to sustain
current response rates to its mailings in the future. The Company's growth
with respect to products sold and marketed through the Free Trial Marketing
system depends both on its ability to select names from rented lists and to
grow its "house list." The availability and relevance of rentable names to the
Company's products are not certain. In addition, since the ability of the
Company to grow its house list is dependent on the supply of rentable names,
house list growth cannot be assured. In both the domestic and international
markets, increases in postal rates (including modifications in the
classification of mail) or telephone rates, or changes in postage or telephone
regulations which prohibit unsolicited direct mail or unsolicited telephone
calls, could significantly impact the economics of the Company's Free Trial
Marketing strategy. In addition, it is possible that other software vendors
could adopt all or parts of the Company's strategy and compete more directly
or effectively with the Company.

If some of the Company's Free Trial Marketing disks were to become infected
with a computer virus, they would cause difficulties for prospects and could
damage the Company's reputation. The Company does extensive testing for
viruses. The Company's use of outside fulfillment contractors increases the
risk that a virus could be shipped undetected on disks bearing the Company's
label. There can be no assurance that ON would be able to collect adequate
compensation from such fulfillment contractors if such a virus infected disks
bearing the Company's label.

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The Company fulfills orders received directly from customers through a
third-party fulfillment contractor, which warehouses the Company's products
and ships them directly to ON's customers. The Company also maintains a
private use prospects list at a bonded third-party database firm. In the event
that either the customer fulfillment contractor or the private use database
firm experience a substantial business interruption, whether through business
failure or interruption or some natural calamity, or the Company's
relationship with either of such parties is terminated for any reason, the
Company's ability to continue to mail free trial offers to prospective
customers and to fulfill orders placed by customers would be adversely
affected.

INDIRECT CHANNELS OF DISTRIBUTION

The Company markets its products (other than CCM) through distributors and
resellers in addition to its direct sales force and its Free Trial Marketing
system. These distributors and resellers also sell other products that are
complementary to, or compete with, those of ON. There can be no assurance that
these distributors and resellers will not give greater priority to products of
other suppliers. They have no long-term obligation to purchase products from
the Company. Since the Company's agreements with its distributors provide for
a right of return, revenue recognized upon sales to distributors is subject to
a reserve for returns. Although management believes that the current reserve
balance is adequate to cover this exposure, there can be no assurance that any
future period reserves for returns will be adequate. Moreover, these
distributors and resellers generally have limited financial resources, and
there can be no assurance with respect to the collectibility of accounts
receivable owed by such distributors and resellers. In addition, the Company
may be unaware of the nature and scope of the representations made to
customers by these distributors and resellers. For example, they could make
representations to customers about the Company's current and future products
which are inaccurate or incomplete. This could result in the products not
meeting the customers' expectations or requirements. Although the Company's
agreements with its distributors generally provide the Company with recourse
against unauthorized action taken by the distributors, there can be no
assurance that the Company could recover adequate compensation to cover the
damage caused by an inaccurate representation.

PROPRIETARY TECHNOLOGY

The Company's success is heavily dependent upon its proprietary software
technology. The Company relies on a combination of contractual rights,
trademarks, trade secrets and copyrights to establish and protect its
proprietary rights in its software.

The Company uses a printed "shrink-wrap" license for users of its Groupware,
Network Management and Security products distributed through traditional
distribution channels in order to protect its copyrights and trade secrets in
those products. Since these shrink-wrap licenses are not signed by the
licensee, many authorities believe that they may not be enforceable under many
state laws and the laws of many foreign jurisdictions. If such licenses are
not enforceable, the user would not be bound by the terms thereof, including
the terms which seek to protect the Company's proprietary technology. If the
printed shrink-wrap licenses prove to be unenforceable, this may have a
material adverse effect on the Company's business, condition (financial or
otherwise), prospects and results of operations.

The laws of some foreign countries either do not protect the Company's
proprietary rights or offer only limited protection for those rights.
Furthermore, in countries with a high incidence of software piracy, the
Company may experience a higher rate of piracy of its products.

The Company has obtained registrations in the United States for the
following trademarks: ON Technology, Notework, Meeting Maker, ON Technology &
Design, ON Location, Instant Update and DaVinci Systems. The Company has filed
for the trademark "ON Command CCM" in the United States, the European
Community, Canada and Australia. The Company has obtained only four foreign
registrations of its Notework mark and two foreign registrations of its
MeetingMaker mark, due to the significant costs involved in obtaining foreign
registrations. As a result, the Company may not be able to prevent a third
party from using its trademarks in many foreign jurisdictions. The Company has
not to date registered any of its copyrights.

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<PAGE>

There can be no assurance that the steps taken by the Company to protect its
proprietary software technology will be adequate to deter misappropriation of
this technology. Lesser sensitivity by corporate, government or institutional
users to avoiding copyright infringement could have a material adverse effect
on the Company's business, condition (financial or otherwise), prospects and
results of operation. While the Company to date has not taken any legal action
to enforce its intellectual property rights against infringing users, it
believes, based upon current interpretations of law, that its use of Free
Trial Marketing and the widespread availability of its trials do not
significantly impact its ability to enforce its intellectual property rights
against infringing users, including corporate, institutional and government
entities. However, there is no assurance that a court or other authority may
not rule otherwise in the future. Such a ruling would have a material adverse
effect on the Company's business, condition (financial or otherwise),
prospects and results of operations.

There has been substantial litigation in the software industry involving
intellectual property rights of technology companies, although, to date, the
Company has not been subject to any such litigation. Although the Company does
not believe that it is infringing the intellectual property rights of others,
there can be no assurance that such claims, if asserted, would not have a
material adverse effect on the Company's business, condition (financial or
otherwise), prospects and results of operations. In addition, as the Company
may acquire or license a portion of the software included in its future
products from third parties, its exposure to infringement actions may increase
because the Company must rely upon such third parties for information as to
the origin and ownership of any software being acquired. The Company generally
obtains representations as to the origin and ownership of such acquired or
licensed software and generally obtains indemnification to cover any breach of
such representations. However, there can be no assurance that such
representations are accurate or that such indemnification will provide
adequate compensation for a breach of such representations. In the future,
litigation may be necessary to enforce and protect trade secrets and other
intellectual property rights owned by the Company. The Company may also be
subject to litigation to defend against claimed infringement of the rights of
others or to determine the scope and validity of the proprietary rights of
others. Any such litigation could be costly and cause diversion of
management's attention, either of which could have a material adverse effect
on the Company's business, condition (financial or otherwise), prospects and
results of operations. Adverse determinations in such litigation could result
in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third
parties or prevent the Company from manufacturing or selling its products, any
one of which could have a material adverse effect on the Company's business,
condition (financial or otherwise), prospects and results of operations.
Furthermore, there can be no assurance that any necessary licenses will be
available on reasonable terms, or at all.

The Company could be subjected to lawsuits by customers, past, present or
future, and others due to possible errors in the Company's software. The
Company is not aware of any material errors in its software or any pending or
threatened litigation. The Company maintains insurance covering such
liabilities in the amounts of $12 million domestically and $4 million
internationally. The Company believes that its insurance coverages are
sufficient to cover any such losses.

VOLATILITY OF STOCK PRICE

The trading price of the Company's Common Stock has been, and in the future
may be, subject to wide fluctuations in response to actual or anticipated
quarterly operating results of the Company, announcements of technological
innovations or new applications by the Company or its competitors and general
market conditions in the software industry, as well as other events or
factors. In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial
effect on the market price of many technology companies and has often been
unrelated to the operating performance of those companies. This volatility may
adversely affect the market price of the Company's Common Stock.

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THE PROPOSED TRANSACTION

GENERAL

The Company's current business consists of three product groups: (i) Network
Management and Security products, including On Guard Internet Manager, On
Guard Firewall and SofTrack; (ii) Groupware products, including Notework,
DaVinci e-mail and MeetingMaker; and (iii) Client Management products,
currently including CCM. The Company also owns the Editor's Choice Network
Management Catalog business. The Groupware, Network Management and Security
products are principally marketed to network supervisors and end users through
the Company's Free Trial Marketing system. This system includes the Company's
proprietary Odyssey software, which manages a variety of proprietary and
third-party databases to direct the Company's telesales personnel through a
highly structured, multi-step telemarketing process. CCM is marketed directly
to corporations with very large local or wide area networks, using enterprise-
oriented direct sales and support teams.

The Company proposes to sell to Elron the Network Management and Security
products, the catalog business and the Free Trial Marketing system, including
the Odyssey software and the associated database, methodology and
documentation. As part of the Proposed Transaction, Elron will hire
substantially all of the personnel engaged in Free Trial Marketing activities,
including Ivan O'Sullivan, the Company's Vice President--Worldwide Marketing,
Chadwick Roll, the Company's Vice President of Inside Sales, and most of the
Company's telesales and telesupport employees. The assets being sold, as more
fully described in the section below entitled "Terms of the Proposed
Transaction," are hereinafter referred to as the "Proposed Assets." After the
consummation of the Proposed Transaction, the Company's remaining assets will
consist of the CCM and Groupware products, together with limited rights to use
the Free Trial Marketing system in connection with the sale of Groupware
products to existing customers and identified potential customers. During the
interim period between the execution of the Purchase Agreement and the
consummation of the Proposed Transaction, Elron is managing the Proposed
Assets pursuant to a Management Agreement.

In July 1997, the Company announced that it would de-emphasize new customer
marketing of its Groupware, Network Management and Security products in order
to focus management resources and cash flow on the CCM products. The Company
elected to proceed with the Proposed Transaction because it concluded that its
financial, marketing, technical and management resources were not sufficient
to continue to support all of its current products, and that, in the judgment
of the Board of Directors, the best long-term potential for growth and
profitability lies in the CCM products. If the Proposed Transaction is
approved by the stockholders, the Company intends to dedicate its financial
and managerial resources to the CCM Business. The Company plans to operate its
Groupware business primarily for cash generation.

Subject to the terms and conditions set forth therein, the Purchase
Agreement provides for the purchase by Elron from the Company of the Proposed
Assets for an aggregate price of $12 million, with the possibility of an
additional performance bonus of up to $1.5 million. Except for stockholder
approval and the delivery of $3,000,000 of guaranteed receivables, the
proposed transaction is not subject to any material conditions. See "--TERMS
OF THE PROPOSED TRANSACTION--Purchase and Sale of Proposed Assets."

USE OF PROCEEDS

The Company estimates that the net proceeds of the Proposed Transaction will
approximate $11.6 million (excluding the possible purchase bonus payable in
late 1998). The principal use of the net proceeds will be to support the needs
of the CCM Business, including technical development and marketing and sales.

BACKGROUND OF THE PROPOSED TRANSACTION

From its inception until late 1996, the Company's business model was
predicated upon the development and acquisition of a portfolio of products in
the Groupware, Workgroup Utilities and Network Management and

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<PAGE>

Security fields. The common element of all of these products was their method
of marketing and distribution: by incorporating ease of installation and use
characteristics, all of these products were suitable for distribution, through
the Company's Free Trial Marketing system, to network supervisors and other
end users of small- to medium-size local and wide area computer networks. A
significant dimension of most of these networks was their heterogeneous
composition, incorporating various types and generations of personal computers
running the latest, as well as older, operating systems, ranging from various
versions of Windows, DOS, Macintosh and OS/2, among others. To build its
product portfolio, in the first quarter of 1996 the Company purchased a
firewall and an anti-virus software product and a United Kingdom-based
software distribution business. These acquisitions were followed by the
purchase, in early 1997, of an Internet usage monitoring product. All of the
acquired products were re-engineered for distribution through the Free Trial
Marketing system.

With increased standardization around the Windows-based operating system and
the broad acceptance of product "suites" which integrated functions previously
found in separate products, the Company's Free Trial Marketing strategy as the
basis for achieving substantial growth in earnings and shareholder value began
to be questioned by the Board of Directors and management. To address this
concern, in mid-1996 the Company established an enterprise-oriented direct
sales force to introduce the Company's products to large customers at the
corporate level. At the same time, the Company began evaluating the possible
acquisition of products that were suitable for enterprise-oriented marketing.
In December 1996, the Company began negotiations to acquire csd Software GmbH
("csd"), the developer and owner of the predecessor product to CCM. Clearly,
CCM differed from the Company's other products, in that it was most suitable
to large, centrally administered networks such as networks at Deutsche Telekom
and Munich Reinsurance, two of csd's largest customers. To penetrate these
customer sites and ensure successful installation and use of the product
required a highly trained direct sales and support team. Furthermore, to
establish and maintain the worldwide reputation of the product as a leading-
edge Client Management solution, substantial resources were required for
product development. At the same time, the Board concluded that the csd
acquisition would provide the Company with a product that offers substantial
growth potential.

After the csd acquisition, the Company's Board of Directors instructed
management to evaluate the viability, from the perspective of both personnel
and financial resources, of simultaneously pursuing the Free Trial Marketing
strategy for the Company's historical products and the direct marketing
strategy for the CCM product. In this connection, the Company retained Arthur
Andersen's special project group to perform various financial analyses,
including cash flow analyses, of each of the Company's products. The Company
also retained the consulting firm of Fletcher Spaght to provide a market
analysis of the Company's various products, focusing primarily on the CCM
Business.

After considering the analysis and recommendations of the Company's
management and consultants, the Board of Directors determined that the
Company's existing financial, marketing, technical and management resources
were not sufficient to continue both its Free Trial Marketing strategy and the
development and marketing of CCM and other similar products through a direct
sales force. Moreover, taking into account the changed market environment for
its traditional distribution model, the Board concluded that the CCM Business
offered greater opportunities for growth in sales and earnings, and
consequently for maximizing shareholder value, than the Company's existing
product lines. Accordingly, on July 29, 1997 the Board adopted a restructuring
plan whereby new customer acquisitions for the Company's Groupware, Network
Management and Security products were de-emphasized and those businesses began
to be operated with the objective of providing the cash flow required to
support the CCM Business. On October 29, 1997, the Company implemented
additional restructuring measures. These included the closing or reducing of
the Company's offices in Sydney, Australia; Paris, France; London, the United
Kingdom; and Munich, Germany, while building up its office in Starnberg,
Germany. Associated staff reductions involved approximately 60 employees,
including ten in the United States.

At about the same time that the Board of Directors began its consideration
of the advisability of continuing to pursue the Company's Free Trial Marketing
strategy simultaneously with its CCM product strategy, the Board also took two
additional steps: first, it began a search for a new chief executive officer
who would focus on

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<PAGE>

developing the CCM business, and second, it retained Wessels, Arnold &
Henderson, L.L.C. ("Wessels") as its financial advisor to seek potential
buyers for the Company's firewall and possibly other products. The Board's
executive search activities resulted in the hiring of Herman DeLatte, whose
appointment as president and chief executive officer was announced on July 29,
1997, simultaneously with the announcement of the restructuring. Concurrently,
Mr. Christopher Risley resigned as the Company's president, effective August
31, 1997, retaining his position as a member of the Board of Directors and
assuming responsibility for assisting in the disposition of certain of the
Company's products.

During its four-month engagement as the Company's financial advisor, Wessels
contacted approximately 20 potential buyers. Of these 20 potential buyers, two
companies met with the Company's President and certain other senior
executives, and three companies engaged in telephonic discussions with the
Company. None of the companies contacted submitted a bid to acquire any assets
of the Company. Wessels resigned from this engagement in May 1997. The Company
subsequently contacted another financial advisor to seek potential buyers.
This second firm identified five additional potential buyers, but none of the
identified companies submitted a bid.

Elron Electronic Industries, Ltd. ("Elron Industries") initiated contact
with the Company in early July 1997. Mr. Risley met with Elron Industries'
management on July 24, 1997 in New York. On August 1, 1997, the Company's and
Elron Industries' management teams met at the Company's headquarters in
Cambridge, Massachusetts. Beginning August 4, 1997, a subcommittee of the
Board of Directors comprised of Messrs. Christopher Risley, Stephen Cheheyl
and Brian Horey began negotiations with Elron Industries concerning the
Proposed Transaction.

In mid-August, the Company was contacted by an investment banking firm
representing another potential purchaser. Mr. Risley met with this potential
purchaser's senior management team on August 19, 1997. The potential purchaser
proposed a business combination pursuant to which the Company's stockholders
would have received common stock. The Board did not pursue this proposal, in
large part because of the volatility and illiquidity of the potential
purchaser's common stock.

From August 11, 1997 to August 13, 1997, Messrs. Risley and O'Sullivan
visited Elron Industries in Israel. Negotiations regarding the terms of the
transaction commenced in late August and resulted in the execution of a letter
of intent on September 10, 1997. The Letter of Intent was not binding, except
for mutual confidentiality provisions and a "standstill" covenant requiring
the parties to deal exclusively with each other with respect to the Proposed
Transaction until October 19, 1997, subject to Elron meeting various
intermediate thresholds including completion of due diligence, preparation of
initial drafts of the purchase documentation and completion of negotiations
with key employees. In light of Elron's progress in meeting these thresholds,
the standstill period was extended to October 28, 1997.

In early September 1997, the Company was contacted by another potential
purchaser regarding a possible acquisition of the Company's firewall product.
Senior management of the Company and the potential purchaser met on September
4, 1997, to discuss the proposal. The potential purchaser subsequently made an
oral cash offer to acquire the Company's firewall product for approximately
$7,000,000. At the time the offer was received, the Company was not permitted
to negotiate this offer due to its standstill agreement with Elron Industries.
The Board of Directors met on October 29, 1997 to consider this offer. The
Board decided to reject the offer for the following reasons, among others:
first, the terms and conditions, as well as the probability of a successful
closing, were uncertain; second, the purchase price was less than the price
proposed by Elron; third the proposed sale did not include the On Guard
Internet Manager and SofTrack products, and thus would not allow management to
focus on the CCM Business; and, fourth, the Board believed that On Guard
Internet Manager and SofTrack would be more difficult to sell apart from the
firewall product.

On October 9, 1997, the Board of Directors retained Wessels to advise the
Board with respect to the fairness, from a financial point of view, of the
Proposed Transaction to the Company's stockholders. See "OPINION OF FINANCIAL
ADVISOR" below. On October 23, 1997, Wessels provided its initial fairness

14
<PAGE>

opinion to the Board, subject to a review of the accounting related to the
Proposed Assets. Following the resolution of a number of remaining substantive
issues, and after hearing Wessels' update of its fairness opinion and
underlying analysis, on October 29, 1997 the Board of Directors approved the
terms of the Proposed Transaction, subject to stockholder approval, and the
Company and Elron signed the Purchase Agreement. For more details concerning
the terms of the Purchase Agreement, see "--TERMS OF THE PROPOSED
TRANSACTION."

REASONS FOR THE PROPOSED TRANSACTION

In reaching its decision to approve and recommend the Purchase Agreement and
the Proposed Transaction to the stockholders of the Company, the Board of
Directors consulted with its advisors and considered the material factors
described below. Based upon its review of such factors, the Board of Directors
approved the Purchase Agreement and the Proposed Transaction.

The Board of Directors considered the following factors in reaching the
conclusion to approve the Purchase Agreement and the Proposed Transaction:

--The Groupware, Network Management and Security and CCM businesses require
significant financial, marketing, technical and management resources. The
Company's existing financial, marketing, technical and management
resources are not sufficient to support the growth of all of these
businesses. Disposition of the Proposed Assets will enable the Company to
narrow its strategic focus and redeploy its financial, marketing,
technical and management resources into the CCM Business.

--The CCM Business requires a fundamentally different sales and marketing
strategy than the Company's other businesses: the CCM Business requires an
enterprise-oriented direct sales force and field service organization,
whereas the Groupware and Network Management and Security businesses have
relied primarily on the Company's Free Trial Marketing system. The
Company's existing financial and marketing resources are not sufficient to
support two divergent marketing strategies.

--The Board of Directors determined, in its business judgment, that the CCM
Business, given the Company's limited resources, offered the best long-
term potential for growth and profitability relative to the Company's
other businesses.

--In the past, acquisitions have been a key component of the Company's
growth strategy. Two factors, among others, have made this strategy
increasingly difficult to implement: first, the cost of acquiring new
products has increased substantially, and, second, given the sharp decline
in the Company's stock price over the past year, the Company's ability to
use its stock for all or a portion of the purchase price has been severely
curtailed.

--The consideration to be paid by Elron consists entirely of cash, thereby
providing immediately available funds for the operations of the CCM
Business.

--The inclusion of substantially all of the assets of the Network
Management and Security business in the Proposed Transaction offers a
number of advantages: first, it eliminates the risk that one or more of
these products could not be sold individually; second, it likely reduces
the transaction costs that the separate sale of these products would
entail; and third, it avoids the likely diminution in value that would
result from holding these products for sale for some period beyond the
expected closing date of the Purchase Agreement.

--The Purchase Agreement does not contain any closing conditions other than
stockholder approval and delivery of the $3,000,000 of guaranteed
receivables, whereas most comparable transactions would contain a variety
of additional conditions that would increase the risk that the sale might
not be consummated.

--Wessels, the Company's financial advisor, has opined that the
consideration to be received by the Company in the Proposed Transaction is
fair to the Company from a financial point of view.

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<PAGE>

In analyzing the Proposed Transaction and in its deliberations regarding the
recommendation of the Purchase Agreement, the Board of Directors also
considered a number of other factors, including (i) its knowledge of the
business, operations, properties, assets, financial condition, prospects and
operating results of the business related to the Proposed Assets (the
"Proposed Business"), (ii) judgments as to the Company's future prospects with
and without the Proposed Business, (iii) the terms of the Purchase Agreement,
which were the product of extensive arm's length negotiations, and (iv)
enhanced stockholder value due to the resulting cash infusion. The Board of
Directors did not find it practical and did not quantify or attempt to attach
relative weights to any of the specific factors that it considered. The Board
of Directors concluded that the opportunities for the Company to streamline
its operations by narrowing the focus of its business were compelling.

Notwithstanding the expectations of the Company's Board of Directors and
senior management regarding the benefits to be realized from the Proposed
Transaction, no assurance can be given that the Company will be able to
realize such benefits or compete effectively against certain other competitors
that possess significantly greater resources and marketing capabilities than
the Company. See "RISK FACTORS."

OTHER STRATEGIC OPTIONS

The Board of Directors considered a variety of options for providing
financial resources to grow the CCM Business.

First, the Board of Directors considered using cash generated by the
Groupware and Network Management and Security businesses to support the growth
of the CCM Business. As part of the corporate reorganization announced on July
29, 1997, the Board of Directors decided to de-emphasize the acquisition of
new customers in its non-CCM businesses. Without the revenue growth associated
with the acquisition of new customers, the Board of Directors determined that
cash generated from the Groupware and Network Management and Security
businesses would not be sufficient to support the growth of the CCM Business.

Second, the Board of Directors considered selling all or a portion of the
Groupware and Network Management and Security businesses in exchange for
future royalty payments. The Board of Directors determined that the
uncertainty of the future royalty stream was too great a risk.

Third, the Board of Directors considered spinning off the Groupware and
Network Management and Security businesses to its stockholders. The Board of
Directors determined that: first, the size of these businesses made a spinoff
to stockholders uneconomic given the transaction costs of such a spinoff;
second, that a spinoff would not provide any cash for the growth of the CCM
Business; and third, that a spinoff would have had adverse tax consequences
for the Company's stockholders.

BUSINESS OF THE COMPANY FOLLOWING THE PROPOSED TRANSACTION

The Company believes that the CCM Business offers opportunities for long-
term growth because CCM currently has technological advantages over the
products offered by the Company's principal competitors. The Company believes
that success in the CCM Business requires both superior technology and the
financial, marketing and human resources to provide the technology and related
services globally. Competitors such as Microsoft, Intel and IBM/Tivoli have
the necessary resources, but the Company believes that their Client Management
products do not offer the technological advantages offered by CCM. Unlike most
of the products offered by the Company's competitors, CCM enables network
administrators to install operating system software as well as application
software. To build upon its technological base, the Company needs to develop
its global resources, either on its own or through strategic relationships
with companies with established global capabilities. Currently, the Company
believes that there is no company offering both global capabilities and the
technological advances offered by CCM.

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<PAGE>

The Company acquired the predecessor to CCM when it acquired all of the
outstanding capital stock of csd. Prior to the acquisition, csd managed, and
the Company now manages, approximately 50,000 seats at Deutsche Telekom,
which, according to the Gartner Group, is the world's largest installation of
managed personal computers. The Company believes that csd was, and the Company
now is, the dominant company in the Client Management market in Germany. With
an established presence in Europe, the Company's strategy for the CCM Business
is to expand its European presence and to develop the North American market.

If the Proposed Transaction is consummated, the Company would continue to
operate the business associated with its DaVinci e-mail, Notework and
MeetingMaker software products to generate cash for the CCM Business.

The CCM Business (as conducted by csd through January 27, 1997 and by the
Company thereafter) generated revenues of approximately $7.5 million in the
fiscal year ended December 31, 1996 and $6.8 million in the three fiscal
quarters ended September 30, 1997.

RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS

At the meeting of the Company's Board of Directors held to consider the
Purchase Agreement, the Board of Directors unanimously approved the Purchase
Agreement and the Proposed Transaction as being in the best interests of the
Company and its stockholders. FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF
DIRECTORS OF THE COMPANY UNANIMOUSLY APPROVED THE PURCHASE AGREEMENT AND THE
PROPOSED TRANSACTION AND RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE "FOR"
THE APPROVAL OF THE PURCHASE AGREEMENT AND THE PROPOSED TRANSACTION AND ALL
OTHER MATTERS RELATING TO THE PROPOSED TRANSACTION TO BE PRESENTED FOR THE
CONSIDERATION AND VOTE OF THE COMPANY'S STOCKHOLDERS.

Even if the Proposed Transaction is not consummated or is consummated on
different terms (which could be materially different from those described
herein), if the foregoing proposal is approved by the requisite vote of the
stockholders as described herein, the Board will be authorized to proceed with
the Proposed Transaction on such terms as it deems expedient and in the best
interests of the Company and its stockholders.

OPINION OF FINANCIAL ADVISOR

Wessels was retained, pursuant to an engagement letter dated October 9, 1997
(the "Wessels Engagement Letter"), to furnish an opinion as to the fairness,
from a financial point of view, to the Company of the financial terms of the
Purchase Agreement.

On October 29, 1997, Wessels rendered its opinion (the "Wessels Opinion") to
the Company's Board of Directors that, as of such date and based on the
procedures followed, factors considered and assumptions made by Wessels and
certain other limitations, all as set forth therein, the financial terms of
the Proposed Transaction was fair from a financial point of view to the
Company.

THE FULL TEXT OF THE WESSELS FAIRNESS OPINION IS SET FORTH AS ANNEX A TO
THIS PROXY STATEMENT AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND
LIMITATIONS OF THE REVIEW BY WESSELS. THE WESSELS FAIRNESS OPINION WAS
PREPARED FOR THE COMPANY'S BOARD OF DIRECTORS AND ADDRESSES ONLY THE FAIRNESS
OF THE PURCHASE PRICE TO THE COMPANY FROM A FINANCIAL POINT OF VIEW AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY COMPANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MEETING.

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<PAGE>

STOCKHOLDERS ARE URGED TO READ THE WESSELS OPINION, THE MATERIAL ASPECTS OF
WHICH ARE SUMMARIZED BELOW, CAREFULLY AND IN ITS ENTIRETY.

The Company's stockholders should note that the opinion expressed by Wessels
was provided for the information of the Company's Board of Directors in its
evaluation of the Proposed Transaction. The Company's Board of Directors did
not impose any limitations on the scope of the investigation of Wessels with
respect to rendering its opinion.

Wessels assumed and relied upon the accuracy and completeness of the
financial, legal, tax, operating and other information provided by the Company
(including without limitation the financial statements and related notes of
the Company and Elron) and certain other publicly available information and
did not independently verify such information. With respect to financial
forecasts related to the Proposed Assets prepared by the Company and provided
to Wessels, Wessels assumed that the forecasts had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Proposed
Assets. Wessels did not perform an independent evaluation or appraisal of any
of the Company's assets or liabilities, including, without limitation, all or
any portion of the Proposed Assets. Wessels was not asked to consider and did
not consider the possible effects of any litigation, other legal claims or any
other contingent matters. The Wessels Opinion is based on the conditions as
they existed and the information available to Wessels on the date of the
Wessels Opinion. Events occurring after the date of the Wessels Opinion may
materially affect the assumptions used in preparing the Wessels Opinion.

In connection with its review of the Proposed Transaction, and in arriving
at its opinion, Wessels has: (i) reviewed and analyzed the financial terms of
the Purchase Agreement; (ii) reviewed and analyzed certain publicly available
financial statements and other information of the Company and Elron; (iii)
reviewed and analyzed certain historical financial statements and other
financial and operating data concerning the Company and the Proposed Assets
prepared by the management of the Company; (iv) reviewed and analyzed certain
financial projections related to the Company and the Proposed Assets prepared
by the management of the Company; (v) reviewed and analyzed certain financial
projections concerning Elron prepared by institutional equity research
analysts; (vi) conducted discussions with members of the senior management of
the Company with respect to the business and prospects of the Company and the
Proposed Assets relative to published industry analyst estimates; (vii)
reviewed the historical and projected financial performance and market
valuations of certain comparable publicly-traded companies; (viii) reviewed
the financial terms, to the extent publicly available, of certain comparable
transactions, and (ix) performed a discounted cash flow valuation of the
Proposed Assets. In addition, Wessels has conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as it has deemed necessary in arriving at its Opinion.

The following is a summary of the financial analyses performed by Wessels in
connection with the delivery of the Wessels Opinion and made available to the
Company's Board of Directors:

Wessels used a comparable company analysis to analyze the Proposed Assets
operating performance relative to a group of ten publicly traded companies
(collectively referred to as the "Comparable Companies") that Wessels deemed
for purposes of its analysis to have comparable business and financial
profiles to the Proposed Assets. The Comparable Companies are: Astea
International, Inc.; Comshare, Inc.; Concentra Corporation; FTP Software,
Inc.; Gensym Corporation; NetManage, Inc.; Novadigm, Inc.; ObjectShare, Inc.
(formerly ParcPlace); Verity, Inc.; and Workgroup Technology Corporation. In
such analysis, Wessels compared the value to be achieved by the Company in the
Proposed Transaction, expressed as a multiple of certain operating data, to
the market trading values of the comparable companies expressed as a multiple
of the same operating results. Although such companies were considered
comparable to the Company for the purpose of this analysis based on certain
characteristics of their respective businesses, none of such companies
possesses characteristics identical to those of the Company. Wessels
calculated the following valuation multiples based on an implied enterprise
value (defined as equity market capitalization plus debt outstanding minus
cash) of $12.25 million for the Proposed Transaction and, as to the Comparable
Companies, on market prices and other information available as of October 28,
1997. Enterprise value multiples of latest twelve months ("LTM") and
annualized last quarter ("ALQ") revenue were based on historical operating
results derived from financial statements. The mean and

18
<PAGE>

median enterprise value as a multiple of each of the indicated revenue
statistics for the Proposed Transaction as compared to those of the Comparable
Companies were as follows: (a) historical LTM revenue, .5x for the Proposed
Transaction, as compared to a mean of .9x and a median of .7x for the
Comparable Companies; and (b) historical ALQ revenue, .5x for the Proposed
Transaction, as compared to a mean of 1.1x and a median of .8x for the
Comparable Companies. The high and low for the LTM revenue multiple among the
Comparable Companies were 3.2x and 0.0x, respectively. The high and low for
the ALQ revenue multiple among the Comparable Companies were 3.8x and 0.0x,
respectively. In each of the comparisons of the value to be achieved by the
Company in the Proposed Transaction as compared to the range of the enterprise
value multiples of historical revenue realized by the stockholders of the
Comparable Companies, the multiples of revenue achieved by the Company in the
Proposed Transaction were below the mean and median values but were within the
range realized by the Comparable Companies. In its deliberations, the Board of
the Directors of the Company noted that the multiple for the Proposed
Transaction was within the range of comparable multiples and was only .1x
lower than the then-current market multiple for the Company's Common Stock.
The Board determined that the portion of the Company's assets being sold as
part of the Proposed Transaction have less future revenue potential to the
overall Company and should be valued at a slight discount to the overall
market valuation of the Company's Common Stock. Thus, the Board determined
that the .5x multiple was fair and reasonable. Additionally, Wessels compared
the value to be achieved by the Company in the Proposed Transaction to the
enterprise value multiples of historical revenue realized by the Company's
stockholders. The enterprise value as a multiple of each of the indicated
revenue statistics for the Proposed Transaction, as compared to those of the
Company, were as follows: (a) historical LTM revenue: .5x for the Proposed
Transaction, as compared to .5x for the Company; and (b) historical ALQ
revenue: .5x for the Proposed Transaction, as compared to .6x for the Company.

Wessels compared multiples of selected financial data and other financial
data relating to the Proposed Transaction with multiples paid in, and other
financial data from, ten selected mergers (the "Comparable Transactions")
since 1991 of publicly traded companies in the software industry with
aggregate transaction values between $0 million and $50 million and where the
acquired company had incurred operating losses in the past twelve months prior
to the acquisition. The Comparable Transactions were selected primarily on the
aggregate transaction value of the business acquired and where the target
companies had similar financial profiles as the Proposed Assets. Wessels noted
that none of the target companies involved in these transactions had a
business that was directly comparable to the Company. This analysis produced
multiples of enterprise value to LTM revenues for the Comparable Transactions
ranging from 0.2x to 1.8x, with a mean and median of .8x and .7x,
respectively, compared with .5x for the Proposed Transaction. The multiples of
enterprise value to LTM operating income and net income for the Comparable
Transactions were not meaningful as all of the target companies in the
Comparable Transaction had accumulated operating losses. In the comparison of
the value to be achieved by the Company in the Proposed Transaction as
compared to the range of multiples of LTM revenue realized by the stockholders
of the Comparable Transactions, the multiple of LTM revenue achieved by the
Company in the Proposed Transaction was below the mean and median values but
were within the range realized by the Comparable Transactions.

Wessels estimated present values of the Proposed Assets using a discounted
cash flow analysis using projections of future operations provided by the
Company's management. Wessels calculated present values of projected operating
cash flows after net changes to working capital over the period between
October 31, 1997 and December 31, 2001 using a discount rate of 16.2%. Since
the Proposed Assets were projected to generate declining revenues in each year
(declining to approximately $12.6 million in 2001), negative cash flows in
each year from 1999 through 2001, and an operating loss in each year from 1998
to 2001, no terminal value was utilized. Wessels, therefore, calculated an
implied valuation of the Proposed Assets by determining the present value of
the annual cash flows. The implied value of the Proposed Assets based on this
analysis was a negative $5.47 million. Wessels determined that, at the time of
the Wessels Opinion, the value of the consideration to be received by the
Company in the Proposed Transaction of approximately $12.0 million was
substantially greater than the present value of the Proposed Assets' cash
flows under the discounted cash flow valuation discussed above.

19
<PAGE>

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Wessels
believes that its analyses must be considered as a whole and that selecting
portions of the analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete or misleading
view of the processes underlying its opinion. In arriving at its fairness
determination, Wessels considered the results of all such analyses. In view of
the wide variety of factors considered in connection with its evaluation of
the fairness of the Proposed Transaction consideration, Wessels did not find
it practicable to assign relative weights to the factors considered in
reaching its opinion. No company or transaction used in the above analyses as
a comparison is identical to the Company or Elron or the Proposed Transaction.
The analyses were prepared solely for purposes of Wessels providing its
opinion as to the fairness of the Proposed Transaction consideration pursuant
to the Purchase Agreement to the Company and do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually
may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses. As described above,
the Wessels Opinion and presentation to the Company's Board of Directors was
one of the many factors taken into consideration by the Company's Board of
Directors in making its determination to approve the Purchase Agreement and
the Proposed Transaction.

Wessels is a nationally recognized investment banking firm and it is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations of corporations. Wessels acted as a managing underwriter of the
initial public offering of the Company's Common Stock in August 1995. The
Company selected Wessels to render the fairness opinion based on Wessels's
familiarity with the Company, its knowledge of the software industry and its
experience in mergers and acquisitions and in securities valuation generally.

In the ordinary course of business, Wessels acts as a market maker and
broker in the publicly traded securities of the Company and receives customary
compensation in connection therewith, and also provides research coverage of
the Company. In the ordinary course of business, Wessels actively trades in
the publicly traded securities of the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities which positions, on occasion, may be
material in size or relative to the volume of trading activity.

Pursuant to the Wessels Engagement Letter, Wessels provided a financial
fairness opinion in connection with the Proposed Transaction and the Company
has paid a nonrefundable opinion fee in an amount equal to less than one-half
of one percent of the Purchase Price (as defined below) (the "Opinion Fee") to
Wessels. Payment of the Opinion Fee to Wessels was not contingent upon the
closing of the Proposed Transaction and Wessels will not receive a premium
when the Proposed Transaction is consummated. The Company has also agreed to
indemnify Wessels against certain liabilities relating to or arising out of
services performed by Wessels in connection with the Proposed Transaction. The
terms of the Wessels Engagement Letter, which are customary for transactions
of this nature, were negotiated at arm's length between the Company and
Wessels, and the Company's Board of Directors was aware of such fee
arrangement at the time of its approval of the Purchase Agreement.

TERMS OF THE PROPOSED TRANSACTION

The following summary of the Proposed Transaction describes the material
terms of the Purchase Agreement, a copy of which is attached hereto as Annex
B. This summary, while it contains all material terms of the Purchase
Agreement, is not intended to be complete and is qualified in its entirety by
reference to the Purchase Agreement. You are urged to read the Purchase
Agreement in its entirety.

PURCHASE AND SALE OF PROPOSED ASSETS

SALE OF CERTAIN ASSETS

Subject to the terms and conditions of the Purchase Agreement, the Company
will sell to Elron (a) all of the Company's right, title and interest as owner
of the computer software programs known as On Guard Internet

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<PAGE>

Manager, On Guard Firewall, and the Odyssey Application Software and Database,
and as licensee of SofTrack (collectively, the "Software"); (b) all of the
Company's right, title and interest in its catalog business, including
management information systems, sales and marketing databases and customer
lists; (c) all of the Company's right, title and interest in and to the
methodology, procedures, techniques and documentation utilized by the Company
for the sale and distribution of computer software, hardware and peripherals
(collectively, the "Free Trial Marketing system"); (d) all of the Company's
right, title and interest in certain contracts, agreements, real and personal
property leases, licenses and other instruments; (e) certain accounts,
accounts receivable, notes and notes receivable, with a Company-guaranteed
value of $3,000,000; (f) certain equipment, furniture, leasehold improvements;
(g) certain inventory; (h) certain trade names and trademarks; and (i) the
goodwill associated with the foregoing assets (collectively, the "Proposed
Assets"). For the fiscal year ended December 31, 1996 and the nine (9) months
ended September 30, 1997, the net sales of the Proposed Business was $24.9
million and $17.0 million and represented 41.8% and 46.0% of the Company's net
sales for the respective periods.

PURCHASE PRICE

The fixed purchase price for the Proposed Assets is $12 million (the
"Purchase Price"). In addition to the Purchase Price, Elron shall pay to the
Company an additional amount (the "Purchase Bonus") based upon Acquired Asset
Revenues and Pre-Tax Profits (as hereinafter defined), in accordance with the
following schedule:

<TABLE>
<CAPTION>
ACQUIRED ASSET REVENUES AND PRE-TAX PROFITS PURCHASE BONUS
------------------------------------------- --------------
<S> <C>
Less than $22,000,000 and 15%................................ $ 0
Equal to or greater than $22,000,000 and 15%, but less than
$24,000,000 and 18%......................................... $ 750,000
Equal to or greater than $24,000,000 and 18%................. $1,500,000
</TABLE>

"Acquired Asset Revenues and Pre-Tax Profits" means the revenues and pre-tax
profits (expressed as a percentage of Acquired Asset Revenues), respectively,
for the Proposed Assets during the 12 calendar months following the effective
date of the Management Agreement (see "Management Agreement" below) between
the Company and Elron (the "Measuring Period"), excluding expenses associated
with research and development, product enhancements, product revisions and
product introductions in excess of the expenses set forth on a specified pro
forma expense analysis, all as determined in accordance with Generally
Accepted Accounting Principles ("GAAP"). Arthur Andersen, LLP shall be engaged
by Elron and the Company to determine the Acquired Asset Revenues and Pre-Tax
Profits and the determination of such firm shall be final, binding and non-
appealable upon the Company and Elron. The Purchase Bonus shall be paid in
accordance with the Escrow Agreement (Purchase Bonus).

ESCROW AGREEMENT

Contemporaneously with the execution and delivery of the Purchase Agreement,
Elron deposited $1.5 million in escrow (the "Purchase Bonus Escrow Funds")
with State Street Bank and Trust Company ("State Street"), pursuant to the
terms of an Escrow Agreement (Purchase Bonus) by and among Elron, the Company
and State Street. The Purchase Bonus Escrow Funds shall be disbursed to
satisfy payment of the Purchase Bonus and/or to satisfy, in whole or in part,
claims by Elron for indemnity obligations according to the indemnity
provisions of the Purchase Agreement.

LETTER OF CREDIT

Contemporaneously with the execution and delivery of the Purchase Agreement,
Citibank N.A. confirmed, at Elron's expense, an unconditional standby letter
of credit (the "Letter of Credit") in favor of the Company in the amount of
$9,000,000. The Letter of Credit shall be drawn to satisfy payment of a
portion of the Purchase Price at the Closing, as set forth below. The balance
of the Purchase Price, $3 million, will be paid in cash by Elron, which had
available cash of $25 million as of September 30, 1997 (based on its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).

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<PAGE>

RETAINED BUSINESS

The Company will continue to market and support its DaVinci and Notework e-
mail and Meeting Maker software products, in addition to CCM. Effective as of
the Closing Date, Elron shall grant to the Company a three-year worldwide
license to use the Odyssey Application Software and Database only in
connection with the wholesale or retail license of DaVinci e-mail, Notework e-
mail and MeetingMaker software products, including versions and feature
extensions of such products. This license shall terminate, with respect to
each such software product, upon the Company's sale to a third party that is
not an affiliate of the Company of either (x) such software product or (y) all
or substantially all of the Company's business or assets. Notwithstanding the
foregoing, (i) the Company shall retain the right to engage in telemarketing,
direct-mail and other customary marketing practices (whether individually or
in combination), and (ii) in connection with the Company's sale of DaVinci e-
mail, Notework e-mail and/or Meeting Maker to a third party, the Company may
provide such third party purchaser with the customer and prospect lists for
such product(s).

NON-COMPETITION

Except as set forth in "Retained Business" above, neither the Company nor
any of its affiliates will, directly or indirectly, in the United States or
elsewhere in the world: (a) use, sell or grant any third party license, for or
without consideration, to use the Free Trial Marketing system or any of its
components for any purpose; or (b) bid for, acquire or compete to acquire
SofTrack or any license or other right with respect to SofTrack upon the
expiration or termination of the SofTrack License Agreement.

REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION

The Purchase Agreement contains customary representations and warranties by
the Company and Elron. The Company makes certain representations as to (i) the
organization and good standing of the Company, (ii) proper corporate
authority, no conflicts and requisite approvals, (iii) accuracy of financial
statements and books and records, (iv) title to and condition of assets, (v)
accounts receivable, including the collectability of certain receivables
designated as "Guaranteed Receivables," (vi) inventory, (vii) taxes, (viii) no
undisclosed liabilities and no material adverse change, (ix) employee benefits
plans and employee matters, (x) compliance with laws, (xi) legal proceedings,
(xii) contract matters, (xiii) intellectual property matters, and (xii)
warranty and product liability. The Company will indemnify Elron for certain
losses arising from the breach of the Company's representations and
warranties.

The Purchase Agreement contains customary indemnification obligations by the
Company. Generally, neither Elron nor the Company (as the case may be, the
"Indemnifying Party") shall be obligated to pay any losses suffered by the
other party (the "Indemnified Party") unless and until the aggregate amount of
all losses exceeds $150,000. Once the aggregate amount of losses exceeds this
amount, the Indemnifying Party shall be required to pay the excess, up to a
maximum of $2,000,000, plus, in the case of the Company, the Purchase Bonus,
to the extent payable.

COVENANTS PENDING CLOSING

The Purchase Agreement contains various covenants of the Company and Elron
pending the Closing. Neither the Company nor Elron shall take any actions that
will result in any of their representations and warranties set forth in
Sections 2 and 3 of the Purchase Agreement becoming untrue in any material
respect. Without the prior written consent of the Company, which consent shall
not be unreasonably withheld, Elron shall not engage in any activity that is
prohibited by the Management Agreement.

CONDITIONS TO CLOSING; FINANCING

The obligation of Elron to consummate the Proposed Transaction is subject
solely to evidence of stockholder approval and delivery of the $3,000,000 of
guaranteed receivables. See "CLOSING." There can be no assurance that these
conditions will be satisfied. The satisfaction of these conditions is not
within the exclusive control of the Company. Consummation of the Proposed
Transaction is not subject to Elron obtaining financing.

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<PAGE>

TERMINATION

The Purchase Agreement shall be terminated (i) by mutual agreement of the
Company and Elron, (ii) by the Company, if any time prior to the stockholders'
approval of the Purchase Agreement, the Company's Board of Directors
determines in good faith (on the basis of outside counsel's advice) that the
approval and adoption of the Purchase Agreement and the Proposed Transaction
would be inconsistent with the Company's Board of Directors' fiduciary duties
under applicable law; or (iii) on the Termination Date (as defined below), if
the Closing has not occurred by such time.

EMPLOYMENT MATTERS

At Closing, approximately 115 employees of the Company will terminate their
employment relationship with the Company and become employees of Elron. In
addition, Elron will enter into an Employment Agreement with Ivan O'Sullivan.

LIQUIDATED DAMAGES

The Company will pay to Elron $1,000,000 in liquidated damages (the
"Liquidated Damages Payment") if the Purchase Agreement is terminated (i) as a
result of the Company's failure to obtain stockholder approval or (ii) the
Company's Board of Directors determines that the approval and adoption of the
Purchase Agreement is inconsistent with the Board's fiduciary duties. The
Company shall have no liability pursuant to the indemnification provisions of
the Purchase Agreement if the Company is required to make the Liquidated
Damages Payment.

SECURITY AGREEMENTS

Contemporaneously with the execution and delivery of the Purchase Agreement,
Elron and the Company executed and delivered a Security Agreement (Management
Assumption) whereby the Company granted to Elron a security interest in the
Proposed Assets to secure certain of the Company's obligations pursuant to the
Purchase Agreement, including the Liquidated Damages Payment.

Simultaneously, the Company and Elron entered into a Security Agreement
(Management Agreement) whereby Elron granted to the Company a security
interest in all of Elron's assets, exclusive of deposit accounts maintained by
Elron with Bank Leumi Trust Company of New York, to secure Elron's obligations
with respect to the employment expenses under the Management Agreement and
with respect to Elron's obligations to the Company in the event that the
Proposed Transaction is not consummated.

MANAGEMENT OF THE PROPOSED BUSINESS PRIOR TO CLOSING

MANAGEMENT AGREEMENT

Contemporaneously with the execution and delivery of the Purchase Agreement,
Elron and the Company executed and delivered a Management Agreement, pursuant
to which Elron shall manage the Proposed Assets for its benefit and at its
risk and expense and shall pay all salaries and other employee related
expenses with respect to the Proposed Assets and the Transferred Employees. So
long as Elron shall comply with the terms of the Management Agreement, under
no circumstances may the Company participate in, control or influence the
management of the Proposed Assets during the term of the Management Agreement.
During the term of the Management Agreement, the Transferred Employees shall
be employed by the Company but shall, to the extent allowed by law, be subject
to the complete supervision, direction and control of Elron. Elron shall pay
for all salaries, commission, taxes, insurance, sick leave, vacation pay,
worker's compensation, unemployment compensation, liabilities pursuant to the
Federal Insurance Contributions Act and the Federal Unemployment Trust Act and
all other claims, costs, expenses and liabilities of any nature whatsoever or
related to the Transferred Employees (collectively, the "Employment Expenses")
arising during the period commencing on the date of the Management Agreement
(the "Management Assumption Date") and ending on the date of

23
<PAGE>

termination of the Management Agreement and Elron shall be directly
responsible for all such expenses related to all other personnel in the
Proposed Business. During the term of the Management Agreement, Elron shall
not (a) mortgage, pledge or subject to any lien, charge or other encumbrance
any of the Proposed Assets, except in the ordinary course of business; (b)
sell, assign, transfer any of the Proposed Assets, except for inventory sold
in the ordinary course of business; (c) waive any rights of material value to
the Proposed Assets, except in the ordinary course of business; (d) alter the
payment terms with respect to any account receivable, including, without
limitation, issue any credit or rebate with respect to any account receivable;
or (e) extend credit to any customers that the Company has designated as
credit hold as of October 29, 1997 or commit to do any of the foregoing,
except in the ordinary course of business.

TRANSITION AGREEMENT

Elron and the Company have entered into a Transition Agreement which
provides for the orderly transition of the Proposed Assets and the Transferred
Employees to Elron.

CLOSING

Contemporaneously with the execution and delivery of the Purchase Agreement,
Elron, the Company and Fulbright & Jaworski LLP (the "Document Escrow Agent")
executed and delivered an Escrow Agreement (Management Assumption) pursuant to
which the Closing Deliveries (as defined below) were deposited with the
Document Escrow Agent. "Closing Deliveries" means certain documentation that
is required to effectuate the transfer of the Proposed Assets and the
consummation of the Proposed Transaction.

Within one business day after the Document Escrow Agent's receipt of (i) a
letter (the "Opinion Release Instructions") authorizing the release of the
legal opinion of Epstein Becker & Green, P.C., the Company's counsel,
addressed to Elron, and (ii) a credit advice from Fleet National Bank with
respect to the cash settlement of the accounts receivable that are to be sold
to Elron, the Document Escrow Agent shall date the Closing Deliveries and
release an original fully executed counterpart of each of the Closing
Deliveries to Elron and to the Company. As confirming bank with respect to the
Letter of Credit, Citibank, N.A. shall, within one business day after its
receipt of the Opinion Release Instructions and credit advice, disburse the $9
million face amount of the Letter of Credit by wire transfer to the Company.
On the Closing Date, (i) the Company shall terminate the employment of the
Transferred Employees and Elron shall offer employment to the Transferred
Employees, in accordance with the terms of the Transition Agreement, (ii) the
Company shall pay to Elron a cash settlement to satisfy its guarantee
obligations regarding accounts receivable, (iii) Elron will pay to the
Company, as part of the Purchase Price, the amount of $3 million, (iv) the
Company shall pay to Elron an amount equal to 80% of the prepaid amounts
received by the Company with respect to maintenance contracts assumed by
Elron, prorated as of the date of the Management Agreement based upon the then
remaining term of each such contract, (v) the Company shall pay to Elron any
actual damages resulting from the failure to satisfy certain third-party
assignments and consents, and (vi) the parties shall make certain closing
adjustments, as specified in the Management Agreement and the Transition
Agreement. In the event that the Opinion Release Instructions are not
delivered to the Document Escrow Agent on or prior to 5:00 p.m. on March 31,
1998 (the "Termination Date"), then (i) the Purchase Agreement and the
Management Agreement shall immediately terminate, (ii) State Street shall
transfer the Purchase Bonus Escrow Funds, plus interest and earnings thereon
to Elron, (iii) the Letter of Credit shall expire by its terms, and (iv) Elron
and the Company shall use their best efforts to transfer the management of the
Proposed Assets and the Proposed Business back to the Company, in accordance
with the terms of the Management Agreement.

ACCOUNTING CONSEQUENCES ARISING FROM THE PROPOSED TRANSACTION

The Company estimates that it will recognize approximately a $6.8 million
gain for accounting purposes as a result of the sale of the Proposed Assets,
based on gross proceeds of $12,000,000, with no consideration to the

24
<PAGE>

purchase bonus of up to $1,500,000. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" for the income tax treatment of the sale of the Proposed Assets.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The Company will recognize income, gain or loss equal to the difference
between (i) the consideration received by the Company plus the liabilities of
the Company satisfied or assumed in connection with the sale of the Proposed
Assets and (ii) the tax basis with respect to the Proposed Assets. The Company
intends, subject to applicable limitations, to use net operating loss
carryforwards to offset any income or gain so recognized as a result of the
sale of the Proposed Assets. However, the Company may incur alternative
minimum tax liability. While the Company has not completed its calculations of
the income or gain which would be recognized as a result of the sale of the
Proposed Assets, it estimates that it will recognize an ordinary loss with
respect to the Proposed Transaction for federal and state income tax purposes.
The Company does not believe that the income taxes payable as a result of the
consummation of the Proposed Transaction will have a material adverse effect
on the Company's business, condition (financial or otherwise), prospects and
results of operations.

REQUIRED APPROVALS

The Company is not required to obtain any federal or state approvals of the
Proposed Transaction. The Company believes that, other than stockholder
approval and the consents specified in the Purchase Agreement, no further
approvals are necessary for the Proposed Transaction.

INTERESTS OF CERTAIN PERSONS

Except for Messrs. O'Sullivan and Roll, who will become employees of Elron,
the officers and directors of the Company have no interest in the Proposed
Transaction other than any interests they may have as stockholders of the
Company.

APPRAISAL RIGHTS INAPPLICABLE

Under Delaware law, the holders of Common Stock do not possess any appraisal
rights in relation to the Proposed Transaction.

EXPENSES

All expenses incurred by the Company in connection with the Proposed
Transaction will be paid by the Company. The estimated fees and expenses to be
incurred by the Company in connection with the Proposed Transaction are as
follows:

<TABLE>
<S> <C>
Accounting fees and expenses....................................... $100,000
Legal fees and expenses............................................ $150,000
SEC filing fee..................................................... $ 2,400
Printing and mailing expenses...................................... $ 50,000
Miscellaneous expenses............................................. $ 87,600
--------
TOTAL: .......................................................... $400,000
========
</TABLE>

No fees or expenses will be paid by or on behalf of the Company to any
broker or other person for soliciting votes. Brokers, dealers, commercial
banks, trust companies and other nominees will be reimbursed by the Company
for reasonable expenses incurred by them in forwarding materials to their
customers.

25
<PAGE>

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial
statements give effect to the Proposed Transaction. The unaudited pro forma
condensed consolidated balance sheet as of September 30, 1997 gives effect to
the Proposed Transaction as if it had occurred on September 30, 1997. The
unaudited pro forma condensed consolidated statements of operations for the
year ended December 31, 1996 and for the nine months ended September 30, 1997
give effect to the Proposed Transaction as if it had occurred on January 1,
1996. The unaudited pro forma condensed consolidated financial statements were
prepared based on consideration to be paid by Elron of $12,000,000. The
unaudited pro forma condensed consolidated financial statements do not reflect
additional contingent consideration that might be paid related to the Purchase
Bonus provided for in the Purchase Agreement.

The unaudited pro forma condensed consolidated financial statements may not
be indicative of the actual results of the Proposed Transaction had it
actually occurred on the above dates, or which may be reported in the future.
The accompanying pro forma condensed consolidated financial statements should
be read in conjunction with the accompanying notes and the historical
financial statements and related notes of the Company included in this Proxy
Statement.

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------------------
PRO
HISTORICAL ADJUSTMENTS FORMA
----------- ----------------- -------
DEBIT CREDIT
------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............ $ 8,394 $12,000(1) $ 247(2) $20,147
Accounts receivable, net............. 9,512 3,046(1) 6,466
Inventories.......................... 1,409 1,124(1) 285
Prepaid expenses and other current
assets.............................. 3,600 3,600
------- -------
Total current assets............... 22,915 30,498
------- -------
Property and equipment, net.......... 5,154 947(1) 4,207
Direct marketing costs............... 81 81
Other assets and deposits............ 71 71
Purchased intangibles, net........... 2,545 540(1) 2,005
------- -------
$30,766 $36,862
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease ob-
ligations........................... $ 684 $ 176(1) $ 508
Accounts payable..................... 6,250 6,250
Accrued expenses..................... 3,679 3,679
Reserve for distributor inventories.. 100 100
Deferred revenue..................... 1,580 350(1) 1,230
------- -------
Total current liabilities.......... 12,293 11,767
------- -------
Capital lease obligations, net of
current portion..................... 71 71
------- -------
Stockholders' Equity................. 18,402 6,622(1) 25,024
------- -------
$30,766 $36,862
======= =======
</TABLE>

The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.

26
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
ADJUSTMENTS
-----------------
HISTORICAL DEBIT CREDIT PRO-FORMA
----------- ------- ------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue..................... $ 51,792 $24,392(3) $ -- $ 27,400
Operating expenses:
Cost of product revenue....... 11,951 5,535(3) 4,768
1,500(5)
148(6)
Sales and marketing........... 24,176 3,284(3) 18,843
330(4)
1,719(6)
Research and development...... 9,456 214(4) 8,678
564(6)
General and administrative.... 4,407 67(4) 3,695
645(6)
Charge for purchased
incomplete research and
development.................. 13,285 13,285
Charge for restructuring...... 5,415 5,415
Gain on sale of assets.......... -- 6,622(7) 6,622(1) --
---------- ----------
Loss from operations.......... (16,898) (27,284)
Net interest income............. 1,134 1,134
---------- ----------
Loss before provision for in-
come taxes................... (15,764) (26,150)
Provision for income taxes...... (97) (97)
---------- ----------
Net loss...................... $ (15,861) $ (26,247)
========== ==========
Pro forma net loss per common
share.......................... $ (1.46) $ (2.42)
========== ==========
Pro forma weighted average
number of common shares
outstanding.................... 10,853,814 10,853,814
========== ==========
</TABLE>

The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements

27
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------------------------
HISTORICAL ADJUSTMENTS PRO-FORMA
----------- ----------------- -----------
(UNAUDITED) DEBIT CREDIT
<S> <C> <C> <C> <C>
Net revenue.................... $ 37,122 $17,080(3) $ $ 20,042
Operating expenses:
Cost of product revenue........ 7,650 2,807(3) 4,644
199(6)
Sales and marketing............ 18,995 3,541(3) 12,600
312(4)
2,542(6)
Research and development....... 9,956 202(4) 8,733
1,021(6)
General and administrative..... 3,975 63(4) 3,025
887(6)
Charge for purchase incomplete
research and development...... 15,898 15,898
Charge for restructuring....... 4,530 4,530
----------- -----------
Loss from operations......... (23,882) (29,388)
Net interest income............ 234 234
----------- -----------
Loss before provision for
income taxes................ (23,648) (29,154)
Provision for income taxes..... (133) (133)
----------- -----------
Net loss..................... $ (23,781) $ (29,287)
=========== ===========
Pro forma net loss per common
share......................... $ (1.97) $ (2.42)
=========== ===========
Pro forma weighted average
number of common shares
outstanding................... 12,091,960 12,091,960
=========== ===========
</TABLE>

The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.

28
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma condensed consolidated financial statements have
been prepared by combining the historical results of the Company and the
following pro forma adjustments:

(1) Represents the sale of the Proposed Assets and recognition of the
related gain.
(2) Represents the estimated payment to be made equal to 80% of the prepaid
amounts received by the Company with respect to maintenance contracts
assumed by Elron, prorated as of the date of the Management Agreement
based upon the then remaining term of each such contract.
(3) Represents reversal of net sales, related cost of goods sold and direct
marketing costs for Software products which are being sold to Elron and
will no longer be sold by the Company.
(4) Represents reversal of depreciation expense for the Proposed Assets,
which are being sold to Elron.
(5) Represents reversal of an inventory writedown associated with a
restructuring charge for inventory, which is being sold to Elron.
(6) Represents reversal of payroll costs and associated fringe benefits of
approximately 100 employees that will terminate their employment
relationship with the Company and become employees of Elron.
(7) Represents reversal of nonrecurring charges, in accordance with
Securities and Exchange Commission regulations.

29
<PAGE>

CERTAIN INFORMATION REGARDING ELRON

Elron is a Delaware corporation with its executive offices located at One
Cambridge Center, Cambridge, Massachusetts 02142. Elron is a subsidiary of
Elron Electronic Industries, Ltd., an Israeli corporation, which is a multi-
national high-technology holding company. Elron Industries' global businesses
are conducted, through a group of affiliated companies, in the fields of
medical diagnostic imaging, advanced defense electronics, communications,
semiconductors, machine vision and lately focusing on the emerging markets of
networking and Internet software and services.

Elron Industries' Ordinary Shares, NIS 0.003 Nominal Value, are publicly
traded on the Nasdaq National Market under the symbol "ELRNF", and on the Tel
Aviv Stock Exchange. Neither Elron nor Elron Industries is affiliated with the
Company.

PRICE RANGE OF COMMON STOCK; DIVIDENDS

The Company effected its initial public offering on August 1, 1995 at a
price of $15.00 per share. Since that date, the Company's Common Stock has
traded on the Nasdaq National Market under the symbol "ONTC." The following
table sets forth, for the periods indicated, the high and low closing sales
prices for the Common Stock, all as reported by Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
First Quarter............................................... $ 6.25 $ 3.50
Second Quarter.............................................. 4.25 2.50
Third Quarter............................................... 4.38 2.56
Fourth Quarter.............................................. 3.75 1.16
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................... $19.13 $11.00
Second Quarter.............................................. 14.75 10.25
Third Quarter............................................... 10.63 4.63
Fourth Quarter.............................................. 7.88 5.00
YEAR ENDED DECEMBER 31, 1995
Third Quarter (from August 1, 1995)......................... 19.50 14.75
Fourth Quarter.............................................. 17.00 12.00
</TABLE>

On October 29, 1997, the Company publicly announced the Proposed
Transaction. The closing sale price for the Common Stock, as reported on
Nasdaq, on October 28, 1997 was $2 15/16.

As of January 5, 1998, there were approximately 239 stockholders of record
of the Company's Common Stock.

The Company has not declared or paid cash dividends on its Common Stock
since 1992 when it converted from an S Corporation to a C Corporation. The
Company currently intends to retain any earnings for use in developing and
growing its business, and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Company's bank line of credit does
not contain any restrictions on the payment of dividends, unless the payment
of such dividends would result in a default thereunder.

30
<PAGE>

SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

The following table sets forth, as of January 5, 1998, certain information
relating to the beneficial ownership of Common Stock by (i) each person known
by the Company to own beneficially more than 5% of the Company's Common Stock;
(ii) each director of the Company; (iii) the Company's Chief Executive Officer
and each of the other five most highly compensated executive officers of the
Company (collectively, the "Named Executive Officers"); and (iv) the directors
and officers of the Company as a group:

<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) PERCENT OF COMMON STOCK(2)
- ------------------------ ----------------------------- --------------------------
<S> <C> <C>
Herman DeLatte.......... 0 0%
Christopher A.
Risley(3).............. 1,301,524 10.61
Loren K. Platzman(4).... 993,479 8.10
Charles River Partner- 689,410 5.61
ship VI(5).............
c/o Charles River Ven-
tures, Inc.
1000 Winter Street,
Suite 3300
Waltham, MA 02154
Vimal Vaidya............ 637,800 5.20
1831 Parkview Green
Circle
San Jose, CA 95131
John M. Bogdan(6)....... 55,431 *
Ivan J. O'Sullivan(7)... 198,049 1.62
R. Stephen Cheheyl(8)... 27,883 *
Brian T. Horey(9)....... 499,919 4.07
William C. Hulley(10)... 496,793 4.04
Michael J. Zak(5) ...... 644,204 5.24
Edward W. Green......... 0 0
All directors and execu- 4,900,288 39.93
tive officers as a
group
(10 persons)(11).......
</TABLE>
- --------
*Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws, where applicable.
(2) The percentages shown in this column are calculated from the 12,270,820
shares of Common Stock actually outstanding on January 5, 1998, in
addition to 106,366 options held by the persons set forth in this table
that are issuable within 60 days from January 5, 1998.
(3) Includes 286,195 shares of Common Stock held by The Risley Family Limited
Partnership (the "RFLP"). Mr. Risley is a general partner of the RFLP, in
which he holds a 1% general partnership interest. As the general partner,
he has sole voting and investment control over the shares of Common Stock
held by the RFLP. The Risley Children's Trust (the "Risley Trust"), an
irrevocable trust for the benefit of Mr. Risley's children, is the
limited partner of the RFLP. Mr. Risley has no investment or voting
control over the Risley Trust and disclaims beneficial ownership of the
Risley Trust's 99% limited partnership interest in the RFLP.

31
<PAGE>

(4) Includes 300,000 shares of Common Stock held by Platzman Investments
L.L.P.
(5) Includes 529,538 shares of Common Stock held by Charles River Partnership
VI, 93,445 shares of Common Stock held by Charles River Partnership VI-A,
an affiliate of Charles River Partnership VI, 8,338 shares held by
Michael J. Zak, 24,684 shares held by John T. Neises, 20,522 shares held
by Richard M. Burnes, Jr. and 12,883 shares issuable upon the exercise of
options held by Mr. Zak. Michael J. Zak is a director of the Company and
a general partner of Charles River Partnership VI and Charles River
Partnership VI-A. Richard M. Burnes, Jr. and John T. Neises are also
general partners of the general partner of Charles River Partnership VI
and Charles River Partnership VI-A. Charles River Partnership VI
disclaims beneficial ownership of the shares held by Charles River
Partnership VI-A and the shares held by Messrs. Zak, Burnes and Neises.
Charles River Partnership VI-A disclaims beneficial ownership of the
shares held by Charles River Partnership VI and the shares held by
Messrs. Zak, Burnes and Neises. Messrs. Zak, Burnes and Neises each
disclaim beneficial ownership with respect to the shares held by Charles
River Partnership VI and VI-A, except to the extent of his respective
proportionate pecuniary interest therein, and each also disclaims
beneficial ownership with respect to shares held by each of the other
general partners.
(6) Includes 39,333 shares issuable upon exercise of options.
(7) Includes 15,501 shares issuable upon exercise of options.
(8) Includes 12,883 shares issuable upon exercise of options.
(9) Includes 487,036 shares of Common Stock directly held by Lawrence,
Tyrrell, Ortale & Smith II, L.P. ("LTOS"). Also includes 12,883 shares
issuable upon the exercise of options ("option shares") held by Mr.
Horey. Mr. Horey, a director of the Company, is a general partner of
LTOS. Pursuant to Mr. Horey's partnership agreement with LTOS, LTOS has a
beneficial interest in such option shares.
(10) Consists of 483,910 shares of Common Stock held directly by The P/A Fund,
L.P. and 12,883 shares issuable upon exercise of options held by Mr.
Hulley. William C. Hulley, a director of the Company, is a general
partner of Adams Capital Management, Inc., a managing partner of The P/A
Fund, L.P. Mr. Hulley disclaims beneficial ownership of the shares held
by The P/A Fund, L.P. Mr. Hulley assigned all options he received
pursuant to the Company's 1995 Director Stock Option Plan and pursuant to
the Company's 1992 Employee and Consultant Stock Option Plan to The P/A
Fund, L.P. and, accordingly, disclaims beneficial ownership with respect
to shares issuable upon the exercise of such options.
(11) Includes an aggregate of 106,366 shares of Common Stock issuable pursuant
to options exercisable within 60 days from January 5, 1998. Includes
shares held by affiliates of certain officers and directors of the
Company with respect to which such officers and directors disclaim
beneficial ownership.

32
<PAGE>

BUSINESS

THE COMPANY

The Company was founded in 1985 and entered the communications software
market in 1990 believing that the rapid proliferation of new client operating
systems (Windows, DOS, Macintosh and OS/2, among others) would create
heterogenous networks of various types and generations of personal computers
running the latest as well as older operating systems. The Company believed
that these heterogenous networks would create a demand for communications
software products that run on leading edge as well as on less advanced
hardware platforms. The Company began shipping e-mail products in 1990 and in
1993 expanded its product line to group scheduling software with the
acquisition of substantially all of the assets of ON Technology, Inc. ("OTI").
The Company entered the software metering business by obtaining the exclusive
worldwide rights to SofTrack in December 1993. The Company expanded its e-mail
offerings with the acquisition of DaVinci Systems Corporation in 1994. In
August of 1995, the Company completed an initial public offering of 2,360,000
shares of its Common Stock resulting in net proceeds of $31,647,000. In the
first quarter of 1996, the Company entered the firewall software and anti-
virus software business through the acquisitions of neTrend Corporation and
Leprechaun Software International, Ltd., respectively and purchased the LAN
software business from Technocom plc. The Company began shipping ON Guard, the
Company's firewall software product, and Macro Virus Track, the Company's
anti-virus software product, during the second quarter of 1996. In 1997 the
Company entered into the Internet usage monitoring and CCM Businesses through
the acquisition of Purview Technologies Inc. and csd.

BACKGROUND OF THE CLIENT MANAGEMENT BUSINESS

In many organizations, Information Technology ("IT") is increasingly viewed
as a strategic resource rather than simply as a support function. At the same
time, IT organizations are under increasing pressure to support more PCs with
fewer resources as well as deliver a higher quality of service (or risk being
outsourced). For example, reducing PC downtime is a major concern for many
organizations because downtime can quickly result in lost revenues or lost
customers due to the unavailability of mission-critical applications. The
dynamics of the current business and technology environment are also placing
significant demand on IT, such as the need to implement Year 2000-compliant
applications, provide Internet or intranet-based access to data and upgrade
end-user PCs to high-end systems such as Windows NT in order to provide end-
users with more advanced functionality, security and performance.

Traditionally, IT tasks such as PC software installation, configuration and
troubleshooting have been handled in a manual, hands-on manner. In many
organizations, this typically involves sending a technician with a CD-ROM
drive to a remote location, such as the manufacturing floor or the trading
floor. In addition, detailed information about end-user PC configurations--
such as individualized parameters (e.g., username/password, IP address,
default font), list of installed software and revisions, and dependencies
between installed software packages--has traditionally been managed in an ad
hoc manner, making it difficult and time consuming to troubleshoot and
reconfigure PCs in case of hardware failure, user misconfiguration, or the
addition of new software packages.

33
<PAGE>

BACKGROUND OF THE GROUPWARE AND NETWORK MANAGEMENT AND SECURITY BUSINESSES

During the 1980s, local area networks ("LANs") connected a heterogeneous mix
of personal computers and workstations running various generations of
operating systems and applications software. The introduction of LANs created
a need for communications software that takes advantage of the installed LAN
infrastructure. Starting with e-mail, several types of communications software
evolved, including electronic group scheduling and network management
software. Communications software is most effective when all members of a
workgroup use the application. However, many organizations and workgroups have
not found communications software that operates satisfactorily across a multi-
platform computing environment. Moreover, communications software is often so
feature-laden and complex that it requires extensive user training. This
dramatically increases the cost of deploying the application and discourages
day-to-day use by the less technically oriented users.

As the number and size of LANs grew, demand emerged for network utilities.
The earliest network utilities provided basic functions such as network
backup, virus protection and printing redirection. Later, network management
software evolved to enable the network administrator to manage the
relationship between the data on the network and the users in the workgroup.
For example, network administrators want to save money by ensuring that they
are not purchasing additional software licenses while some existing licensees
sit idle. Much of the available network management software attempts to
combine many of these and other functions into a single software product. The
resulting product can be difficult to use to solve specific problems. With the
current shortage of trained network administrators and the prevalence of part-
time administrators, easy to use tools that target specific problems faced by
administrators are often preferred.

PRODUCTS AND TECHNOLOGY

The following table sets forth certain information about ON's principal
products, including the networks and operating systems supported by each:

<TABLE>
<CAPTION>
FIRST LATEST LIST
PRODUCT PRINCIPAL NETWORK CLIENT OPERATING RELEASE RELEASE PRICE PER
CATEGORY PRODUCTS SUPPORTED SYSTEMS SUPPORTED DATE(1) DATE 100 USERS
-------- -------------- -------------- ----------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Client Management Prod-
ucts
Comprehensive Client ON Command Unix, Windows DOS, Windows, 1992 10/97 $20,000
Management CCM NT, TCP/IP Windows 95, to
Windows NT $500,000
Groupware Products
Group Scheduling Meeting Maker NetWare DOS, Windows 3/91 10/97 $ 8,500
XP VINES Macintosh
IPX NetBIOS Windows 95
TCP/IP OS/2, Unix
AppleTalk Power
Internet Macintosh
E-mail Notework NetWare DOS, Windows 2/90 5/97 $ 5,500
Macintosh
Windows 95
DaVinci e-mail NetWare DOS, Windows 2/88 11/95 $ 5,900
VINES Macintosh
LANtastic Windows 95
Proposed Assets
Internet Firewall ON Guard TCP/IP, IPX DOS, Windows 5/96 9/97 $ 6,490
Firewall Macintosh
Windows 95
Internet ON Guard TCP/IP Windows NT 2/97 10/97 $ 4,995(3)
Usage Monitoring Internet
Manager
Metering SofTrack for NetWare DOS, Windows 11/93 7/97 $ 1,545
NetWare Macintosh,
OS/2 Windows
95
SofTrack for Windows NT Windows, 11/96 5/97 $ 1,395
Windows NT Windows 95
</TABLE>
- --------
(1) Some products were first released prior to the Company's ownership.
(2) U.S. list prices at November 10, 1997.
(3) Usually discounted to $2,995. This report includes trademarks of companies
other than the Company. All other company or product names are trademarks
or registered trademarks of their respective owners.

34
<PAGE>

CLIENT MANAGEMENT PRODUCTS

The Company's current Client Management product is CCM, an advanced and
scalable software system for managing desktop PCs in enterprise networks. CCM
provides total desktop control from a central administrative workstation,
virtually eliminating the need to dispatch technicians to implement common IT
operations at the end-user desktop. For example, CCM can remotely install
operating system software, update client application software, or reconfigure
PC parameters such as IP addresses or default screen resolution.

CCM is a scalable system that allows IT organizations to automate repetitive
and error-prone tasks and manage them on entire groups of PCs simultaneously.
Key benefits of CCM include significantly reduced Total Cost of Ownership
(TCO), enhanced quality of service for IT organizations, and the ability to
rapidly implement strategic enterprise-wide technology initiatives.

The target market for CCM is large organizations with 500 to 5,000 PCs. CCM
is primarily sold and supported via a direct sales organization in the United
States, Germany, the United Kingdom and Scandinavia. In addition, the Company
is currently exploring partnerships with local resellers and systems
integrators outside of these areas, including France and Australia.

CCM is an updated and enhanced version of Integra SME, which was originally
developed by csd for the German market in 1992. Since acquiring csd in January
1997, the Company has continued development and support of the product, both
in the United States and Germany. The first English-language version of the
product was renamed ON Command CCM and launched in the United States in July
1997.

CCM'S CAPABILITIES INCLUDE:

--Remote Installation of Operating Systems and Applications: CCM's advanced
Pre-OS Agent takes control of the PC regardless of its state, allowing the
system to reformat the disk and install operating systems under central
control--even when the PC's hard disk is blank, has been corrupted or
misconfigured, or when the operating system or network operating system
("NOS") is not operational. CCM can also be used to implement enterprise-
wide operating system upgrades from Windows 3.x or OS/2 to Windows 95 or
NT, for example. In addition, CCM can be used to install application
software packages such as Office 97, Lotus Notes, Netscape Navigator, or
Year 2000-compliant client-side versions of SAP R/3 or Oracle, for
example.

--Native Install Technology: CCM installs software by remotely executing
standard vendor installation procedures on the target PC. This approach is
highly reliable because vendor procedures typically adapt in real time to
specific PC hardware and software configurations. In addition, CCM's
installation technology uses a parametric approach that makes it extremely
easy to create customized installations for individual users or groups of
uses, simply by modifying a parameter table used to drive the installation
process from the administrative console. In comparison, traditional
"snapshot" software installation approaches are unreliable and difficult
to customize because they blindly copy bulk images or binary files to the
target PC, based on an idealized hardware and software configuration and
particular set of installation choices.

--Remote configuration of desktop parameters: CCM's Intelligent Desktop
Agents can remotely configure parameters such as IP or gateway addresses,
default printers, or application options such as default fonts and URL
home pages. In addition, these parameters are stored on the central CCM
server, so that they can be quickly reloaded in case of failure or
misconfiguration.

--Scalable Architecture: CCM offers powerful grouping capabilities that
allow IT organizations to administer groups of PCs as single
administrative objects. For example, PCs can belong to one or multiple
groups based on hardware manufacturer, physical location, or functional
organization. Network scalability is also supported by CCM's ability to
perform job scheduling and bandwidth management to minimize network load,
and by its use of IP as the underlying protocol for optimum efficiency.

35
<PAGE>

--Enterprise-Class Robustness and Ease-of-Use: CCM offers a number of
capabilities for robust operation in enterprise environments, including
pre- and post-installation dependency checking and detailed logging to
support automatic restart in case of network or power outages. An
intuitive Windows-based graphical user interface is used for administering
and monitoring the status of client management tasks, and administering
client configuration information.

--Support for Industry Standards and Heterogeneous Environments: CCM
supports standard servers (Sun Solaris, Microsoft Windows NT Server),
standard clients (DOS, Windows 3.x, Windows 95, Windows NT Workstation)
and standard networks (IP protocol, Ethernet connectivity). The Company
monitors evolving desktop management standards closely and intends to
support them when appropriate.

--Open Architecture: CCM is based on an open architecture that allows
customers and partners to create customized software installation and
configuration procedures using the ITool Command language.

GROUPWARE PRODUCTS

Notework is an entry-level, easy to use e-mail application for NetWare LANs.
While offering the basic features required by practically all e-mail users,
Notework is designed to be installed in five minutes, used by end-users within
five minutes, and administered with minimal effort. Notework maintains its
simplicity by eliminating complex and little used features while making it
less complicated to perform basic e-mail functions, such as creating, sending,
reading and filing mail. Support is provided for DOS, Windows, Windows NT, and
Windows under OS/2. Notework Mobile Office extends the simplicity theme over
to remote users by utilizing the same mail address for both LAN-based and
remote messages--providing a convenience factor that even sophisticated e-mail
packages cannot offer. With a gateway in place, Notework can interoperate with
most private and commercial e-mail systems.

DaVinci e-mail is a full-featured e-mail application for DOS, Windows, and
Macintosh client platforms. Although DaVinci can run on most types of LANs,
the majority of its installations are operating on NetWare networks. DaVinci's
administrative functions are designed to benefit from NetWare's underlying
binderies and user directories to eliminate the need for an administrator to
create each user twice, once for the network and once for e-mail. DaVinci
supports the new, robust MHS Services transport under NDS and NetWare 4.1, and
also supports NetWare 2.x and 3.x, Global MHS 2.0, Connect2 and MHS 1.5.
Behind its intuitive and easy-to-use interface is a powerful and customizable
application. A configurable toolbar, conversation threading, collapsible
folders, as well as add-on modules for Rules and Remote users, make DaVinci e-
mail suitable for large organizations and medium-to-small businesses alike.

Meeting Maker is a client/server, cross-platform network scheduling
application that automates the process of proposing meetings, coordinating
agendas, and securing meeting locations with the necessary equipment. To
schedule a meeting using Meeting Maker, a user merely proposes a time for the
meeting and selects the guests. The Meeting Maker client checks with the
Meeting Maker server to determine whether all guests are available at the
appointed time. On approval from the meeting initiator, Meeting Maker will
issue an invitation to all guests. If they are not available, Meeting Maker
can automatically determine the first time when all guests are available to
meet. Meeting Maker then tracks the RSVPs from guests in order to keep the
host informed as to the people who will and will not attend the meeting.
Through its cross-platform architecture, Meeting Maker can be run on Windows
(Windows 3.1/95/NT), Macintosh, PowerMac, Unix, and OS/2 workstations--or
seamlessly on any combination of these platforms in an integrated environment.
Meeting Maker supports networks running either TCP/IP, IPX, AppleTalk,
NetBIOS--or any combination of these protocols. Large enterprise installations
can use the Windows NT or Unix server options to support thousands of users;
workgroups typically use a Windows, Macintosh or NetWare server platform.
Using IP, organizations can easily connect Meeting Maker servers around the
world via the Internet. With support for SMTP and MAPI, Meeting Maker can
easily send meeting notices to colleagues, customers, business partners and
vendors through many e-mail packages. Mobile users can use Meeting Maker with
their Newton, Psion, Casio, Sharp, HP and Timex Data Watch portable devices.

36
<PAGE>

PRODUCTS INCLUDED IN THE PROPOSED ASSETS

The ON Guard Firewall is designed to provide computer network security for
medium- to large-size organizations with Internet or Intranet exposure. The ON
Guard firewall creates a barrier between an organization's network and the
Internet through which only authorized traffic can pass. ON Guard is optimized
for Novell NetWare and Microsoft Windows NT networks. ON Guard combines the
proven firewall technique known as Stateful Multi-Layer Inspection, the price
and performance advantages of the Windows and Intel architectures, and the
comprehensive coverage provided by support for both IP-and IPX-based networks.
The ON Guard firewall is designed to accept or reject any type of Internet or
network-segment traffic. ON Guard's optional Address Translation technology
dynamically maps all internal IP addresses to one "safe" address on the
firewall. This added layer of protection prevents hackers from gaining access
to internal networks and servers by impersonating valid IP addresses. A
Windows-based configuration program prompts the network technician through a
series of screens to select the types of traffic and services to accept
through the firewall. A Rules Tester checks the configuration against a
collection of Computer Emergency Response Team (CERT) advisories for added
assurance. ON Guard is independently certified by the National Computer
Security Association.

SofTrack for NetWare is a license metering tool for Novell NetWare LAN
servers that monitors the number of copies of a software application in use on
each file server and desktop across the network. SofTrack allows organizations
to buy software licenses based on actual usage instead of buying one copy for
every user. By monitoring usage, SofTrack users can comply with software
license agreements, reduce costs and avoid software piracy. SofTrack for
NetWare supports NetWare 4.x and NetWare 3.x servers as well as NetWare
Directory Services, providing network administrators with an efficient and
time-saving solution for administrating servers, users, group and other
objects in a global network environment.

SofTrack for Windows NT is a native NT Service that provides network
administrators with the ability to centrally manage software licenses, ensure
compliance with licensing terms, and save money when buying upgrades and new
applications. In combination with SofTrack for NetWare, SofTrack for Windows
NT automatically shares licenses among NetWare and Windows NT application
servers, providing the network administrator with the flexibility to automate
load balancing by instructing SofTrack to reallocate unused licenses between
servers. SofTrack for Windows NT is invisible to the local user and tamper-
proof, preventing clever users from attempting to bypass license metering.

On Guard Internet Manager is a complete enterprise solution for the
management and monitoring of Internet usage in an organization. The Internet
Manager features advanced technology that captures all network traffic to
World Wide Web, FTP, Telnet and Gopher sites, and records it in a relational
database in real-time. This allows corporations to create detailed reports and
graphs showing where their employees are going on the Web, who is using it the
most, and what they are downloading to internal networks, for example. In
addition to monitoring usage, corporations can also choose to block specific
sites in order to enforce corporate usage guidelines. The Internet Manager
installs on a single, centralized Windows NT client or workstation, is
transparent to end-users, and does not add network overhead or require network
reconfiguration. It can be used to monitor any IP client in an Ethernet-based
environment such as DOS, Windows, Unix and Macintosh systems.

SALES AND MARKETING

Enterprise Sales

Beginning late in 1996, the Company began its Enterprise Sales program. This
effort focuses on key accounts with larger companies where the opportunity
exists for volume sales and long-term, repeat business. Through the Enterprise
Sales program, the Company is building relationships in which its knowledge of
the customer's needs translates into purchasing advantages and maximized
support. Regular visits to the customer's site provide the Company's sales
representatives with valuable feedback for technology development, future
upgrades and service enhancements. The Company has established direct sales
and support offices in Cambridge, Massachusetts; Tarrytown, New York;
Somerset, New Jersey and Washington, D.C.

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<PAGE>

Free Trial Marketing

The Company has historically concentrated its sales and marketing efforts on
an integrated Free Trial Marketing strategy, complemented by public relations,
trade shows, trade advertising, direct mail and electronic distribution via
the Internet. As discussed in detail above, pursuant to the Proposed
Transaction the Company will retain limited rights to its Free Trial Marketing
system for use with respect to the sale of Groupware products to existing
customers and identified potential customers.

One of the first questions that network administrators ask of software
vendors is: "Will this software work in my network environment?" ON resolves
this concern for potential customers by providing them with 30-day free trials
of all of the Company's principal products (other than CCM). The trials are
full featured versions of the product that are internally designed to cease
operation in 30 days. The Company's Free Trial Marketing strategy reaches and
supports its prospects through a combination of direct mail, trade shows,
press relations, telemarketing and advertising. The Company's telephone sales
personnel actively market ON's products to prospective and existing customers
whose names and profiles are provided through ON's lead generating programs.
Another significant focus of the Company's telesales force is to contact
existing customers to cross-sell additional communications software and
network management software. The Company's periodic upgrade programs are
intended to enhance the functionality of ON's products, ensure the
compatibility of the product with new versions of operating systems and
provide an opportunity for the Company's telesales force to market new
products and increase the number of users licensed at each site.

The Company's house list records contain information such as contact name,
contact title, network size, number of servers and the type of client
platforms used at a site. The database also records ON's contacts with
prospects and customers by either sales or customer support personnel. The
Company has found that prospects who decide not to purchase the first product
they trial are still receptive to trying and buying subsequent products
offered to them. In addition, whenever the Company upgrades a product, it
offers a retrial to previous tried-but-did-not-buy prospects. The Free Trial
Marketing system includes a private use datebase, which is maintained at a
bonded third party database contractor. This private use database contains
more than 100 key industry mailing lists. Using this database, mailings can be
focused on particular target segments. The private use database was
constructed to ON's specifications.

ON's international distributors and resellers adapt ON's marketing
techniques to local conditions but overall follow the same Free Trial
Marketing disciplines and focus on getting trials installed and evaluated.
ON's international team is concentrating on supporting current distributors
and resellers and finding compatible distributors and resellers for new
markets.

Other Marketing Activities

ON promotes its products through advertising activities in trade
publications and direct mail campaigns, including its Editor's Choice catalog,
which also offers network products produced by other vendors. The catalog is
part of the Proposed Assets to be sold to Elron.

The Company also distributes its software trials through electronic
distribution via the Internet. The Company operates a World Wide Web server on
the Internet and has its free trials available for download from that server.
In addition, the Company has its trials available for download from
Cybersource's Software.net server. The Company maintains forums on CompuServe
and America Online, which enable subscribers of these services to discuss
issues related to communications software and network management software and
make inquiries regarding ON's products.

ON has a limited number of original equipment manufacturer ("OEM")
arrangements. Total revenue derived through these arrangements, however, is
not significant. The Company also attends trade shows and publishes quarterly
newsletters which are mailed to existing and prospective customers.

38
<PAGE>

PRODUCT DELIVERY

The Company has a variety of means to fulfill the product demand created by
its sales and marketing programs. CCM will be delivered directly to customers
by the Company's field organization. Other methods of distribution may include
system integrators, full service distributors and OEMs. The Company also has
additional experience with the following product delivery techniques:

Direct Fulfillment

Most of the Company's orders for its Groupware and Network Management and
Security products are delivered through direct fulfillment contractors that
manufacture and assemble components, store inventory, and process customer
orders received from ON for either same or next day shipment. Orders are
recorded by the ON sales department and transferred electronically to the
fulfillment contractor for processing. ON owns all of its inventory and has an
in-house production staff to purchase inventory and help ensure availability
for shipments. Once orders are shipped by the fulfillment contractor, shipping
confirmation is returned to ON electronically.

Independent Distributors

ON utilizes independent distributors to market its products (other than CCM)
internationally and, to a substantially lesser extent, in North America. ON's
international distributors are responsible for marketing the Company's
software and for providing technical and customer support to their customers.
While these distributors include some large systems integrators, most are
small companies that market ON's software along with products of other
companies that they represent. The agreements between the Company and its
international distributors typically obligate the distributor to provide
technical support and the most current versions of the Company's products to
the distributor's customers and to provide the Company with information about
its licensees. International distribution agreements generally are terminable
by the Company under certain circumstances, including failure of the
distributor to meet specified sales targets.

Resellers

ON also markets its Groupware and Network Management and Security products
through resellers, including Egghead Software, Corporate Software, Software
Spectrum and 800 Software. These resellers focus primarily on licensing the
Company's software to corporate and government customers.

CUSTOMERS

The Company markets its products primarily to large- and medium-size
corporate, government and institutional customers. None of the Company's
customers accounted for more than 10% of the Company's total revenue in 1994,
1995 and 1996.

CUSTOMER SUPPORT

FREE TRIAL MARKETING SYSTEM

Approximately one-half of the Company's customer support calls occur during
the 30-day Free Trial period. The Company believes that quality technical
support is critical to the success of any software business, but is especially
critical if the support must be given in advance of the purchase decision.
Accordingly, the Company has invested heavily both in the support personnel
and in software and hardware tools to improve the quality of support. In
particular, the Company utilizes a sophisticated shared database to provide
problem-solution combinations to its representatives.

CCM CUSTOMERS

The Company employs professional technical support staff in Starnberg,
Germany and Cambridge, Massachusetts to support CCM customers via telephone
hotline, electronic mail and on-site visits. On-site training is also
available on a case-by-case basis.

39
<PAGE>

RESEARCH AND DEVELOPMENT

The Company's product development organization, currently consisting of 61
employees and additional full-time and part-time contract programmers, is
responsible for developing new products, adapting acquired products to fit the
ON product strategy and enhancing existing products. Generally, the Company's
contract programmers do not work exclusively for the Company. In addition, the
development organization provides free trial expiration technology,
registration technology and installation technology to third party developers
who are building products for license to ON.

A key element of the Company's research and development strategy is to make
its products available on platforms that are important to its customers. The
Company is currently extending some of its products to support OS/2, Windows
95, Windows NT and two dialects of UNIX.

During product tests, ON dedicates staff from the support and sales
department to monitor alpha and beta sites and solicit detailed reports on
usability and errors occurring in customer environments. Many quality
assurance personnel have been recruited from the technical support department
because they are able to test products with greater awareness of the issues
which might confuse customers.

The Company's research and development expenses were approximately
$5,277,000, $7,015,000 and $8,456,000 for 1994, 1995, and 1996, respectively,
and $6,098,000 for the nine months ended September 30, 1997, in each case
excluding charges for purchased incomplete research and development projects.
The Company's practice to date has been to expense all software development
costs as incurred.

COMPETITION

The market for the Company's products is highly competitive, and the Company
expects competition to increase in the future. The Company believes that the
principal competitive factors affecting the market for its products include
performance, functionality, quality, customer support, breadth of product
line, speed of product delivery, frequency of upgrades and updates, brand name
recognition, company reputation, adherence to industry standards, integration
with third-party solutions and price. Certain of the criteria upon which the
performance and quality of the Company's Groupware and Network Management and
Security software compete include speed of response, ease of use,
interoperability with other messaging systems and simplicity of
administration. Certain of the Company's competitors in the Network Management
software market, such as Blue Lance, and Funk Software, have been in the
market longer than the Company, and other competitors, such as Intel, McAfee,
Seagate and Symantec, are larger and may have greater name recognition than
the Company. Certain of the Company's competitors in the client management
software market, such as Microsoft, Intel, IBM/Tivoli, Hewlett Packard,
Computer Associates, Seagate and McAfee, are larger and have greater resources
and name recognition than the Company.

As is the case in many segments of the software industry, the Company may
encounter increasing price competition in the future. This could reduce
average selling prices and, therefore, profit margins. Competitive pressures
could result not only in sustained price reductions but also in a decline in
sales volume, which could adversely affect the Company's business, condition
(financial or otherwise), prospects and results of operations. There can be no
assurance that the Company will continue to compete effectively against
existing and potential competitors in the Groupware and Network Management and
Security software markets, many of whom have substantially greater financial,
technical, marketing and support resources and name recognition than the
Company. In addition, there can be no assurance that software vendors who
currently use traditional distribution methods will not in the future decide
to compete more directly with the Company by utilizing free trial marketing.

Both the Groupware market and the Network Management and Security market are
highly fragmented, with products offered by many vendors. In the e-mail
market, the Company competes with offerings from CE Software, Infinite
Technologies, Lotus, Microsoft, Novell, Netscape, and numerous shareware and
freeware developers. In the group scheduling market, the Company competes with
Campbell Services, CE Software,

40
<PAGE>

Lotus, Microsoft, Microsystems Software, Novell, Netscape, Now Software, and
with personal information managers products ("PIMs") that have been enhanced
to include some group scheduling features. Lotus, Microsoft and Novell have in
the past bundled communications software with their operating system products
or software application suite offerings and have publicly announced, or the
Company believes are likely to provide, such bundles with future offerings.
There can be no assurance that the Company can continue to compete effectively
against communications software which is included free with the operating
system, as these bundled products are improved in the future. In addition, the
trend toward enterprise-wide communications software solutions may result in a
consolidation of the communications software market around a smaller number of
vendors who are able to provide all of the necessary software and support
capabilities.

In the Network Management and Security market, the Company's principal
competitors include Intel, McAfee, Symantec, Seagate, Check Point Software
Technologies Ltd., Raptor Systems, numerous shareware authors who distribute
products through electronic software distribution, and numerous smaller
companies that may in the future develop into stronger competitors or be
consolidated into larger competitors. Shareware is software that is made
available electronically on bulletin boards. Shareware users are encouraged to
evaluate the software for a short period of time and then either cease using
it or pay a license fee. The Company also faces competition from large and
established software companies such as Lotus, Microsoft and Novell, which
offer communications and network management software as enhancements to their
network operating systems or as part of their software application suites. The
Company believes that as these markets develop, it may face increased
competition from these large companies, as well as other companies seeking to
enter the market.

Historically, the Company's international revenue from sales of its
Groupware, Network Management and Security products have been generated
primarily through independent distributors in Europe, Australia, Israel, South
Africa and South America, certain of which are bound by contracts with the
Company but which generally do not represent the Company exclusively. The
Company's United Kingdom offices support and market products within the United
Kingdom and other parts of Europe. The Company's Starnberg, Germany office
primarily supports and markets CCM throughout Germany. The competitive
environment for communications software tools internationally is similar to
that in North America. The Company has only recently begun to compete in Asian
markets, which have significantly lagged behind North America and Europe in
their adoption of LAN technology. There can be no assurance that the Company
will be able to continue to compete successfully in international markets.

The widespread inclusion of the functionality of the Company's products as
standard features of operating systems software could render the Company's
products obsolete and unmarketable, particularly if the quality of such
functionality were comparable to that of the Company's products. If the
Company were unable to develop new communications and network management
software to further enhance operating systems and to replace successfully any
obsolete products, the Company's business, condition (financial or otherwise),
prospects and results of operations would be materially and adversely
affected.

In the Client Management market, the Company faces competition from large
and established companies, such as Microsoft, Intel, Computer Associates and
IBM/Tivoli, which offer client management capabilities as part of their
systems, network and/or desktop management systems. Moreover, Microsoft has
announced the Zero Administration Initiative for Windows ("ZAW"), which
includes a set of technologies that address some of the same client management
issues as CCM. Microsoft has described components of ZAW being available for
future versions of the Windows NT and Windows 95 operating systems, as well as
the Microsoft Systems Management Server product. There can be no assurance
that the Company can continue to compete effectively against Client Management
software which is included free with operating system software.

PROPRIETARY TECHNOLOGY

41
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The Company uses a printed "shrink-wrap" license for users of its Groupware,
Network Management and Security products distributed through traditional
distribution channels in order to protect its copyrights and trade secrets in
those products. Since these licenses are not signed by the licensee, many
authorities believe that they may not be enforceable under many state laws and
the laws of many state and foreign jurisdictions. If such licenses are not
enforceable, the user would not be bound by the terms thereof, including the
terms which seek to protect the Company's proprietary technology.

The Company has obtained registrations in the United States for the
following trademarks: ON Technology, Notework, Meeting Maker, ON Technology &
Design, ON Location, Instant Update and DaVinci Systems. The Company has filed
for the trademark "ON Command CCM" in the United States, the European
Community, Canada and Australia. The Company has obtained only four foreign
registrations of its Notework mark and two foreign registrations of its
Meeting Maker mark due to the significant costs involved. As a result, the
Company may not be able to prevent a third party from using its trademarks in
many foreign jurisdictions. The Company has not to date registered any of its
copyrights.

There can be no assurance that the steps taken by the Company to protect its
proprietary software technology will be adequate to deter misappropriation of
this technology. Lesser sensitivity by corporate, government or institutional
users to avoiding copyright infringement could have a material adverse effect
on the Company's business conditions, prospects and results of operation.
While the Company to date has not taken any legal action to enforce its
intellectual property rights against infringing users, it believes, based upon
current interpretations of law, that its use of Free Trial Marketing and the
widespread availability of its trials do not significantly impact its ability
to enforce its intellectual property rights against infringing users,
including corporate, institutional and government entities. However, there can
be no assurance that a court or other authority may not rule otherwise in the
future. Such a ruling would have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operations.

There has been substantial litigation in the software industry involving
intellectual property rights, although, to date, the Company has not been
subject to any such litigation. Although the Company does not believe that it
is infringing the intellectual property rights of others, there can be no
assurance that such claims, if asserted, would not have a material adverse
effect on the Company's business, condition (financial or otherwise),
prospects and results of operations. In addition, as the Company may acquire
or license a portion of the software included in its future products from
third parties, its exposure to infringement actions may increase because the
Company must rely upon such third parties for information as to the origin and
ownership of any software being acquired. The Company generally obtains
representations as to the origin and ownership of such acquired or licensed
software and generally obtains indemnification to cover any breach of such
representations. However, there can be no assurance that such representations
are accurate or that such indemnification will provide adequate compensation
for a breach of such representations. In the future, litigation may be
necessary to enforce and protect trade secrets and other intellectual property
rights owned by the Company. The Company may also be subject to litigation to
defend against claimed infringement of the rights of others or to determine
the scope and validity of the proprietary rights of others. Any such
litigation could be costly and cause diversion of management's attention,
either of which could have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or
prevent the Company from manufacturing or selling its products, any one of
which could have a material adverse effect on the Company's business,
condition (financial or otherwise), prospects and results of operations.
Furthermore, there can be no assurance that any necessary licenses will be
available on reasonable terms, or at all.

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<PAGE>

OPERATIONS

The Company designs most of its product, marketing and sales materials in-
house. Product and trial orders are fulfilled under contract with outside
fulfillment agencies. First calls for catalog orders are handled by an outside
agency, with difficult calls forwarded to the Company. The balance of other
sales and support calls are handled directly by the Company.

EMPLOYEES

From December 31, 1996 to September 30, 1997, the number of Company
employees decreased from 343 to 245, primarily due to the restructuring
implemented by the Company in the third quarter of 1997. Competition for
qualified management and technical personnel is intense in the software
industry. The Company's continued success will depend in part on its ability
to attract and retain qualified personnel. None of the Company's employees is
represented by a labor union and the Company believes that its employee
relations are good.

PROPERTIES

The Company's headquarters, located in Cambridge, Massachusetts currently
occupies approximately (i) 20,600 square feet under a lease expiring September
30, 1999; (ii) approximately 19,500 square feet under a sublease ("11th Floor
Sublease") also expiring September 30, 1999; and (iii) approximately 7,500
square feet under a sublease expiring January 31, 1998. The 11th Floor
Sublease (subject to landlord and sublandlord consent) will be assigned to
Elron pursuant to the Purchase Agreement. The Company's Raleigh, North
Carolina offices occupy approximately 6,900 square feet under a lease expiring
February 28, 2002. The Company's subsidiary, DaVinci Systems Corporation,
leased approximately 33,100 square feet of space in Morrisville, North
Carolina pursuant to a lease expiring October 31, 1999. This property was
subleased to Northern Telecom Inc. The Company's Marietta, Georgia offices
occupy approximately 3,500 square feet under a lease expiring July 31, 1999.
The Company's international offices are located in the UK, France and
Australia occupying approximately 14,000 square feet, 156 square feet, and 516
square feet, respectively. The lease for the occupancy in the United Kingdom
expires March 31, 2005, whereas the leases in France and Australia expire in
April and May 1997, respectively. The Company's Starnberg, Germany offices
occupy 10,174 square feet pursuant to a lease expiring July 31, 1999. The
Company believes that its existing facilities are adequate for the present and
that additional space will be available as needed.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected financial data derived from the
Consolidated Financial Statements of the Company. The Consolidated Financial
Statements have been audited by Arthur Andersen LLP, independent public
accountants. The data presented for the nine months ended September 30, 1996
and 1997 is derived from unaudited consolidated financial statements and
include, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data for such
periods. The data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and with Management's Discussion
and Analysis of Financial Condition and Results of Operations. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of future results.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Net product revenue... $3,306 $ 7,728 $25,240 $43,381 $ 50,165 $ 36,619 $ 33,648
Other revenue......... 138 177 588 740 1,627 1,153 3,474
------ ------- ------- ------- -------- -------- --------
Total revenue....... 3,444 7,905 25,828 44,121 51,792 37,772 37,122
------ ------- ------- ------- -------- -------- --------
Operating expenses:
Cost of product reve-
nue.................. 143 763 6,716 8,199 11,951 9,713 7,650
Sales and marketing... 2,121 5,009 10,824 20,984 24,176 18,222 18,995
Research and develop-
ment................. 744 2,364 5,277 7,014 9,456 6,775 9,956
General and adminis-
trative.............. 429 1,183 2,319 3,184 4,407 3,190 3,975
Charge for purchased
research and
development.......... -- 1,537 4,700 -- 13,285 13,285 15,898
Charge for restructur-
ing.................. -- -- -- -- 5,415 5,415 4,530
------ ------- ------- ------- -------- -------- --------
Income (loss) from oper-
ations................. 7 (2,951) (4,008) 4,740 (16,898) (18,828) (23,882)
Interest income (ex-
pense), net............ -- (13) (80) 554 1,134 884 234
------ ------- ------- ------- -------- -------- --------
Income (loss) before
provision for taxes.... 7 (2,964) (4,088) 5,294 (15,764) (17,944) (23,648)
Provision for income
taxes.................. (5) -- (11) (1,622) (97) (44) (133)
------ ------- ------- ------- -------- -------- --------
Net income (loss)....... $ 2 $(2,964) $(4,099) $ 3,672 $(15,861) $(17,900) $(23,781)
====== ======= ======= ======= ======== ======== ========
Cash dividend per com-
mon share............ $ 0.13 -- -- -- -- -- --
Pro forma net income
(loss) per share(1).. $ (0.59) $ 0.40 $ (1.46) $ (1.65) $ (1.97)
======= ======= ======== ======== ========
Pro forma weighted
average common and
common equivalent
shares
outstanding(2)....... 6,952 9,087 10,854 10,876 12,092
======= ======= ======== ======== ========
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equiva-
lents................ $ 509 $ 101 $ 2,798 $33,338 $ 20,774 $ 23,004 $ 8,394
Working capital (defi-
cit)................. 578 (1,182) 1,299 35,562 25,347 23,785 10,622
Total assets........ 1,250 3,929 13,168 50,173 44,142 41,291 30,766
Long-term obligations,
less current
portion.............. -- 280 878 1,506 510 754 71
Redeemable convertible
preferred stock...... 1,189 3,205 12,188 -- -- -- --
Total stockholders'
equity (deficit)..... (414) (3,235) (7,840) 40,306 33,493 31,662 18,402
</TABLE>
- --------
(1) Reflects the conversion of all outstanding shares of the Company's
Convertible Preferred Stock into 3,841,632 shares of Common Stock at the
closing of the Company's initial public offering on August 1, 1995.
(2) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.

44
<PAGE>

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

OVERVIEW

The Company develops, markets and supports Groupware, Network Management and
Security, and Client Management software, including client/server tools for
group scheduling, software metering, firewall technology and Client Management
software.

RESULTS OF OPERATIONS

The following table sets forth, for the years indicated, certain financial
data as percentages of the Company's total revenue:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Net product revenue.......... 97.7 % 98.3 % 96.9 % 96.9 % 90.6 %
Other revenue................ 2.3 % 1.7 % 3.1 % 3.1 % 9.4 %
------ ------ ------ -------- --------
Total revenue.............. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
====== ====== ====== ======== ========
Operating expenses:
Cost of product revenue...... 26.0 % 18.6 % 23.1 % 25.7 % 20.6 %
Sales and marketing.......... 41.9 % 47.6 % 46.6 % 48.2 % 51.2 %
Research and development..... 20.4 % 15.9 % 18.3 % 17.9 % 26.8 %
General and administrative... 9.0 % 7.2 % 8.5 % 8.5 % 10.7 %
Charge for purchased R&D..... 18.2 % -- 25.6 % 35.2 % 42.8 %
Charge for restructuring..... -- -- 10.5 % 14.3 % 12.2 %
(loss) income from operations.. (15.5)% 10.7 % (32.6)% (49.8)% (64.3)%
------ ------ ------ -------- --------
(Expense) interest income,
net........................... (0.3)% 1.3 % 2.2 % 2.3 % 0.6 %
------ ------ ------ -------- --------
Net (loss) income before
provision for income taxes.... (15.8)% 12.0 % (30.4)% (47.5)% (63.7)%
------ ------ ------ -------- --------
Provision from income taxes.... -- (3.7)% (0.2)% (0.1)% 0.4 %
------ ------ ------ -------- --------
Net (loss) income.............. (15.8)% 8.3 % (30.6)% (47.4)% (64.1)%
====== ====== ====== ======== ========
</TABLE>

Net Product Revenue. The Company's net product revenue is derived primarily
from the licensing of software products. Net product revenue also includes
revenue from catalog sales of third party products and catalog advertising
space. The Company sells advertising space in its catalog for cash or receives
third party advertised product. Revenue for catalog advertising space for cash
sales is recognized the day the catalog is mailed to customers. Revenue for
third party advertised product received is recognized as each item is sold.
Revenue from catalog advertising sales that was recognized upon sale of third
party products for the years ended December 31, 1994, 1995 and 1996, was $1.3
million, $2.4 million and $2.5 million, respectively, and for the nine months
ended September 30, 1996 and 1997 was $1.7 million and $900,000, respectively.
Net product revenue increased 72.0% from 1994 to 1995, and 15.6% from 1995 to
1996, due primarily to the increase in volume of sales of communications and
new network management software to new customers and to customers upgrading
existing licenses. In addition, net product revenue for the first six months
of 1994 includes the recognition of approximately $1.5 million of product
revenue relating to products shipped in 1993 for which the Company had
significant customer obligations which were satisfied by the shipment of a
final product version in the first quarter of 1994. For the nine months ended
September 30, net product revenue decreased 8.1% from 1996 to 1997. The
decrease was primarily attributable to products de-emphasized as part of the
strategic

45
<PAGE>

reorganization and restructuring of the third quarter of 1996. The Company
anticipates that net product revenue will continue to decrease in absolute
dollars due to the Proposed Transaction.

Other Revenue. The Company's other revenue consists of rentals of portions
of the Company's customer lists, royalties received in connection with
licensing ON's software to third parties and maintenance revenue. Other
revenue increased by 25.9% from 1994 to 1995, and 119.9% from 1995 to 1996.
These increases were primarily due to an increase in revenue generated from
maintenance agreements. For the nine months ended September 30, other revenue
increases 201.3% from 1996 to 1997. This increase is primarily attributed to
an increase in revenue from maintenance contracts for existing customers as
well as those obtained as part of the csd Software GmbH ("csd") acquisition.
The Company anticipates that other revenue may decrease in absolute dollars
due to the Proposed Transaction.

Cost of Product Revenue. Cost of product revenue consists primarily of
expenses associated with product documentation, production and fulfillment
costs, and royalty fees associated with products that are licensed from third
party developers. In addition, cost of product revenue includes the cost of
third party products resold through the Company's catalog, the cost of
producing the catalog and amortization of purchased intangibles. Cost of
product revenue decreased as a percentage of total revenue from 26.0% in 1994
to 18.6% in 1995 as catalog revenue decreased as a percentage of total revenue
in both 1994 and 1995. The four editions of the Editors' Choice catalog
published in 1995 were similar in breadth of product offering to the four
editions published in 1994. The revenue growth of the other product offerings
of the Company significantly outpaced the growth of catalog revenue, as the
catalog had substantially reached its mature revenue level per edition. Cost
of product revenue increased as a percentage of total revenue from 18.6% in
1995 to 23.1% in 1996. This increase was primarily due to a $571,000
elimination of profit for inventory previously sold to Technocom plc, prior to
the Company's acquisition of their LAN software business, a $2.0 million
inventory write down related to the restructuring in the third quarter of
1996, and an increase in product sales from 1995 to 1996. As part of the
Company's 1996 restructuring plan and reorganization of its operations, the
Company has decreased its emphasis on the e-mail business and certain catalog
products and has ceased to market, sell, develop, and support other product
lines. As a result, the product inventory relating to the de-emphasized
products, and discontinued product lines were subsequently identified and
written off, all of which is included in cost of product revenue in the amount
of $2.0 million. The product sales related increase was consistent as a
percentage of total revenue from 1995 to 1996. For the nine months ended
September 30, cost of product revenue decreased (21.2%) from 1996 to 1997.
This decrease was primarily the result of decreased product revenue. As part
of the Company's announced reorganization of its operations, the Company has
ceased to market, sell, develop and support the anti-virus business and
decreased its emphasis on the investment in new customer acquisitions for its
Groupware and Network Management and Security businesses. As a result, the
product inventory related to the ceased product lines and de-emphasized
products were subsequently identified and written-off, all of which is
included in cost of product revenue in the amount of $849,000. The Company
anticipates that cost of product will continue to decrease in absolute dollars
due to the Proposed Transaction.

Sales and Marketing Expense. Sales and marketing expense primarily consists
of compensation paid to sales and marketing personnel, the costs of direct
mail and telemarketing campaigns, and the costs of product trials requested by
potential customers. Sales and marketing expense also includes the costs of
administering the catalog operation, the costs of public relations, trade
shows and conferences, and the telephone and information technology costs
associated with sales activities. Sales and marketing expense increased as a
percentage of total revenue from 41.9% in 1994 (46.1% excluding the impact of
the 1993 deferred revenue) to 47.6% in 1995 due principally to the Company's
investment in its telemarketing organization in North Carolina. Sales and
marketing expense decreased slightly as a percentage of total revenue from
47.6% in 1995 to 46.7% in 1996. This slight decrease is a result of the
restructuring of the company, offset by the additional sales personnel
required to support the growth in the customer base, the costs associated with
the Company's marketing efforts of existing products, the beginning of ON
Technology UK Ltd.'s marketing programs in Europe, and the launch of the
Company's new firewall product, ON Guard. For the nine months ended September
30, sales and marketing expenses increased 4.2% from 1996 to 1997. The
increase in absolute dollars was primarily the result of the csd

46
<PAGE>

acquisition and the costs associated with marketing a larger portfolio of
products. The Company anticipates that sales and marketing expense may
decrease in absolute dollars due to the Proposed Transaction.

Research and Development Expense. Research and development expense includes
costs associated with the development of new products, the enhancement of
existing products, and costs associated with providing technical support.
Research and development expense decreased as a percentage of total revenue
from 20.4% in 1994 to 15.9% in 1995 primarily as a result of increased
licensing of third party network management software products which more than
offset the cost of continued development of incomplete products acquired from
DaVinci in 1994. Research and development expense increased as a percentage of
total revenue from 15.9% in 1995 to 18.3% in 1996. This increase in absolute
dollars was primarily related to the increase in the size of the product
portfolio, the associated costs of product development, enhancements and
maintenance, and the additional costs associated with the Company's
acquisitions of neTrend Corporation and Leprechaun Software International,
Ltd. in the first quarter of 1996. For the nine months ended September 30,
research and development expenses increased by 47.0% from 1996 to 1997. The
increase was primarily related to the increase in the size of the product
portfolio, and the associated costs of product development, enhancements and
maintenance relating to products acquired in the acquisition of csd and
Purview Technologies, Inc. The Company plans to continue to make significant
investments in research and development related to the CCM Business.

General and Administrative Expense. General and administrative expense
includes executive compensation, executive support costs, accounting
operations, planning, and business development operations. General and
administrative expense increased in absolute dollars from $5.3 million in 1994
to $7.0 million in 1995 due to personnel growth and associated costs, and
decreased as a percentage of total revenue from 9.0% in 1994 to 7.2% in 1995.
General and administrative expense increased in absolute dollars from $7.0
million in 1995 to $9.5 million in 1996 and as a percentage of sales from 7.2%
in 1995 to 8.5% in 1996. The increase reflects personnel growth and associated
costs in general support areas including costs associated with the Company's
acquisition of the LAN software business from Technocom plc in the first
quarter of 1996, resulting in the newly formed ON Technology UK Ltd., and the
related expenses of administering that office. For the nine months ended
September 30, general and administrative expenses increased by 24.6% from 1996
to 1997. The increase in absolute dollars reflects personnel growth and
associated costs in general support areas, offset by continued efficiency in
core administrative operations. This increase, however, was approximately the
same as a percentage of total revenue from 1996 to 1997. The growth is a
direct result of the acquisitions of the LAN Software business from Technocom
plc and csd. The percentage of general and administrative expense to total
revenue is expected to increase due to reduced sales resulting from the
Proposed Transaction.

Charge for Purchased Research and Development. In connection with the
acquisition of DaVinci in 1994, the Company allocated $4.7 million of the
purchase price to incomplete research and development projects. In connection
with the acquisitions of neTrend Corporation, Leprechaun Software
International, Ltd. and the LAN Software business from Technocom plc in 1996,
the Company allocated an aggregate of $13.3 million of the respective purchase
prices to incomplete research and development projects. The neTrend technology
was acquired in January 1996 and a limited product based on the acquired
technology was shipped in June 1996. Development continued in the product
throughout 1996 and 1997 and a commercially viable product was shipped in June
1997. The product development investment made by the Company in the neTrend
technology from the date of acquisition through June 1997 was approximately
$1.7 million. The Leprechaun technology was acquired in January 1996 and was
developed until July 1997 when the Company concluded that a commercially
viable product could not be completed and the project was abandoned. Purchased
R&D from the Technocom assets was not material to the operation of the
Company. The investment in product development made by the Company in the
Leprechaun technology from the date of acquisition through July 1997 was
approximately $1.4 million. In connection with the acquisitions of Purview
Technologies, Inc. and csd during the nine months ended September 30, 1997 the
Company allocated an aggregate of $15.9 million of the respective purchase
prices to incomplete research and development projects. The Purview
acquisition was completed in January 1997 and a commercially viable product
was shipped in September 1997. The product development investment in the
Purview technology made by the Company from the date of acquisition through
September 1997 was approximately $.4 million. The

47
<PAGE>

csd acquisition was completed in January 1997 and the acquired company
continued to ship its existing technology. In August 1997, the Company first
shipped the CCM product based on the acquired technology and on Windows NT
Advanced Server. The product development investment made by the Company from
the date of acquisition through August 1997 was approximately $1.5 million.
CCM uses client/server architecture which was incomplete at the time of the
acquisition. CCM development continues and a version of the product with an
open API for network management partners is expected to ship in the Spring of
1998. The additional product development investment required through the
spring of 1998 is estimated to be approximately $3.2 million. These costs were
expensed as of the acquisition dates and the allocations represent the
estimated fair values related to the incomplete projects determined by
appraisals using appropriate assumptions and valuation techniques. The
development of these projects had not yet reached technological feasibility
and the technology had no alternative future use. The technology acquired in
these acquisitions have required substantial additional development by the
Company.

Charge for Restructuring. On August 6, 1996, the Company announced that it
had implemented a reorganization of its operations and a restructuring plan
(the "Plan"). The Plan included write-offs and writedowns of certain assets,
including accruing the costs related to a significant reduction in the
Company's work force, primarily in the technical support and sales and
marketing departments, and the de-emphasis of certain product lines, resulting
in a non-recurring charge of $5.4 million. Included in the Plan was an
inventory writedown of $2.0 million which is included in cost of product
revenue in accordance with Emerging Issues Task Force (EITF) 96-9,
Classification of Inventory Markdowns and Other Costs Associated with a
Restructuring.

On July 29, 1997, the company announced that it had implemented a
reorganization of its operations and a restructuring plan (the "Plan"). The
Plan included write-offs and write-downs of certain assets, including accruing
the costs related to a significant reduction in the workforce, primarily in
the technical support and sales and marketing departments. In addition, the
Company has exited from the anti-virus business and de-emphasized its
investment in new customer acquisitions for the Company's groupware, network
management and security businesses. As a result of the Plan the Company
recorded a charge of $4,530. Included in the Plan was an additional inventory
write-down of $849 which is included in cost of product revenue in accordance
with Emerging Issues Task Force (EITF) 96-9, Classification of Inventory
Markdowns and Other Costs Associated with a restructuring.

In connection with the sale of assets to Elron Software Inc., the Company
expects to record a pre-tax reorganization and restructuring charge totaling
$6.2 million to $6.6 million in the fourth quarter ended December 31, 1997.
The restructuring charge includes reorganization costs related to the Proposed
Transaction; the closing of international sales offices in the United Kingdom,
France and Australia, and the Company's severance costs related to the
reduction of the related workforce.

Income Taxes The provision for income taxes during 1994 consisted of federal
alternative minimum and minimum state taxes. The tax provision for 1995 was
calculated based upon the Company's effective tax rate, giving benefit to
available net operating loss and credit carryforwards. In the year ended
December 31, 1996, the Company incurred a significant operating loss. However,
included in the book charges were amounts not currently deductible for income
taxes. The 1996 tax provision includes the amount currently payable with an
offsetting deferred tax benefit to record a portion of the Company's deferred
tax asset. The tax provision for the nine months ended September 30, 1997
represents a tax provision on income in Germany with no provision or benefit
required in the Company's remaining foreign or domestic operating results.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through cash flow
from operations and private and public placements of capital stock. At
December 31, 1994, 1995, 1996 and September 30, 1997 the Company had available
cash and cash equivalents of $2.8 million, $33.3 million, $20.8 million and
$8.4 million, respectively, and working capital of $35.6 million, $25.3
million, and $10.6 million, respectively. On April 1, 1996, the Company
acquired a new line of credit with a commercial bank for $10.0 million that
allows the Company to borrow up to the lesser of $10.0 million or the sum of
80% of qualified domestic accounts receivable and 40% of qualified foreign
accounts receivable. Borrowings bear interest at the bank's prime rate. The
line expires April 1, 1998. Advances pursuant to the line of credit are
secured by liens granted on the Company's

48
<PAGE>

accounts receivables. At December 31, 1994, 1995 and 1996 and September 30,
1997, the Company did not have an outstanding balance under the line of credit
agreement.

Net cash provided by (used in) operating activities for the years ended
December 31, 1994, 1995 and 1996 and nine months ended September 30, 1997 was
$1.2 million, $(265) thousand, $(656) thousand and $(3,208) thousand,
respectively. In 1994, net cash provided by operating activities consisted of
a $4.1 million net loss which was the result of a $4.7 million charge for
incomplete research and development relating to the acquisition of DaVinci, a
$2.4 million increase in accounts receivable, a $712 thousand increase in
direct marketing costs and a $1.4 million decrease in deferred revenue offset
by an increase of $1.9 million in accounts payable, $1.4 million in accrued
expenses and $1.2 million in the reserve for distributor inventory. The
increase in the reserve for distributor inventory represents the Company's
estimate of product paid for by distributors that will be returned. In 1995,
net cash used in operating activities consisted of approximately $3.7 million
of net income from operations, a $311 thousand decrease in accrued expenses, a
$91 thousand decrease in accounts payable, a $2.0 million increase in accounts
receivable, a $279 thousand decrease in reserve for distributor inventory, and
a $2.0 million increase in inventories. The increase in inventories was due
primarily to new product introductions, increased stocking levels as a result
of increased revenue and related unit shipments, and procedures put in place
by the Company during 1995 to help ensure more complete availability of
product in stock. In 1996, net cash used in operating activities consisted of
approximately $15.9 million net loss from operations which was the result of a
$13.3 million charge for incomplete research and development relating to the
acquisitions of Leprechaun Software International, Ltd., neTrend Corporation
and the LAN software business from Technocom, plc, a $3.0 million charge for
restructuring, depreciation and amortization of $3.2 million, offset by an
increase in accounts receivable of $3.2 million and increase in prepaid assets
of $1.4 million. For the nine months ended September 30, 1997, net cash used
in operating activities consisted primarily of a net loss of ($23.8 million)
offset by a charge for purchased research and development of $15.9 million.
Additional factors contributing to net cash used in operating activities
included depreciation and amortization of $3.4 million, and a asset write-down
related to restructure charge of $1.3 million. These changes primarily are the
result of the acquisitions of Purview Technologies, Inc., and csd.

Net cash used in investing activities for the years ended December 31, 1994,
1995 and 1996 and September 30, 1997 was $6.1 million, $611 thousand, $9.5
million and $8.4 million, respectively. This primarily reflects purchases of
property and equipment of $374 thousand, $1.2 million, $4.5 million and $1.5
million, respectively. Direct costs in 1994 relate to the acquisition of
DaVinci for $5.0 million. Direct costs in 1996 relate to the acquisition of
Leprechaun Software International, Ltd., neTrend Corporation, and the LAN
software business from Technocom plc of $628 thousand, $2.2 million, and $2.0
million, respectively. For the nine months ended September 30, 1997, net cash
used in investing activities primarily reflects purchases of property and
equipment of $1.6 million, and direct costs of the acquisitions of Purview
Technologies, Inc. and csd of $1.2 million and $5.8 million, respectively.
While the Company expects capital expenditures to decrease in absolute
dollars, there are currently no plans to change the Company's current pattern
of investment in property and development on either a long or short term
basis.

Net cash (used in) provided by financing activities for the years ended
December 31, 1994, 1995 and 1996 and September 30, 1997 was $7.6 million,
$31.4 million, ($2.6) million and ($763) thousand, respectively. In 1994, this
was the result of multiple private placements of capital stock of $8.5
million, borrowings under the line of credit of $562 thousand, payments under
the line of credit of $1.2 million and principal repayments on obligations of
capital leases of $280 thousand. In 1995, this was a result of principal
repayments on obligations of capital leases of $869 thousand, and $31.6
million in net proceeds from the issuance of common stock from the initial
public offering in August 1995. In 1996, this was a result of principal
repayments on obligations of capital leases of $1.2 million and the purchase
of treasury stock of $1.6 million. For the nine months ended September 30,
1997, net cash used in financing activities consisted of principal repayment
on obligations under capital lease of $818 thousand and the creation of
deferred compensation of $347 thousand, partially offset by exercises of stock
options and stock purchases through the ESPP of $38 thousand.

49
<PAGE>

The Company has estimated that the product development, marketing and sales
costs of the CCM products are approximately $1.0 to $1.5 million per month.
The Company believes that its existing cash balances, funds generated from
operations and borrowings under its line of credit will be sufficient to fund
these costs through March 1998, whether or not the Proposed Transaction is
consummated. If the Proposed Transaction is consummated, the Company believes
that it will have sufficient financial resources to fund these costs through
at least December 1998. If the Proposed Transaction is not consummated, the
Company will have to seek additional sources of capital to fund CCM product
costs beyond March 1998. There can be no assurance that the Company's estimate
of the marketing, sales and product development costs of the CCM products will
prove correct, that such costs will not increase beyond the Company's
available financial resources, or that additional sources of capital, if and
when needed, will be sufficient or available.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

There have been no changes in or disagreements with the Company's
accountants on accounting or financial disclosure.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not hold any market risk sensitive instruments.

TRANSACTION OF OTHER BUSINESS

The Board of Directors of the Company is not aware of any matters that may
be presented at the Special Meeting other than those mentioned in the
Company's Notice of Special Meeting preceding this Proxy Statement and a part
hereof. If, however, other matters do properly come before the Special
Meeting, it is intended that the persons named in the proxy will vote,
pursuant to their discretionary authority and according to their best
judgments in the best interests of the Company.

INDEPENDENT PUBLIC ACCOUNTANTS

A representative of Arthur Andersen LLP, the Company's independent public
accountants, will be present at the Special Meeting, afforded the opportunity
to make a statement and available to respond to questions.

50
<PAGE>

STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING

Any stockholder of the Company who wishes to present a proposal at the 1998
Annual Meeting of Stockholders of the Company and who wishes to have such
proposal included in the Company's proxy statement for that meeting, must have
delivered a copy of such proposal to ON Technology Corporation at One
Cambridge Center, Cambridge, MA 02142, Attention: Corporate Secretary, no
later than December 31, 1997; provided, however, that if the 1998 Annual
Meeting of Stockholders is held on a date more than 30 days before or after
the corresponding date of the 1997 Annual Meeting of Stockholders, any
Stockholder who wishes to have a proposal included in the Company's proxy
statement for that meeting must deliver a copy of the proposal to the Company
a reasonable time before the proxy solicitation is made. The Company reserves
the right to decline to include in the Company's proxy statement any
stockholders proposal which does not comply with the rules of the Commission
for inclusion therein.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, New York,
New York, 10048. Copies of such material can also be obtained at prescribed
rates by addressing written requests for such copies to the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
In addition, the Company is required to file electronic versions of such
material with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system. The Commission maintains a
World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Electronic filings are publicly available on the Commission's
World Wide Web site within 24 hours of acceptance. The address of such site is
http://www.sec.gov.

This Proxy Statement summarizes or otherwise refers to documents which are
not delivered herewith. Such documents are available on request, without
charge, directed to ON Technology Corporation, One Cambridge Center,
Cambridge, MA 02142, Attention: Investor Relations. In order to ensure timely
delivery of the documents, any requests should be made by January 20, 1998.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 1.

51
<PAGE>

OTHER MATTERS

The Board of Directors is not aware of any matter to be presented for action
at the Meeting, other than the matters set forth herein. Should any other
matter requiring a vote of stockholders arise, the proxies in the enclosed form
of proxy confer upon the person or persons entitled to vote the shares
represented by such proxies discretionary authority to vote the same in
accordance with the best judgment.

By Order of the Board of Directors

/s/ John M. Bogdan
John M. Bogdan
Secretary

January 12, 1998

52
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Independent Public Accountants.......................... F-2
Consolidated Balance Sheets:
December 31, 1995 and 1996 and 1996 and Nine Months Ended Sep-
tember 30, 1997................................................ F-3
Consolidated Statements of Operations:
Years ended December 31, 1994, 1995 and 1996 and Nine Months
Ended September 30, 1996 and 1997.............................. F-4
Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit):
Years ended December 31, 1994, 1995 and 1996 and Nine Months
Ended September 30, 1997....................................... F-5
Consolidated Statements of Cash Flows:
Years ended December 31, 1994, 1995 and 1996 and Nine Months
ended September 30, 1996 and 1997.............................. F-6
Notes to the Consolidated Financial Statements.................... F-10
Report of Independent Public Accountants as to Schedule II........ F-25
Consolidated Financial Statement Schedules........................
Schedule II--Valuation and Qualifying Accounts Years ended Decem-
ber 31, 1996, 1995 and 1994...................................... F-26
Computation of Pro Forma Net (Loss) Income Per Share.............. F-27
</TABLE>

Other Schedules are omitted because the conditions required for filing do not
exist or the required information is included in the financial statements or
notes thereto.

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ON Technology Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of ON
Technology Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1996, and 1995, and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 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 mistatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ON Technology Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Boston, Massachusetts
January 21, 1997
(except for the matters discussed in Note 4(a) and
4(b) as to which the dates are January 24, 1997
and January 28, 1997, respectively)

F-2
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $33,338 $ 20,774 $ 8,394
Accounts receivable, net of allowance of $605,
$1,191 and $2,062 respectively............... 6,377 9,852 9,512
Inventories................................... 2,834 2,323 1,409
Prepaid expenses and other current assets..... 1,374 2,537 3,600
------- -------- --------
Total current assets........................ 43,923 35,486 22,915
------- -------- --------
Property and equipment, at cost:
Computers and equipment....................... 2,173 6,226 8,063
Equipment under capital leases................ 3,804 3,895 3,895
Furniture and fixtures........................ 133 247 275
------- -------- --------
Less-accumulated depreciation and
amortization................................. 2,069 4,527 7,079
------- -------- --------
4,041 5,841 5,154
------- -------- --------
Direct Marketing Costs........................ 1,554 1,067 81
Other assets and deposits..................... 127 86 71
Purchased intangibles, net of $993, $1,261 and
$2,074 of accumulated amortization,
respectively................................. 528 1,662 2,545
------- -------- --------
$50,173 $ 44,142 $ 30,766
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.. $ 1,143 $ 1,063 $ 684
Accounts payable.............................. 3,392 5,619 6,250
Accrued expenses.............................. 2,265 2,252 3,679
Reserve for distributor inventories........... 934 204 100
Deferred revenue.............................. 627 1,001 1,580
------- -------- --------
Total current liabilities................... 8,361 10,139 12,293
------- -------- --------
Capital lease obligations, net of current
portion...................................... 1,506 510 71
------- -------- --------
Stockholders' Equity:
Common stock, $0.01 par value--Authorized
20,000,000 Issued and outstanding--10,180,024
shares, 11,008,243 shares, and 12,281,502
respectively................................. 102 110 123
Additional paid-in capital.................... 45,051 55,637 63,037
Deferred compensation......................... -- -- (347)
Accumulated deficit........................... (4,493) (20,354) (44,135)
Accumulated deficit of S corporation.......... (354) (354) (354)
Cumulative translation adjustment............. -- 88 125
Treasury stock (no shares, 257,867 and 15,000
shares respectively, at cost)................ -- (1,634) (47)
------- -------- --------
Total stockholders' equity.................. 40,306 33,493 18,402
------- -------- --------
$50,173 $ 44,142 $ 30,766
======= ======== ========
</TABLE>

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

F-3
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Net product revenue..... $ 25,240 $ 43,381 $ 50,165 $ 36,619 $ 33,648
Other revenue........... 588 740 1,627 1,153 3,474
--------- --------- ---------- ---------- ----------
Total revenue......... 25,828 44,121 51,792 37,772 37,122
--------- --------- ---------- ---------- ----------
Operating expenses:
Cost of product
revenue................ 6,716 8,199 11,951 9,713 7,650
Sales and marketing..... 10,824 20,984 24,176 18,222 18,995
Research and
development............ 5,277 7,014 9,456 6,775 9,956
General and
administrative......... 2,319 3,184 4,407 3,190 3,975
Charge for purchased
incomplete research and
development............ 4,700 -- 13,285 13,285 15,898
Charge for restructure.. -- -- 5,415 5,415 4,530
--------- --------- ---------- ---------- ----------
(Loss) income from
operations........... (4,008) 4,740 (16,898) (18,828) (23,882)
Interest expense........ (97) (288) (250)
Interest income......... 17 842 1,384 884 234
--------- --------- ---------- ---------- ----------
(Loss) income before
provision for income
taxes................ (4,088) 5,294 (15,764) (17,944) (23,648)
Provision for income
taxes.................. (11) (1,622) (97) (44) (133)
--------- --------- ---------- ---------- ----------
Net (loss) income..... $ (4,099) $ 3,672 $ (15,861) $ (17,900) $ (23,781)
========= ========= ========== ========== ==========
Net loss per common
share in 1996 and 1997
and Pro forma net
(loss) income per
common and common
equivalent share in
1995 and 1994.......... $ (0.59) $ 0.40 $ (1.46) $ (1.65) $ (1.97)
========= ========= ========== ========== ==========
Weighted average number
of common and common
equivalent shares
outstanding............ 6,951,836 9,086,764 10,853,814 10,875,798 12,091,960
========= ========= ========== ========== ==========
</TABLE>

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

F-4
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY(DEFICIT)
(IN THOUSANDS)

<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------
SERIES A SERIES B SERIES C
------------- -------------- ---------------
NUMBER $.01 NUMBER $.01 NUMBER $.01
OF PAR OF PAR OF PAR
SHARES VALUE SHARES VALUE SHARES VALUE TOTAL
------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1993............ 231 $1,275 1,166 $1,930 -- $ -- $ 3,205
Sale of Series C
redeemable
convertible
preferred stock,
net of issuance
costs of $25.... -- -- -- -- 14,921 8,500 6,500
Exercise of
common stock
options......... -- -- -- -- -- -- --
Retirement of
common stock.... -- -- -- -- -- -- --
Accretion of
preferred stock
dividends....... -- 86 -- -- -- 397 483
Net loss........ -- -- -- -- -- -- --
---- ------ ------ ------ ------- ------ -------
Balance,
December 31,
1994............ 231 1,361 1,166 1,930 14,921 8,897 12,188
Exercise of
common stock
options......... -- -- -- -- -- -- --
Accretion of
preferred stock
dividends....... -- 50 -- -- -- 397 447
Sale of common
stock, net of
issuance costs
of $1,275....... -- -- -- -- -- -- --
Conversion of
preferred
stock........... (231) (1,411) (1,166) (1,930) (14,921) (9,294) (12,635)
Tax benefit from
nonqualified
stock options... -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- --
---- ------ ------ ------ ------- ------ -------
Balance,
December 31,
1995............ -- -- -- -- -- -- --
Issuance of
common stock in
connection with
acquisitions.... -- -- -- -- -- -- --
Sale of common
stock under the
Employee Stock
Purchase Plan... -- -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- -- -- --
Purchase of
treasury stock..
Cumulative
translation
adjustment...... -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- --
---- ------ ------ ------ ------- ------ -------
Balance,
December 31,
1996............ -- $ -- -- $ -- -- $ -- $ --
Issuance of
common stock in
connection with
acquisitions.... -- -- -- -- -- -- --
Sale of common
stock under the
Employee Stock
Purchase Plan... -- -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- -- -- --
Deferred
compensation
related to
grants of common
stock options...
Amort of
deferred
compensation
related to
grants of common
stock options...
Issuance
(Purchase) of
treasury stock..
Cumulative
translation
adjustment...... -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- --
---- ------ ------ ------ ------- ------ -------
Balance,
September 30,
1997
(unaudited)..... -- $ -- -- $ -- -- $ -- $ --
==== ====== ====== ====== ======= ====== =======
<CAPTION>
STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK
------------- ---------------
NUMBER $.01 ADDITIONAL ACCUMULATED CUMULATIVE NUMBER
OF PAR PAID IN DEFERRED ACCUMULATED DEFICIT OF TRANSLATION OF
SHARES VALUE CAPITAL COMPENSATION DEFICIT S CORPORATION ADJUSTMENT SHARES COST TOTAL
------- ----- ---------- ------------ ----------- ------------- ----------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1993............ 3,161 $31 $225 $ $ (3,136) (354) $ $ $ 3,234
Sale of Series C
redeemable
convertible
preferred stock,
net of issuance
costs of $25.... -- -- (25) -- -- (25)
Exercise of
common stock
options......... 377 4 (2) -- -- 2
Retirement of
common stock.... (5) -- -- -- -- --
Accretion of
preferred stock
dividends....... -- -- -- (483) -- (483)
Net loss........ -- -- -- (4,099) -- (4,099)
------- ----- ---------- ------------ ----------- ------------- ----------- ------ -------- --------
Balance,
December 31,
1994............ 3,533 35 198 -- (7,718) (354) -- -- -- (7,839)
Exercise of
common stock
options......... 445 4 148 -- -- 152
Accretion of
preferred stock
dividends....... -- -- -- (447) -- (447)
Sale of common
stock, net of
issuance costs
of $1,275....... 2,360 24 31,623 -- -- 31,647
Conversion of
preferred
stock........... 3,842 39 12,596 -- -- 12,635
Tax benefit from
nonqualified
stock options... -- -- 488 -- -- 488
Net income...... -- -- -- 3,672 -- 3,672
------- ----- ---------- ------------ ----------- ------------- ----------- ------ -------- --------
Balance,
December 31,
1995............ 10,180 102 45,051 -- (4,493) (354) 40,306
Issuance of
common stock in
connection with
acquisitions.... 727 7 10,351 -- -- 10,358
Sale of common
stock under the
Employee Stock
Purchase Plan... 9 -- 93 -- -- 93
Exercise of
common stock
options......... 92 1 142 -- -- 143
Purchase of
treasury stock.. (258) (1,634) (1,634)
Cumulative
translation
adjustment...... -- -- -- -- -- 88 88
Net loss........ -- -- -- (15,861) -- (15,661)
------- ----- ---------- ------------ ----------- ------------- ----------- ------ -------- --------
Balance,
December 31,
1996............ 11,008 $110 $55,637 $ -- $(20,354) $(354) $ 88 (258) $(1,634) $33,493
Issuance of
common stock in
connection with
acquisitions.... 1,213 13 6,886 -- -- 258 1,634 8,533
Sale of common
stock under the
Employee Stock
Purchase Plan... 23 73 -- -- 73
Exercise of
common stock
options......... 38 -- 25 -- -- 25
Deferred
compensation
related to
grants of common
stock options... 416 (416) --
Amort of
deferred
compensation
related to
grants of common
stock options... 69 69
Issuance
(Purchase) of
treasury stock.. -- (15) (47) (47)
Cumulative
translation
adjustment...... -- -- -- -- -- 37 37
Net income...... -- -- -- (23,781) -- (23,781)
------- ----- ---------- ------------ ----------- ------------- ----------- ------ -------- --------
Balance,
September 30,
1997
(unaudited)..... 12,282 $123 $63,007 $(347) $(44,135) $(354) $125 (15) $ (47) $18,402
======= ===== ========== ============ =========== ============= =========== ====== ======== ========
</TABLE>

F-5
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Ac-
tivities
Net (loss) income............ $(4,099) $3,672 $(15,861) $(17,900) $(23,781)
Adjustments to reconcile net
(loss) income to net cash pro-
vided by (used in) operating
activities
Charge for purchased incom-
plete research
and development............. 4,700 -- 13,285 13,285 15,898
Asset write-down related to
restructure charge.......... -- -- 3,048 2,829 1,328
Amortization of deferred com-
pensation................... -- -- -- -- 69
Depreciation and amortiza-
tion........................ 837 1,880 3,217 2,489 3,438
Retirements of property and
equipment................... 48 -- -- -- --
Change in direct marketing
costs....................... (712) (842) (1,074) (970) (50)
Change in net deferred income
taxes....................... -- -- (481) -- 1,062
Changes in assets and liabil-
ities, net
of acquisitions:
Accounts receivable......... (2,382) (1,953) (3,211) (482) 1,363
Inventories................. (94) (2,030) 524 1,279 959
Prepaid expenses and other
current assets............. (160) (785) (1,440) (582) (912)
Accounts payable............ 1,859 (91) 1,823 72 197
Accrued expenses............ 1,387 (311) (11) (470) (2,052)
Reserve for distributor in-
ventories.................. 1,213 (279) (730) (534) (104)
Reserve for restructure..... -- -- -- 904 2,069
Deferred revenue............ (1,427) 474 255 64 (2,692)
------- ------ -------- -------- --------
Net cash provided by (used
in) operating
activities................ 1,170 (265) (656) (16) (3,208)
------- ------ -------- -------- --------
Cash flows from Investing Ac-
tivities:
Escrow receivable............ (625) 625 -- -- --
Change in other assets and
deposits.................... (92) 4 (27) 30 15
Purchase of property and
equipment, net.............. (374) (1,240) (4,476) (3,660) (1,549)
Purchase of Leprechaun Soft-
ware International, Ltd.,
net of cash acquired........ -- -- (628) (786) --
Purchase of DaVinci Systems
Corporation, net of cash ac-
quired...................... (4,976) -- -- -- --
Purchase of neTrend Corpora-
tion, net................... -- -- (2,260) (2,260) --
Purchase of Technocom plc,
net......................... -- -- (1,963) (1,963) --
Purchase of Purview Technolo-
gies, Inc., net of cash ac-
quired...................... -- -- -- -- (1,121)
Purchase of csd Software
GmbH, net of
cash acquired............... -- -- -- -- (5,791)
------- ------ -------- -------- --------
Net cash used in investing
activities................ (6,067) (611) (9,354) (8,639) (8,446)
------- ------ -------- -------- --------
</TABLE>

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

F-6
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Financing Ac-
tivities
Proceeds from sales of
redeemable convertible
preferred stock............ 8,475 -- -- -- --
Exercise of stock options... 2 152 143 138 29
Sale of stock under the
employee stock purchase
plan....................... -- -- 93 93 73
Tax benefit from stock
options.................... -- 486 -- -- --
Purchase of treasury stock.. -- -- (1,634) (1,030) (47)
Principle repayments on
obligations under capital
lease...................... (280) (869) (1,168) (882) (818)
Borrowings under line of
credit and demand note
payable.................... 562 -- -- -- --
Repayments on line of credit
and demand note payable.... (1,165) -- -- -- --
Net proceeds from sale of
common stock............... -- 31,647 -- -- --
------- -------- -------- -------- --------
Net cash provided by (used
in) financing
activities............... 7,594 31,416 (2,566) (1,681) (763)
------- -------- -------- -------- --------
Effect of exchange rates on
cash & cash equivalents...... -- -- 12 2 37
Net increase (decrease) in
cash and cash equivalents.... 2,697 30,540 (12,564) (10,334) (12,380)
Cash and cash equivalents, be-
ginning of period............ 101 2,798 33,338 33,338 20,774
------- -------- -------- -------- --------
Cash and cash equivalents, end
of period.................... $ 2,798 $ 33,338 $ 20,774 23,004 8,394
======= ======== ======== ======== ========
Supplemental Disclosure of
Cash Flow Information
Cash paid for--
Interest paid.............. $ 94 $ 271 $ 205 $ 179 $ 131
======= ======== ======== ======== ========
Income taxes paid.......... $ -- $ 657 $ 1,302 $ 1,270 $ 487
======= ======== ======== ======== ========
Supplemental Disclosure of
Noncash Investing and
Financing Activities
Accretion of preferred stock
dividends.................... $ 483 $ 447 $ -- $ -- $ --
======= ======== ======== ======== ========
Conversion of preferred stock
into common stock............ $ -- $ 12,635 $ -- $ -- $ --
======= ======== ======== ======== ========
Acquisition of equipment under
capital leases............... $ 1,233 $ 2,124 $ 91 $ 91 $ --
======= ======== ======== ======== ========
Cashless exercises of stock
option....................... $ 22 $ -- $ -- $ -- $ --
======= ======== ======== ======== ========
</TABLE>

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

F-7
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------
1994 1995 1996 1996 1997
------- ----- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Acquisition of DaVinci Systems
Corporation
Fair value of assets acquired.. $ 6,655 $ -- $ -- $ -- $ --
Liabilities assumed............ (1,479) -- -- -- --
Cash acquired.................. (200) -- -- -- --
------- ----- -------- ---------- -------
Cash paid for acquisition and
direct costs net of cash
acquired...................... $ 4,976 $ -- $ -- $ -- $ --
======= ===== ======== ========== =======
Acquisition of Leprechaun Soft-
ware International, Ltd.
Fair value of assets acquired.. $ -- $ -- $ 1,158 $ 1,158 $ --
Fair value of stock issued..... -- -- (158) (158) --
Liabilities assumed............ -- -- (370) (370) --
Cash acquired.................. -- -- (2) (2) --
------- ----- -------- ---------- -------
Cash paid for acquisition and
direct costs net of cash
acquired...................... $ -- $ -- $ 628 $ 628 $ --
======= ===== ======== ========== =======
Acquisition of intangible assets
from neTrend Corporation and
Vimal Vaidya
Fair value of assets acquired.. $ -- $ -- $ 12,460 $ 12,460 $ --
Fair value of stock issued..... -- -- (10,200) (10,200) --
------- ----- -------- ---------- -------
Cash paid for acquisition and
direct costs.................. $ -- $ -- $ 2,260 $ 2,260 $ --
======= ===== ======== ========== =======
Acquisition of Technocom plc.
Fair value of assets acquired.. $ -- $ -- $ 1,963 $ 1,963 $ --
------- ----- -------- ---------- -------
Cash paid for acquisition and
direct costs.................. $ -- $ -- $ 1,963 $ 1,963 $ --
======= ===== ======== ========== =======
</TABLE>

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

F-8
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -----------------
1994 1995 1996 1996 1997
----- ----- ----- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Acquisition of Purview Technologies Inc.
Fair value of assets acquired........... $ -- $ -- $ -- $ -- $ 2,379
Fair value of stock issued.............. -- -- -- -- (1,139)
Liabilities assumed..................... -- -- -- -- (107)
Cash acquired........................... -- -- -- -- (12)
----- ----- ----- ------- ---------
Cash paid for acquisition and direct
costs net of cash acquired............. $ -- $ -- $ -- $ -- $ 1,121
===== ===== ===== ======= =========
Acquisition of csd Software GmbH
Fair value of assets acquired........... $ -- $ -- $ -- $ -- $ 18,312
Fair value of stock issued.............. -- -- -- -- (7,395)
Liabilities assumed..................... -- -- -- -- (5,100)
Cash acquired........................... -- -- -- -- (26)
----- ----- ----- ------- ---------
Cash paid for acquisition and direct
costs net of cash acquired............. $ -- $ -- $ -- $ -- $ 5,791
===== ===== ===== ======= =========
</TABLE>

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

F-9
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

ON Technology Corporation and its Subsidiaries (the "Company") are engaged
in the development, marketing, sales support, and distribution of software for
local area networks.

In 1994, the Company acquired all of the outstanding stock of DaVinci
Systems Corporation (DaVinci), a company engaged in the development and
marketing of software. This transaction was accounted for as a purchase in
accordance with Accounting Principles Board (APB) No. 16 (see Note 2).

During 1996, the Company completed three acquisitions. The Company acquired
all of the assets and assumed certain liabilities of Leprechaun Software
International, Ltd., certain technology of neTrend Corporation and certain
intangible assets of Technocom plc. These acquisitions were accounted for as
the purchase of business combinations in accordance with APB No. 16 (see Note
3).

In 1997, the Company acquired all of the stock of csd Software GmbH , a
German developer and marketer of PC Desktop Software Management Tools, and
acquired the stock of Purview Technologies, Inc., a development stage company
engaged in Internet usage monitoring software development. These acquisitions
will be accounted for as a purchase in accordance with APB No. 16 (see Note
4).

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the notes to the consolidated financial statements.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Interim Financial Statements

The accompanying consolidated financial statements for the nine month
periods ended September 30, 1996 and September 30, 1997 are unaudited, but in
the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted, although the Company
believes that the disclosures included adequate to make the information
presented not misleading. Results for the nine months ended September 30, 1997
are not necessary indicative of the results that may be expected for the year
ending December 31, 1997.

Management Estimates

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

Revenue Recognition

Revenue from software product sales is recognized upon shipment of the
product to customers where the Company has no significant vendor obligations.
The Company sells advertising space in its catalog for cash or

F-10
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

receives third party advertising product. Revenue for catalog advertising
space for cash is recognized the day the catalog is mailed to customers.
Revenue for third party advertised product received is recognized as each item
is sold. The deferred revenue balance at September 30, 1997, December 31,
1996, 1995 and 1994 relates primarily to revenue on software maintenance
contracts, which is recognized ratably as it is earned. The reserve for
distributor inventories balance at September 30, 1997, December 31, 1996, 1995
and 1994 relates to sales to distributors for which the Company has accrued
its estimate of future distributor returns when the product was shipped. In
addition, the Company accrues the costs associated with providing telephone
support related to certain products.

Cash and Cash Equivalents

The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company has classified its cash equivalents as held-to-
maturity and recorded them at amortized cost, which approximates market value.
The Company considers all highly liquid cash investments with maturates of
three months or less at the date of acquisition to be cash equivalents. Cash
equivalents consisted of commercial paper and money market funds at September
30, 1997, December 31, 1996 and 1995.

Fair Value of Financial Instruments

SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires
disclosure of an estimate of the fair value of certain financial instruments.
The Company's financial instruments consist of cash equivalents, accounts
receivable and capital leases. The estimated fair value of these financial
instruments approximates their carrying value at September 30, 1997, and as of
December 31, 1996 and 1995. The estimated fair values have been determined
through information obtained from market sources and management estimates.

Direct Marketing Costs

The Company sells its products through various channels, including free
trial marketing. The Company incurs substantial costs in advance of a free
trial campaign, including the rental of mailing lists, postage and printing.
The Company capitalizes such costs in accordance with the American Institute
of Certified Public Accountants' (AICPA) Statement of Position 93-7, Reporting
on Advertising Costs. The Company amortizes such costs over a three-month
period, which approximates the period of expected revenues. The Company has
recorded $1,067 and $1,554 of net capitalized direct marketing costs in the
accompanying consolidated balance sheets at December 31, 1996 and 1995,
respectively. The Company recorded $7,387, $7,291 and $3,032 of direct
marketing expense for the years ended December 31, 1996, 1995 and 1994,
respectively.

Inventories

The Company values inventories at the lower of cost (first-in, first-out) or
market. Inventories consist principally of computer software disks, computer
hardware, packaging costs and other related purchased computer peripheral
items. The components of inventories are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1997 1996 1995
------------- ------- -------
<S> <C> <C> <C>
Raw Materials................................ $ 674 $ 637 $ 444
Finished Goods............................... 735 1,686 2,390
------- ------- -------
$ 1,409 $ 2,323 $ 2,834
======= ======= =======
</TABLE>

F-11
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Depreciation

The Company provides for depreciation by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful
lives, using the straight-line method, as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
Computers and equipment........................................ 3-7 Years
Equipment acquired under capital leases........................ Life of lease
Furniture and fixtures......................................... 5-7 Years
</TABLE>

The Company accounts for its long-term assets in accordance with SFAS No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of. Under SFAS No. 121, the Company is required to
assess the valuation of its long-lived assets, including cost in excess of net
assets acquired, based on the estimated future cash flows to be generated by
such assets. At each balance sheet date, the Company evaluated the
realizability of goodwill based on profitability expectations, using the
undiscounted cash flow method, for each subsidiary having a material goodwill
balance. Based on it's most recent analysis, the Company believes that no
impairment of goodwill exists at December 31, 1996.

Software Development Costs

Costs incurred in the development of computer software to be sold have been
expensed as research and development costs in the accompanying consolidated
statements of operations, in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed. SFAS No.
86 requires that costs incurred in creating a computer software product be
charged to research and development expense until technological feasibility
has been established for the product. The costs incurred subsequent to the
attainment of technological feasibility in 1994, 1995, and 1996 are
insignificant. The Company has recorded charges for purchased incomplete
research and development related to the acquisitions discussed in Notes 2, 3
and 4. In each case, the Company determined that technological feasibility of
the in-process purchased technology acquired had not been established and that
the technology had no alternative future use.

Foreign Currency Translation

The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at fiscal year-end in accordance
with SFAS No. 52, Foreign Currency Translation. Revenues and expenses are
translated using exchange rates in effect during each period. The cumulative
translation adjustment component of stockholders' equity relates primarily to
the Company's European operation which was established in 1996.

Postretirement Benefits

The Company has no obligations for postretirement benefits.

Concentration of Credit Risk

SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-balance-sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company's

F-12
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

financial instruments that subject the Company to credit risk consist of cash
and cash equivalents and accounts receivable. The Company maintains the
majority of cash balances with four financial institutions. The Company's
accounts receivable credit risk is not concentrated within any geographic
area, and no single customer accounts for greater than 10% of revenues or
represents a significant credit risk to the Company.

Net (Loss) Income per Common and Common Equivalent Share

For the nine months ended September 30, 1997 and 1996, and the year ended
December 31, 1996, net loss per common share was based on the weighted average
number of common shares outstanding during the period. Pro forma net (loss)
income per common equivalent shares for the years ended December 31, 1995 and
1994 was computed using the pro forma weighted average number of common shares
assuming that all series of redeemable convertible preferred stock had been
converted to common stock as of the original issuance dates. Other shares of
stock issuable pursuant to stock options have been included when their effect
is dilutive, in accordance with the treasury stock method.

Export Revenue

Export revenue as a percentage of total revenue for the nine months ended
September 30, 1997 and years ended December 31, 1996, 1995 and 1994 was 35%,
17%, 14% and 10%, respectively.

New Accounting Standards

In February 1997, the Financial Standards Board (FASB) issued SFAS No. 128,
Earnings Per Share which is effective for the fiscal year ending December 31,
1997 and early adoption is not permitted. The Company does not expect the
adoption of these standards to have a material effect on its financial
position or results of operations.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.

In July 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable segment of an enterprise. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. Unless impracticable,
companies would be required to restate prior period information upon adoption

(2) ACQUISITION OF DAVINCI

On June 1, 1994, the Company acquired all of the outstanding stock of
DaVinci. As consideration, the Company paid $3,532 to DaVinci's shareholders,
assumed $1,479 of liabilities and paid off $900 of DaVinci's notes payable to
certain investors. This transaction was accounted for as a purchase, and
accordingly, the results of DaVinci since June 1, 1994, are included in the
accompanying consolidated statements of operations. The aggregate purchase
price of $6,655 (which consisted of $4,432 in cash, including $900 paid to
certain investors who held notes payable, $1,479 of assumed liabilities, and
$744 of direct acquisitions costs) was allocated based on the fair value of
the tangible and intangible assets as follows:

F-13
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(2) ACQUISITION OF DAVINCI--(CONTINUED)

<TABLE>
<S> <C>
Current assets....................................................... $1,014
Property and equipment............................................... 153
Purchased intangible assets, including acquired technology........... 788
Purchased incomplete research and development........................ 4,700
------
$6,655
======
</TABLE>

Included in purchased intangible assets are amounts related to trade names,
customer lists and acquired technologies including acquired software products.
These intangibles have been fully amortized as of December 31, 1996. The
portion of the purchase price allocated to incomplete research and development
projects that had not yet reached technological feasibility and did not have a
future alternative use, totaling $4,700, was charged to expense as of the
acquisition date. The amount allocated to incomplete research and development
projects represents the estimated fair value related to these projects
determined by an independent appraisal. Proven valuation procedures and
techniques were utilized in determining the fair value of each intangible
asset. To bring these projects to technological feasibility, high risk
developmental and testing issues needed to be resolved which required
substantial additional effort and testing.

(3) ACQUISITIONS IN 1996

Acquisition of Leprechaun Software International, Ltd.

On March 6, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of Leprechaun Software International, Ltd., a
company engaged in the development of an antivirus software product. The
aggregate purchase price including direct acquisition costs of $1,158 was
allocated based on fair value of the tangible and intangible assets acquired
as follows:

<TABLE>
<S> <C>
Current assets....................................................... $ 51
Property and equipment............................................... 13
Purchased intangible assets, including acquired technology........... 157
Purchased incomplete research and development........................ 937
------
$1,158
======
</TABLE>

As consideration, the Company paid $330 in cash, $200 in notes, issued 9,471
shares of common stock of the Company with a fair value of $16.68 per share,
assumed $370 in liabilities and incurred $100 in direct acquisition costs.
This transaction was accounted for as a purchase and, accordingly, the results
since March 6, 1996 are included in the accompanying consolidated financial
statements. Included in purchased intangible assets are amounts related to
acquired technology and goodwill. (See note 5)

Acquisition of Intangible Assets from neTrend Corporation and Vimal Vaidya

On January 30, 1996, the Company acquired certain intangible assets,
consisting primarily of incomplete firewall software technology from Vimal
Vaidya and acquired technology from neTrend Corporation, a development stage
company wholly owned by Vimal Vaidya, which, together with Vimal Vaidya,
developed the firewall software technology. The aggregate purchase price
including direct acquisition costs of $12,460 was allocated based on fair
value of the intangible assets acquired as follows:

F-14
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(3) ACQUISITIONS IN 1996--(CONTINUED)

<TABLE>
<S> <C>
Acquired technology................................................. $ 676
Purchased incomplete research and development....................... 11,784
-------
$12,460
=======
</TABLE>

As consideration, the Company paid $2,000 in cash, issued 717,300 shares of
common stock with a fair value of $14.22 per share and incurred $260 in direct
acquisition costs. (See note 13)

Acquisition of Technocom plc.

On March 29, 1996 the Company acquired certain assets of Technocom plc's LAN
software distribution business. The aggregate purchase price including direct
acquisition costs of $1,963 was allocated based on the fair value of the
tangible and intangible assets acquired as follows:

<TABLE>
<S> <C>
Property and equipment............................................... $ 110
Purchased intangible assets, including acquired technology........... 1,289
Purchased incomplete research and development........................ 564
------
$1,963
======
</TABLE>

As consideration, the Company paid $1,803 in cash and incurred $160 in
direct acquisition costs. Also, included in cost of product revenue for the
year ended December 31, 1996 is a $571 charge for the elimination of profit
for inventory previously sold to Technocom plc. This transaction was accounted
for as a purchase and, accordingly, the results since March 29, 1996 are
included in the accompanying consolidated financial statements. Included in
purchased intangible assets are amounts related to acquired technology,
goodwill, trade names and customer lists.

These intangible assets are being amortized on a straight line basis over
the estimated useful life not to exceed three years. The portion of the
purchase price allocated to incomplete research and development projects that
had not yet reached technological feasibility and did not have any future
alternative use was expensed as purchased incomplete research and development
as of the acquisition dates. The amounts allocated to incomplete research and
development projects represents the estimated fair value related to these
projects determined by an appraisal. Proven valuation procedures and
techniques were utilized in determining the fair value of the purchased
intangible assets. To bring these projects to technological feasibility, high
risk development and testing issues needed to be resolved which required
substantial additional effort and testing. (See note 13)

(4) ACQUISITIONS IN 1997

A. Purview Technologies, Inc.

On January 24, 1997, the Company acquired all of the capital stock of
Purview Technologies, Inc., a company engaged in Internet access monitoring
and management software. The aggregate purchase price of $2,379 was allocated
based on the fair market value of the tangible and intangible assets acquired
as follows:

<TABLE>
<S> <C>
Current Assets....................................................... $ 51
Purchased intangible assets, including acquired technology........... 210
Purchased incomplete research and development........................ 2,118
------
$2,379
======
</TABLE>

F-15
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(4) ACQUISITIONS IN 1997--(CONTINUED)

As consideration, the Company paid $1,000 in cash and issued 205,251 shares
of Common Stock with a fair market value of $5.55 per share, assumed $107 in
liabilities, and incurred $133 in direct acquisition costs. This transaction
was accounted for as a purchase, and accordingly, the results since January
24, 1997, are included in the accompanying condensed consolidated financial
statements. (See note 13)

B. csd Software GmbH

On January 28, 1997, Wilma 96 Vermogensverwaltungs GmbH ("Wilma GmbH") a
wholly-owned subsidiary of the Company purchased all of the capital stock of
csd Software GmbH, a German corporation engaged in the development of PC
desktop software management tool products. The aggregate purchase price of
$15,400 was allocated based on the fair market value of the tangible and
intangible assets acquired as follows:

<TABLE>
<S> <C>
Purchased intangible assets, including acquired technology.......... $ 1,620
Purchased incomplete research and development....................... 13,780
-------
$15,400
=======
</TABLE>

Unaudited pro forma operating results for the Company, assuming the
acquisition of csd occurred on January 1, 1996 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Pro forma net sales............................................ $ 57,640
Pro forma net loss............................................. (18,068)
Pro forma net loss per share................................... $ (1.48)
Shares used in computing pro forma net loss per share.......... 10,853,814
</TABLE>

For purposes of these pro forma operating results, the in-process R&D was
assumed to have been written off prior to January 1, 1996, so that the
operating results presented include only recurring costs.

As consideration, the Company paid $5,000 in cash and issued 1,315,790
shares of Common Stock of the Company with a fair market value of $5.62,
assumed $5,100 in liabilities, and incurred $734 in direct acquisition costs.
This transaction was accounted for as a purchase, and accordingly, the results
since January 28, 1997, are included in the accompany condensed consolidated
financial statements.

With respect to each of the foregoing two acquisitions, purchased intangible
assets consist of amounts related to acquired technology including acquired
software products and assembled workforce. These intangible assets will be
amortized on a straight-line basis over their estimated useful life's not to
exceed three years. The portion of the purchase price allocated to incomplete
research and development projects that had not yet reached technological
feasibility and did not have future alternative use was expensed as purchased
research and development as of the respective acquisition dates.

The amounts allocated to incomplete research and development projects
represents the estimated fair value related to these projects determined by an
appraisal. Proven valuation procedures and techniques were utilized in
determining the fair value of the purchased intangible assets. To bring these
projects to technological feasibility, high risk development and testing
issues needed to be resolved which required substantial additional effort and
testing.

F-16
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(5) CHARGE FOR RESTRUCTURING

Restructuring Charge in 1996

On August 6, 1996, the Company announced that it had implemented a
reorganization of its operations and a restructuring plan (the "Plan"). The
Plan included write-offs and writedowns of certain assets, including accruing
the costs related to a significant reduction in the Company's work force,
primarily in the technical support and sales and marketing departments, and
the de-emphasis of certain product lines, resulting in a non-recurring charge
of $5,415. Included in the Plan was an additional inventory writedown of
$2,026 which is included in cost of product revenue in accordance with
Emerging Issues Task Force (EITF) 96-9, Classification of Inventory Markdowns
and Other Costs Associated with a Restructuring.

The following are the significant components of the $5,415 charge for
restructuring:

<TABLE>
<S> <C>
Employee severance, benefits and related costs...................... $1,531
Write-off and write-down of assets to net realizable value excluding
inventory.......................................................... 3,522
Provision for lease loss and related costs in closing facility...... 362
------
$5,415
======
</TABLE>

The total cash impact of the restructuring amounted to $2,367 which had been
paid as of December 31, 1996.

Restructuring Charge in 1997

On July 29, 1997, the company announced that it had implemented a
reorganization of its operations and a restructuring plan (the "Plan"). The
Plan included write-offs and write-downs of certain assets, including accruing
the costs related to a significant reduction in the workforce, primarily in
the technical support and sales and marketing departments. In addition, the
Company has exited from the anti-virus business and de-emphasized its
investment in new customer acquisitions for the Company's groupware, network
management and security businesses. As a result of the Plan the Company
recorded a restructure charge of $4,530. Included in the Plan was an
additional inventory write-down of $849 which is included in cost of product
revenue in accordance with Emerging Issues Task Force (EITF) 96-9,
Classification of Inventory Markdowns and Other Costs Associated with a
restructuring.
The following are the significant components of the $4,530 charge to
restructuring:

<TABLE>
<S> <C>
Employee severance, benefits and related costs...................... $1,980
Write-off and write-down of assets to net realizable value excluding
inventory.......................................................... 1,346
Provision for costs in closing facilities........................... 1,204
------
$4,530
======
</TABLE>

Total cash impact of the restructuring is $2,834 of which $1,064 was paid by
September 30, 1997. The Company anticipates the balance of the restructuring
cost to be paid over the next year.

As a result of the sale of assets to Elron Software Inc., the Company
expects to record a pre-tax reorganization and restructuring charge totaling
$6.2 million to $6.6 million in the fourth quarter ended December 31, 1997.
The restructuring charge includes reorganization costs related to the
Company's sale of its Network Management and Network Security Business to
Elron Software Inc; the closing of international sales offices in Slough,
England, Paris, France and Sydney, Australia; and the Company's severance
costs related to the reduction of approximately 100 people from the workforce.

F-17
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(6) INCOME TAXES

The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these
differences reverse. The income tax provision for the years ended December 31,
1996 and 1995 was calculated based on the Company's effective tax rate giving
benefit to available net operating loss and research and development credit
carryforwards and by recognizing a portion of the Company's deferred tax asset
in the year ended December 31, 1996. The income tax provision for the year
ended December 31, 1994 consists of federal alternative minimum and minimum
state income taxes payable.

The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ----
<S> <C> <C> <C>
Current
Federal............................................... $ 735 $1,092 $ 7
State................................................. 444 530 4
------- ------ ----
1,179 1,622 11
Deferred
Federal............................................... (675) -- --
State................................................. (407) -- --
------- ------ ----
(1,082) -- --
------- ------ ----
$ 97 $1,622 $ 11
======= ====== ====
</TABLE>

In the year ended December 31, 1996, the Company incurred a significant
operating loss. However, included in the book changes were amounts not
currently deductible for income taxes. The 1996 tax provision includes the
amount currently payable with an offsetting deferred tax benefit to record a
portion of the Company's deferred tax asset. The Company provides deferred
income taxes for temporary differences between assets and liabilities
recognized for financial reporting and income tax purposes. The income tax
effects of these temporary differences are as follows:

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax asset--
Accounts receivable allowance............................ $ 479 $ 218
Inventory reserve........................................ 1,215 322
Purchased intangibles.................................... 5,910 680
Reserve for distributor inventories...................... 82 336
Other temporary differences.............................. 461 187
Net operating loss and tax credit carryforwards.......... 571 482
------- -------
8,718 2,225
------- -------
Deferred tax liability--
Direct marketing costs and prepaid expenses.............. (535) (308)
------- -------
Valuation allowance........................................ (7,702) (1,917)
------- -------
$ 481 $ --
======= =======
</TABLE>

F-18
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(6) INCOME TAXES--(CONTINUED)

The Company has placed a significant valuation allowance against its net
deferred tax asset. The valuation allowance increased during 1996 by $5,785
since the Company believes it is "more likely than not" that it will not be
able to utilize its deferred tax asset. The Company has recorded a deferred
tax asset for that portion to which it will "more likely than not" benefit.

As of December 31, 1996, the Company has available net operating loss
carryforwards of $1,023. These carryforwards expire through 2008 and are
subject to review and possible adjustment by the Internal Revenue Service. The
Tax Reform Act of 1986 contains provisions that may limit the amount of net
operating loss and credit carryforwards that the Company may utilize in any
one year in the event of certain cumulative changes in ownership over a three-
year period in excess of 50%, as defined, therein.

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

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Federal Statutory Rate............................. (34.0)% 34.0 % (34.0)%
State taxes, net of federal benefit................ (6.2)% 6.6 % (5.1)%
Recognition of net operating loss carryforwards and
deferred provision................................ 39.6 % (10.0)% 38.9 %
----- ----- -----
Effective tax rate................................. 0.6 % 30.6 % 0.2 %
===== ===== =====
</TABLE>

(7) LINE OF CREDIT

The Company has a $10,000 line of credit (the "Line") that allows the
Company to borrow up to the lesser of $10,000 or 80% of qualified eligible
accounts receivable, as defined, plus 40% of foreign qualified receivables, as
defined. Borrowings bear interest at the bank's prime rate (8.50% at September
30, 1997). The Line expires on April 1, 1998, at which time all outstanding
borrowings must be repaid. The Company has pledged all accounts receivable as
collateral. The Line requires the Company to meet certain financial covenants,
as defined in the Line. At December 31, 1996, the Company was in compliance
with all of these covenants. As of December 31, 1996, no amounts were
outstanding.

(8) LONG-TERM OBLIGATIONS AND COMMITMENTS

Leases

The Company conducts its operations in leased facilities and leases certain
equipment under operating and capital leases expiring at various times through
2001.

The Company has a master lease agreement, as modified, that allows the
Company to enter into up to $3,000 in fair market value equipment leases.
Borrowings under both lease agreements are payable in monthly installments
ranging from $1 to $9, including interest ranging from 7.01% to 24.49% with
terms ranging between 36 and 50 months. As of December 31, 1996, the Company
had the ability to borrow up to $3,000 under this master lease agreement.

F-19
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(8) LONG-TERM OBLIGATIONS AND COMMITMENTS--(CONTINUED)

The approximate minimum annual lease payments under both the operating and
capital leases are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1997....................................................... $1,670 $1,164
1998....................................................... 1,513 503
1999....................................................... 1,165 28
2000....................................................... 326 0
Thereafter................................................. 976 0
------ ------
$5,650 1,695
======
Less--Amount representing interest......................... 122
------
Present value of minimum lease payments.................... 1,573
Less--Current portion...................................... 1,063
------
$ 510
======
</TABLE>

Total rental expense included in the accompanying consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 was $1,418,
$846 and $486, respectively.

The amount of equipment under capital lease and the related accumulated
amortization are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Equipment acquired under capital lease..................... $ 3,895 $ 3,804
Accumulated amortization................................... (2,559) (1,300)
------- -------
Net equipment acquired under capital lease................. $ 1,336 $ 2,504
======= =======
</TABLE>

Total amortization expense included in the accompanying consolidated
statements of operations for the years ended December 31, 1996, 1995 and 1994
is $$1,259, $1,001 and $273, respectively.

Royalties

The Company has entered into several software license agreements. These
agreements provide the Company with exclusive worldwide licenses to distribute
certain software products. The Company is required to pay royalties on all
related sales, subject to the following aggregate royalty targets. If the
royalty targets for any specific product are not met by the Company, then the
Company may lose the exclusive distribution rights to that software product.
The following table represents the minimum royalty requirement to maintain
exclusive distribution rights as of December 31, 1996

<TABLE>
<S> <C>
1997................................................................. $ 2,105
1998................................................................. 3,050
1999................................................................. 3,900
2000................................................................. 500
2001................................................................. 500
Thereafter........................................................... 2,000
-------
$12,055
=======
</TABLE>

F-20
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(8) LONG-TERM OBLIGATIONS AND COMMITMENTS--(CONTINUED)

Total royalty expense included in the accompanying consolidated statements
of operations for the years ended December 31, 1996, 1995 and 1994 was $2,178,
$2,333 and $1,184, respectively.

(9) STOCKHOLDERS' EQUITY

Initial Public Offering

In August of 1995, the Company completed an initial public offering (the
"IPO") of 2,360,000 shares of its common stock for $15.00 per share. The sale
of common stock resulted in net proceeds to the company of $31,647, after
deducting all expenses related to the IPO. In connection with the Company's
initial public offering, the redeemable convertible preferred shares were
automatically converted into 3,841,632 shares of common stock.

Common Stock

The Company has 20,000,000 authorized shares of common stock $.01 par value,
of which 12,281,502 shares and 11,008,243 shares were issued and outstanding
at September 30, 1997 and December 31, 1996, respectively

Preferred Stock

The Company has an authorized class of Preferred Stock consisting of
2,000,000 shares, which may be issued from time to time in one or more series.
The Company's Board of Directors has authority to issue the shares of
Preferred Stock in one or more series, to establish the number of shares to be
included in each series and to fix the designation, powers preferences and
rights of the shares of each series and the qualifications, limitations or
restrictions thereof, without any further vote or action by the stockholders.
The issuance of Preferred Stock could decrease the amount of earnings and
assets available for distribution to holders of Common Stock, and may have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company had not issued any shares of Preferred Stock as of
December 31, 1996.

Reserved Shares of Stock

The Company had reserved 2,726,614 shares of common stock at December 31,
1996 for the exercise of stock options under the 1992 Employee and Consultant
Stock Option Plan, 1995 Directors Stock Option Plan and 1995 Employee Stock
Purchase Plan.

Stock Split

On May 18, 1995, the Board of Directors approved a one-for-six reverse stock
split. Accordingly, all shares of common stock and the conversion ratio of
preferred stock have been retroactively adjusted in the accompanying
consolidated financial statements for all periods presented to reflect these
split.

(10) STOCK OPTION PLANS

In July 1992, the Company adopted the 1992 Employee and Consultant Stock
Option Plan, as amended (the "Plan"). Pursuant to the Plan, the Company may
grant to employees and consultants of the Company statutory and nonstatutory
stock options to purchase up to 3,300,000 shares of common stock.

F-21
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(10) STOCK OPTION PLANS--(CONTINUED)

The Company's 1995 Directors Stock Option Plan ( the "Director's Plan") was
adopted on May 18, 1995 and provides for the granting of options to purchase
up to 100,000 shares of Common Stock to directors who are not employees of the
Company.

Stock option activity for the option plans was as follows:

<TABLE>
<CAPTION>
WGHT AVG
NUMBER EXERCISE
OF EXERCISE PRICE PRICE
SHARES RANGE PER SHARE PER SHARE
--------- --------------------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1993...... 1,009,099 $ .0307 -- $ 1.2600 $ .2259
Granted........................... 638,502 .5040 -- 2.4600 2.1185
Exercised......................... (376,874) .0307 -- .9600 .0349
Terminated........................ (192,286) .5040 -- 2.4600 1.7355
--------- ------- --- --------- --------
Outstanding, December 31, 1994...... 1,078,441 $ .0307 -- $ 2.4600 $ 1.1685
Granted........................... 308,607 2.4600 -- 17.5000 10.7900
Exercised......................... (444,878) .0307 -- 9.0000 .3412
Terminated........................ (318,446) .5040 -- 16.1250 2.0496
--------- ------- --- --------- --------
Outstanding, December 31, 1995...... 623,724 .0307 -- 17.5000 5.6373
Granted........................... 603,217 5.1250 -- 16.7500 8.8626
Exercised......................... (91,795) .5040 -- 9.0000 1.5642
Terminated........................ (112,240) .5040 -- 16.1250 8.6597
--------- ------- --- --------- --------
Outstanding, December 31, 1996...... 1,022,906 .0307 -- 17.5000 7.5710
Granted........................... 1,852,939 .0100 -- 5.7500 2.5557
Exercised......................... (38,254) .0307 -- 2.4600 .6566
Terminated........................ (726,380) .5040 -- 16.7500 8.4937
--------- ------- --- --------- --------
Outstanding, September 30, 1997..... 2,111,211 $ .0100 -- $ 17.5000 $ 2.9588
========= ======= === ========= ========
Exercisable, September 30, 1997..... 247,883 $ .0100 -- $ 17.5000 $ 4.8420
========= ======= === ========= ========
</TABLE>

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 Accounting for Stock Based Compensation, which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. The Company
has determined that it will continue to account for stock-based compensation
for employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123 for options granted in 1996 and
1995 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average assumptions are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Risk-free interest rate...................................... 6.34% 6.50%
Expected dividend yield...................................... -- --
Expected lives............................................... 7 7
Expected volatility.......................................... 73.56% 73.56%
</TABLE>

F-22
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(10) STOCK OPTION PLANS--(CONTINUED)

Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net (loss) income and pro forma net (loss) income per
share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- -----
<S> <C> <C>
Net (Loss) Income
As Reported................................................. (15,861) 3,672
Pro Forma................................................... (16,846) 3,378
Net (Loss) Income Per Share
As Reported................................................. (1.46) 0.40
Pro Forma................................................... (1.55) .37
</TABLE>

Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

The Company has recorded $416 of deferred compensation during the nine
months ended September 30, 1997. The deferred compensation represents the
excess of the fair market value of the Company's common stock over the
exercise price of certain options on the date of the grant. Deferred
compensation will be amortized to compensation expense over the vesting period
of each employee's stock option.

Employee Stock Purchase Plan

On May 18, 1995, the Company adopted the 1995 Employee Stock Purchase plan
pursuant to which up to 1,000,000 shares of common stock may be issued. The
plan consists of semiannual offerings commencing on the first day the
Company's common stock was publicly traded and each subsequent offering
commencing on January 1 and July 1 of each year. The maximum number of shares
of common stock that may be purchased by an employee is determined on the
first day of each offering period, as defined in the Plan. The price at which
the shares are purchased is the lower of 85% of the closing price on the first
or last day of the offering period.

(11) 401 (K) PLAN

In 1994, the Company established a plan under Section 401 (k) of the
Internal Revenue Code (the "401 (k) Plan") covering all eligible employees, as
defined. Participants in the 401 (k) Plan may not contribute more than the
lesser of the specified statutory amount or 15% of his or her pretax total
compensation. The 401 (k) Plan permits, but does not require, additional
contributions to the 401(k) Plan by the Company. The Company made no
contributions during 1996, 1995 and 1994.

(12) ACCRUED EXPENSES

Accrued expenses consisted of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------
1997 1996 1995
------------- ------ ------
<S> <C> <C> <C>
Payroll and payroll related..................... $ 749 $ 691 $ 564
Royalties....................................... 251 240 511
Reserve for restructure......................... 2,069 -- --
Other........................................... 610 1,321 1,190
------ ------ ------
$3,679 $2,252 $2,265
====== ====== ======
</TABLE>

F-23
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(13) SUBSEQUENT EVENTS

On October 29, 1997, the Company announced that it would seek shareholder
approval (Proposed Transaction) to sell to Elron Software Inc., a wholly owned
subsidiary of Elron Electronics Industries, for an aggregate price of $12
million, with the possibility of an additional performance bonus of up to $1.5
million, (a) all of the Company's right, title and interest as owner of the
computer software programs known as OnGuard Internet Manager, OnGuard
Firewall, and the Odyssey Application Software and Database, and as license of
SofTrack (collectively, the "Software"), (b) all of the Company's right, title
and interest in its catalog business, including management information
systems, sales and marketing databases and customer lists; (c) all of the
Company's right, title and interest in and to the methodology, procedures,
techniques and documentation utilized by the Company for the sale and
distribution of computer software, hardware and peripherals, (collectively,
the "free Trial Marketing System"); (d) all of the Company's right title and
interest in certain contracts, agreements, real and personal property leases,
licenses and other instruments; (e) certain accounts receivable, notes and
notes receivable, with a Company-guaranteed value of $3,000,000; (f) certain
equipment, furniture, leasehold improvements; (g) certain inventory; (h)
certain trade names and trademarks; and (i) the goodwill associated with the
foregoing assets (collectively, the "Proposed Assets"). As part of the
Proposed Transaction, Elron will hire from the Company, approximately 100
employees including Ivan O'Sullivan, the Company's Vice President--World Wide
Marketing, and Chadwick Roll, the Company's Vice President of Inside Sales.

As a result of the sale of assets to Elron Software Inc., the Company
expects to record a pre-tax reorganization and restructuring charge totaling
$6.2 million to $6.6 million in the fourth quarter ended December 31, 1997.
The restructuring charge includes reorganization costs related to the
Company's sale of its Network Management and Network Security Business to
Elron Software Inc; the closing of international sales offices in the United
Kingdom, France and Australia, and the Company's severance costs related to
the reduction of the related workforce.

F-24
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ON Technology Corporation and Subsidiaries:

We have audited in accordance with generally accepted standards, the
consolidated financial statements of ON Technology Corporation and
Subsidiaries included in this Schedule 14A and have issued our report thereon
dated January 21, 1997 (except for the matters discussed in Notes 4(a) and
4(b) as to which the dates are January 24, 1997 and January 28, 1997,
respectively). Our audit was made for the purpose of forming an opinion on the
basic consolidated Financial statements taken as a whole. The accompanying
Schedule II is presented for the purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects, the financial
data required to be set forth therein, in relation to the consolidated
financial statements taken as a whole.

Arthur Andersen LLP

Boston, Massachusetts
January 21, 1997

F-25
<PAGE>

SCHEDULE II

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE, OTHER
BEGINNING OF CHARGED TO ADDITIONS TO BALANCE, END
YEAR EXPENSE ALLOWANCE(1) WRITE-OFFS OF TERM
------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1994... $ 61 $395 $173 $195 $ 434
Year ended December 31, 1995... $434 $256 -- $ 85 $ 605
Year ended December 31, 1996... $605 $639 -- $ 53 $1,191
</TABLE>
- --------
(1) Additions arising through the acquisition of DaVinci Systems Corporation in
1994.

F-26
<PAGE>

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

COMPUTATION OF PRO FORMA NET (LOSS) INCOME PER SHARE(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1997 1997
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net (Loss) Income....... $ (4,099) $ 3,672 $ (15,861) $ (23,781) $ (23,781)
========= ========= ========== ========== ==========
Pro Forma Earnings Per
Share
Weighted Average Common
and Common Equivalent
Shares Outstanding..... 3,858,608 9,086,764 10,853,814 12,091,960 12,091,960
Conversion of Preferred
Stock.................. 2,805,247 -- -- -- --
Dilutive Effect of
Common Equivalent
Shares Issued
Subsequent to May 23,
1994(2)................ 287,981 -- -- -- --
--------- --------- ---------- ---------- ----------
6,951,836 9,086,764 10,853,814 12,091,960 12,091,960
========= ========= ========== ========== ==========
Pro Forma Net (Loss)
Income
Per Common and Common
Equivalent Share....... $ (0.59) $ 0.40 $ (1.46) $ (1.97) $ (1.97)
========= ========= ========== ========== ==========
</TABLE>
- --------
(1) Fully dilutive pro forma net (loss) income per share has not been
separately presented, as the amounts would not be meaningful.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock options issued at prices below the initial public offering
price per share ("cheap stock") during the twelve month period immediately
preceding the initial filing date of the Company's Registration Statement
for its initial public offering have been included as outstanding for all
periods presented. The dilutive effect of the common and common stock
equivalents was computed in accordance with the treasury stock method.

F-27
<PAGE>

ANNEX A

October 29, 1997

The Board of Directors
ON Technology Corporation
One Cambridge Center
Cambridge, MA 02142

Attention: Mr. Christopher A. Risley, Director

Gentlemen:

You have requested us to render an opinion (the "Opinion") as to the
fairness, from a financial point of view, to ON Technology Corporation, a
Delaware corporation ("ON" or the "Company"), of the financial terms of an
Asset Purchase Agreement ("Agreement") dated October 29, 1997 by and between
the Company and Elron Software, Inc., a Delaware corporation ("Buyer").
Capitalized terms used herein shall have the meanings used in the Agreement
unless otherwise defined herein.

Pursuant to the Agreement, the Company shall sell, transfer, convey, assign
and deliver to Buyer and the Buyer shall purchase, acquire, accept, assume and
pay for, all of the Company's right, title and interest in and to the Acquired
Assets (as fully described in Schedule 1.1A of the Agreement). At Closing, the
amount of $12,000,000 shall be payable to ON. Contemporaneously with the
payment of the Purchase Price, the Buyer shall deliver by wire transfer to the
Escrow Agent, the sum of $1,500,000 (the "Purchase Bonus Escrow Funds") which
shall be held pursuant to the terms of the Escrow Agreement. Wessels, Arnold &
Henderson, L.L.C. ("Wessels, Arnold & Henderson"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, corporate
restructurings, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for corporate and
other purposes. Wessels, Arnold & Henderson will receive a fee for rendering
this Opinion. In the ordinary course of business, Wessels, Arnold & Henderson
acts as a market maker and broker in the publicly traded securities of ON and
receives customary compensation in connection therewith and also provides
research coverage for the Company. In the ordinary course of business,
Wessels, Arnold & Henderson actively trades in the publicly traded securities
of ON for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.

In connection with our review of the transaction contemplated by the
Agreement, and in arriving at our Opinion, we have: (i) reviewed and analyzed
the financial terms of the Agreement; (ii) reviewed and analyzed certain
publicly available financial statements and other information of the Company
and the Buyer; (iii) reviewed and analyzed certain historical financial
statements and other financial and operating data concerning the Company and
the Acquired Assets prepared by the management of the Company; (iv) reviewed
and analyzed certain financial projections related to the Company and the
Acquired Assets prepared by the management of the Company; (v) reviewed and
analyzed certain financial projections concerning Buyer prepared by
institutional equity research analysts; (vi) conducted discussions with
members of the senior management of the Company with respect to the business
and prospects of the Company and the Acquired Assets relative to published
industry analyst estimates; (vii) reviewed the historical and projected
financial performance and market valuations of certain comparable publicly-
traded companies; (viii) reviewed the financial terms, to the extent publicly
available, of certain comparable transactions, and (ix) performed a discounted
cash flow valuation of the Acquired Assets. In addition, we have conducted
such other analyses and examinations and considered such other financial,
economic and market criteria as we have deemed necessary in arriving at our
Opinion.

A-1
<PAGE>

In rendering our Opinion, we have assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided to us by the Company and have not independently verified such
information. We have not performed an independent evaluation or appraisal of
any of the Company's respective assets or liabilities, including, without
limitation, all or any portion of the Acquired Assets. With respect to the
financial forecasts related to the Acquired Assets, we have assumed that they
have been reasonably prepared on the bases reflecting the best currently
available estimates and judgments of the management of the Company as to the
respective future financial performance of the Acquired Assets.

The Company agrees that, except as required by applicable law, the Opinion
provided to the Company by Wessels, Arnold & Henderson under this letter
agreement shall not be disclosed publicly or made available to third parties
without the prior written approval of WA&H, which approval shall not be
unreasonably withheld; provided, however, that the Opinion may be included in
the proxy statement submitted to shareholders of the Company for the purpose
of approving the Agreement and any other required SEC filings. Further, our
Opinion speaks only as of the date hereof and is based on the conditions as
they exist and information which we have been supplied as of the date hereof.

Based on our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that as of the date hereof, the financial terms of the proposed
transaction contemplated by the Agreement are fair from a financial point of
view to the Company.

Very truly yours,

Wessels, Arnold & Henderson, L.L.C.

By: _________________________________
Bryson D. Hollimon
Managing Director

A-2
<PAGE>

ANNEX B

ASSET PURCHASE AGREEMENT

BY AND BETWEEN

ON TECHNOLOGY CORPORATION

AND

ELRON SOFTWARE, INC.

OCTOBER 29, 1997

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1.Purchase and Sale of the Assets........................................ 1
1.1 Purchase of the Assets.......................................... 1
1.2 Management Assumption........................................... 1
1.3 Further Assurances.............................................. 3
1.4 Purchase Price for the Acquired Assets.......................... 4
1.5 Purchase Bonus.................................................. 4
1.6 Assumption of Liabilities....................................... 5
1.7 Odyssey Application Software and Database....................... 5
1.8 Allocation of Purchase Price and Assumed Liabilities............ 5
1.9 Closing......................................................... 6
2.Representations of the Company......................................... 6
2.1 Organization.................................................... 6
2.2 Authorization................................................... 6
2.3 Ownership of the Acquired Assets................................ 7
2.4 Financial Statements; Books and Records......................... 7
2.5 Absence of Undisclosed Liabilities.............................. 7
2.6 Litigation...................................................... 7
2.7 Accounts Receivable; Inventory.................................. 8
2.8 Tax Matters..................................................... 9
2.9 Contracts and Commitments....................................... 9
2.10 Compliance with Agreements and Laws............................. 10
2.11 Employee Relations.............................................. 10
2.12 Employee Benefit Plans.......................................... 10
2.13 Warranty and Product Liability.................................. 12
2.14 Regulatory Approvals............................................ 12
2.15 Intellectual Property........................................... 12
2.16 Tangible Personal Property...................................... 13
2.17 Absence of Changes.............................................. 13
2.18 No Misleading Statements........................................ 13
2.19 Accounts Payable................................................ 13
3.Representations of the Buyer........................................... 13
3.1 Organization and Authority...................................... 14
3.2 Authorization................................................... 14
3.3 Regulatory Approvals............................................ 14
4.Access to Information; Public Announcements............................ 14
4.1 Access to Management, Properties and Records.................... 14
4.2 Public Announcements............................................ 15
5.Pre-Closing Covenants of the Company and the Buyer..................... 15
5.1 Absence of Material Changes..................................... 15
5.2 Continued Truth of Representations and Warranties............... 15
5.3 Reports, Taxes.................................................. 15
5.4 Communications with Customers and Suppliers..................... 15
5.5 Payment of Arthur Andersen LLP Fees............................. 15
5.6 Shareholder Approval............................................ 16
5.7 No Solicitations................................................ 16
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.Ancillary Agreements................................................... 17
6.1 Ancillary Agreements............................................ 17
6.2 Transferred Premises............................................ 17
6.3 Macola License Agreement........................................ 17
6.4 TLP Equipment Lease............................................. 18
6.5 Oracle Database Management Software............................. 18
6.6 Database America Information Systems, Inc. Agreement............ 18
6.7 Fulfillment House Agreements.................................... 18
6.8 Agreements to Be Deposited into Escrow.......................... 18
7.Conditions to Obligations of the Buyer................................. 18
7.1 Shareholder Approval............................................ 18
7.2 Accounts Receivable............................................. 18
7.3 Closing Deliveries.............................................. 19
8.Condition to Obligations of the Company................................ 19
8.1 Conditions Precedent............................................ 19
8.2 Opinion of Buyer's Counsel...................................... 19
8.3 Closing Deliveries.............................................. 20
9.Indemnification........................................................ 20
9.1 By the Company.................................................. 20
9.2 By the Buyer.................................................... 20
9.3 Claims for Indemnification...................................... 21
9.4 Defense of any Claim............................................ 21
9.5 Survival of Representations; Claims for Indemnification......... 22
9.6 Payment of Indemnification Claims............................... 22
10.Post-Closing Agreements............................................... 22
10.1 Proprietary Information......................................... 22
10.2 Sharing of Data................................................. 23
10.3 Cooperation..................................................... 23
10.4 Non-Competition................................................. 24
10.5 Non-Solicitation................................................ 24
10.6 Enforceability.................................................. 24
10.7 Use of Name..................................................... 24
11.Termination of Agreement.............................................. 24
11.1 Termination by Lapse of Time.................................... 24
11.2 Termination by Agreement of the Parties......................... 24
12.Dispute Resolution.................................................... 25
12.1 General......................................................... 25
12.2 Consent of the Parties.......................................... 25
12.3 Arbitration..................................................... 25
13.Brokers............................................................... 26
13.1 The Company..................................................... 26
13.2 For the Buyer................................................... 26
14.Notices............................................................... 26
15.Successors and Assigns................................................ 27
16.Entire Agreement; Amendments; Attachments............................. 27
</TABLE>

ii
<PAGE>

17. Severability.................................................. 20
18. Expenses; Sales Taxes......................................... 20
19. Liquidated Damages............................................
20. Legal Fees.................................................... 21
21. Governing Law................................................. 21
22. Section Headings.............................................. 21
23. Counterparts.................................................. 21
24. References to Monetary Amounts, Payments...................... 21
</TABLE>

iii
<PAGE>

SCHEDULES

<TABLE>
<C> <S>
1.1A Acquired Assets
1.1B Excluded Assets
1.2(c) Wire transfer instructions to the Company's account
1.5 Pro-Forma Expense Analysis
1.6 Assumed Liabilities
1.8 Allocation of Purchase Price and Assumed Liabilities
2.2 Consents
2.3 Encumbrances
2.4 Current Financial Statements
2.5 Undisclosed Liabilities
2.6 Litigation
2.7(a) Accounts Receivable
2.7(c) Inventory
2.7(d) Stock Rotation--Unit Cost List
2.9 Contracts
2.10 Compliance with Laws, Permits
2.11 Employees
2.12(a) Employee Plans
2.12(d) Employee Plans--Qualifications; Claims
2.13 Warranty and Product Liability Claims
2.14 Regulatory Approvals
2.15 Intellectual Property
2.16 Personal Property List
2.17 Absence of Changes

EXHIBITS

A. Escrow Agreement (Purchase Bonus)
B. Instrument of Assumption of Liabilities
C. Opinion of Company's Counsel
D. Employment Agreement--Ivan O'Sullivan
E. Bill of Sale
F. Transition Plan
G. Opinion of Buyer's Counsel
H. SofTrack Side Letter
</TABLE>

iv
<PAGE>

ASSET PURCHASE AGREEMENT

This Agreement (the "Agreement") is made as of the 29th day of October, 1997
(the "Management Assumption Date") by and between Elron Software, Inc., a
Delaware corporation with its principal office at One Cambridge Center,
Cambridge, Massachusetts 02142 (the "Buyer") and ON Technology Corporation, a
Delaware corporation with its principal office at One Cambridge Center,
Cambridge, Massachusetts 02142 (the "Company").

PRELIMINARY STATEMENT

A. The Company (i) owns and operates a computer software catalog business,
(ii) owns, licenses and supports computer software known as OnGuard Internet
Manager and OnGuard Firewall, (iii) owns marketing support software known as
Odyssey, and (iv) sublicenses and supports computer software known as
SofTrack, together with certain rights and other assets related to the
foregoing, as more fully described in this Agreement (the "Acquired
Business").

B. Subject to the terms and conditions of this Agreement, the Buyer desires
to purchase, and the Company desires to sell, all of the assets comprising the
Acquired Business, provided, however, that with respect to SofTrack, the Buyer
shall assume and the Company shall assign the license of such program.

NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereby agree as follows:

1. PURCHASE AND SALE OF THE ASSETS

1.1 Purchase of the Assets. Subject to and upon the terms and conditions of
this Agreement, at the closing of the transactions contemplated by this
Agreement (the "Closing"), the Company shall sell, transfer, convey, assign
and deliver to the Buyer, and the Buyer shall purchase, acquire, accept,
assume and pay for, all of the Company's right, title and interest in and to
the assets and rights listed on Schedule 1.1A hereto, free and clear of all
liens, charges, claims, pledges, security interests and other encumbrances of
any nature whatsoever, except as otherwise listed on Schedule 2.3 attached
hereto (the "Acquired Assets"). Notwithstanding the foregoing, there shall be
excluded from the assets, properties, rights and interests to be transferred
to the Buyer hereunder, the assets listed on Schedule 1.1B hereto (the
"Excluded Assets").

1.2 Management Assumption.

(a) Except with respect to the conditions precedent set forth in Subsections
7.1, 7.2 and 8.1 hereof, including the Company's obligation to obtain the
approval of its shareholders to the transactions contemplated herein (the
"Shareholder Approval"), all of the Buyer's and all of the Company's
conditions precedent to the Closing have been satisfied in all respects.

(b) Contemporaneously with the execution and delivery of this Agreement, (i)
the Buyer and the Company shall execute and deliver an Escrow Agreement
(Management Assumption) by and among the Buyer, the Company and Fulbright &
Jaworski, L.L.P., as escrow agent (the "Document Escrow Agent"), pursuant to
which the Closing Deliveries (as defined in Subsection 8.3) shall be deposited
with the Document Escrow Agent, (ii) the Buyer shall deposit the Purchase
Bonus Escrow Funds with State Street Bank and Trust Company (the "Purchase
Bonus Escrow Agent"; the Document Escrow Agent and the Purchase Bonus Escrow
Agent are referred to herein collectively as the "Escrow Agents"), in
accordance with Subsection 1.5(e) below, (iii) Citibank, N.A. shall confirm,
at the Buyer's expense, an unconditional standby letter of credit (the "Letter
of Credit") in favor of the Company, in the amount of $9,000,000, and (iv) the
Buyer and the Company shall execute and deliver a Management Agreement (the
"Management Agreement"), pursuant to which the Buyer shall manage the Acquired
Assets for its benefit and at its risk and expense and pursuant to which the
Buyer shall pay all salaries and other employee-related expenses with respect
to the Acquired Business, as more particularly set forth in the Management
Agreement.

B-1
<PAGE>

(c) Within one business day after the Document Escrow Agent's receipt of (i)
the letter authorizing the release of the legal opinion of the Company's
counsel (the "Opinion Release Instructions"), which shall be in the form
attached as an exhibit to the Escrow Agreement (Management Assumption) and
which shall be signed by a member of the firm of Epstein Becker & Green, P.C.,
and (ii) a credit advice from Fleet National Bank with respect to the cash
settlement of the Accounts Receivable (as hereinafter defined), in the form
attached as an exhibit to the Escrow Agreement (Management Assumption), the
Document Escrow Agent shall date each of the Closing Deliveries as of the date
of the later to occur of the Escrow Agent's receipt of the Opinion Release
Instructions and the Credit Advice (the "Closing Date"), and release each of
the Closing Deliveries to the Buyer and to the Company, as indicated in the
upper right hand corner of the first page of each of the Closing Deliveries.
As confirming bank with respect to the Letter of Credit, Citibank, N.A. shall,
within one business day after its receipt of the Opinion Release Instructions
and the Credit Advice, disburse the face amount of the Letter of Credit by
wire transfer to the account specified in Schedule 1.2(c) attached hereto (the
"Wire Account"). On the Closing Date, (i) the Company shall terminate the
employment of the Transferred Employees and the Buyer shall hire the
Transferred Employees, in accordance with the terms of the Transition
Agreement executed by the Buyer and the Company, dated as of the date hereof
(the "Transition Agreement"), (ii) the Company shall pay to the Buyer a cash
settlement to satisfy its guaranty obligations regarding Accounts Receivable,
(iii) the Buyer will pay to the Company, as part of the Purchase Price, the
amount of $3,000,000, (iv) the Company shall pay to the Buyer an amount equal
to 80% of the prepaid amounts received by the Company with respect to
maintenance contracts, prorated as of the Management Assumption Date based
upon the then remaining term of each such contract as indicated on Schedule
2.9(a), (v) the Company shall pay to the Buyer any Actual Damages resulting
from the failure to satisfy the Ancillary Conditions, as set forth in
Subsection 6.1 below, (vi) the Buyer shall reassign to the Company all
Accounts Receivable that are outstanding as of the Closing Date and that are
designated in Schedule 2.7(a) as "Guaranteed Receivables," and (vii) the
parties shall make the closing adjustments specified in Section 3.3 and
Section 4.9 of the Management Agreement and Exhibit B, paragraph 1, of the
Transition Agreement. All payments referenced in clauses (ii), (iii), (iv),
(v) and (vii) shall be effected by means of an interbank transfer from the
paying party's deposit account at Fleet National Bank to the recipient party's
deposit account at Fleet National Bank. The transactions described in this
Subsection 1.2(c) are referred to herein as the "Closing".

(d) In the event that the Opinion Release Instructions are not delivered to
the Document Escrow Agent on or prior to 5:00 p.m., Boston time on March 31,
1998 (the "Termination Date"), then (A) this Agreement and the Management
Agreement shall immediately terminate, (B) the Escrow Agent shall transfer the
Purchase Bonus (Escrow Funds), as defined in Subsection 1.5(e), plus interest
and earnings thereon, by wire transfer to an account designated by the Buyer,
(c) the Letter of Credit shall expire by its terms, and (D) the Buyer and the
Company shall use their best efforts to transfer the management of the
Acquired Business and the Acquired Assets back to the Company, in accordance
with the terms of the Management Agreement.

(e) Notwithstanding anything herein to the contrary, in the event of the
occurrence or existence of any fact that would otherwise constitute a breach
of any of the Company's representations and warranties herein that would not
have occurred had the Closing occurred on the Management Assumption Date
(including, without limitation, any breach that is caused by any act or
omission of the Buyer pursuant to the Buyer's obligations under the Management
Agreement), then such breach shall not be deemed to be a breach by the Company
of such representation and/or warranty.

(f) The Buyer and the Company agree that the only conditions precedent to
the Closing are the delivery of the Opinion Release Instructions and the
Credit Advice to the Escrow Agents. Notwithstanding the discovery or
occurrence, prior to, on, or after the Management Assumption Date, of any
matter whatsoever, including, without limitation, the breach of any
representation or warranty herein or in any other agreement between the Buyer
and the Company (regardless of the extent of materiality), or any defect
claim, damage, loss, liability, cost or expense relating to any matter
whatsoever (regardless of the extent of materiality and whether or not
latent), including without limitation, the Acquired Business, the Acquired
Assets and the Transferred Employees, the sole recourse of each of the Buyer
and the Company shall be the indemnification provisions set forth in Section 9
of this

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<PAGE>

Agreement. The Buyer covenants and agrees that it shall not take any other
action to enjoin or otherwise hinder or delay, in any manner whatsoever, the
delivery of the Closing Deliveries and/or the effectuation of the Closing.

1.3 Further Assurances. At any time and from time to time after the Closing,
at the Buyer's request and without further consideration, the Company shall
promptly execute and deliver such instruments of sale, transfer, conveyance,
assignment and confirmation, and take all such other action, as the Buyer may
reasonably request, more effectively to transfer, convey and assign to the
Buyer, and to confirm the Buyer's title to, all of the Acquired Assets, to put
the Buyer in actual possession and operating control thereof.

1.4 Purchase Price for the Acquired Assets.

The purchase price (the "Purchase Price") to be paid by the Buyer for the
Acquired Assets shall be $12,000,000, payable as set forth in Section 1.2
above.

1.5 Purchase Bonus

(a) In addition to the Purchase Price, the Buyer shall pay to the Company an
additional amount (the "Purchase Bonus") based upon Acquired Asset Revenues
and Pre-Tax Profits (as hereinafter defined), in accordance with the following
schedule:

<TABLE>
<CAPTION>
PURCHASE
ACQUIRED ASSET REVENUES ($) AND PRE-TAX PROFITS (%) BONUS
--------------------------------------------------- --------
<S> <C>
Less than $22,000,000 and 15%................................... $ 0
Equal to or greater than $22,000,000 and 15%, but less than
$24,000,000 and 18%............................................ $ 750,000
Equal to or greater than $24,000,000 and 18%.................... $1,500,000
</TABLE>

(b) "Acquired Asset Revenues and Pre-Tax Profits" means the revenues and
pretax profits, respectively, for the Acquired Assets during the twelve
calendar months immediately following the Management Assumption Date, (the
"Measuring Period"), excluding expenses associated with research and
development, product enhancements, product revisions and product introductions
in excess of the expenses set forth on the pro-forma expense analysis (the
"Expense Analysis") attached hereto as Schedule 1.5, as determined in
accordance with U.S. generally accepted accounting principles, including,
without limitation, any appropriate adjustments to match marketing and other
expenses to revenues ("Purchase Bonus GAAP").

(c) During the Measuring Period, the Buyer shall use good faith efforts to
operate the Acquired Business in a manner that is consistent with the Buyer's
expected operation of the Acquired Assets following the expiration of the
Measuring Period, and the Buyer shall not incur expenses in a manner that
would unfairly prejudice the Company's ability to achieve the Purchase Bonus.

(d) The certified public accounting firm of Arthur Andersen, LLP shall be
engaged by the Buyer and the Company to determine the Acquired Asset Revenues
and Pre-Tax Profits in accordance with the requirements of clause (b) above,
and the determination of such firm shall be final, binding and non-appealable
upon the Company and the Buyer. The Buyer and the Company shall instruct
Arthur Andersen, LLP to make such determination within 25 days. The expenses
of such firm shall be borne equally by the Buyer and the Company. The Purchase
Bonus shall be paid in accordance with the terms of the Escrow Agreement
(Purchase Bonus).

(e) Contemporaneously with the execution and delivery of this Agreement, the
Buyer shall deliver by wire transfer to the Purchase Bonus Escrow Agent, the
sum of $1,500,000 (the "Purchase Bonus Escrow Funds") which shall be held
pursuant to the terms of the Escrow Agreement substantially in the form
attached hereto as Exhibit A (the "Escrow Agreement (Purchase Bonus)"), to
satisfy payment of the Purchase Bonus (as hereinafter defined); and/or to
satisfy, in whole or in part, the Buyer's claims for indemnity obligations in
accordance with the provisions of Section 9.

B-3
<PAGE>

1.6 Assumption of Liabilities.

(a) At the Closing, the Buyer shall deliver an instrument of assumption of
liabilities (the "Instrument of Assumption") substantially in the form
attached hereto as Exhibit B, pursuant to which it shall assume and agree to
perform, pay and discharge the liabilities, obligations and commitments of the
Company (the "Assumed Liabilities") that are specifically set forth in
Schedule 1.6 attached hereto.

(b) The Buyer shall not at the Closing assume or agree to perform, pay or
discharge, and the Company shall remain unconditionally liable for, all
obligations, liabilities and commitments, fixed or contingent, of the Company
other than the Assumed Liabilities.

1.7 Odyssey Application Software and Database. Effective as of the Closing
Date, the Buyer shall grant to the Company, and the Company shall accept, a
three-year worldwide license to use the Odyssey application software and
database only in connection with the wholesale or retail license of DaVinci E-
Mail, Noteworks E-Mail and Meeting Maker software products, and all versions
and feature extensions of such products, which license shall terminate, with
respect to each such software product, upon the Company's sale, to a third
party that is not an affiliate of the Company, of either (x) such software
product or (y) all or substantially all of the Company's business or assets.
Notwithstanding the foregoing, (i) the Company shall retain the right to
engage in telemarketing, direct-mail and other customary marketing practices
(whether individually or in combination), and (ii) in connection with the
Company's sale of DaVinci E-mail, Noteworks E-mail and/or Meeting Maker to a
third party, the Company may provide such third party purchaser with the
customer and prospect lists for such product(s), in comma-delimited or similar
format.

1.8 Allocation of Purchase Price and Assumed Liabilities. Schedule 1.8
hereto sets forth an allocation of the aggregate amount of the Purchase Price
and the Assumed Liabilities among the Acquired Assets and the Assumed
Liabilities as provided in Section 1060 of the Internal Revenue Code of 1986
and the regulations promulgated thereunder, and both the Buyer and Company
hereby agree to file all necessary tax returns consistent with, and not to
take any position on any income, transfer or gains tax return inconsistent
with, such agreed-upon allocation.

1.9 Closing. The Management Assumption and the Closing shall occur in the
manner set forth in Subsection 1.2 above. The transfer of the Acquired Assets
to the Buyer shall be deemed to occur at 9:00 a.m., Boston time, on the
Closing Date.

2. REPRESENTATIONS OF THE COMPANY

The Company represents and warrants to the Buyer that:

2.1 Organization.

The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power to own its properties, to carry on its business as now being
conducted, to execute and deliver this Agreement and the agreements
contemplated herein, and to consummate the transactions contemplated hereby
and thereby. The Company is duly qualified to do business and in good standing
in all jurisdictions in which its ownership of property or the character of
its business requires such qualification, except where the failure to be so
qualified will not have a material adverse effect on the business and
operations of the Company, taken as a whole. Certified copies of the
Certificate of Incorporation and Bylaws of the Company, as amended to date,
have been previously delivered to the Buyer, are complete and correct, and no
amendments have been made thereto or have been authorized since the date
thereof. As of September 30, 1997, the Company has issued and outstanding
12,281,502 shares of its Common Stock (excluding treasury shares).

B-4
<PAGE>

2.2 Authorization. The execution and delivery by the Company of this
Agreement and the agreements provided for herein, and the consummation by the
Company of all transactions contemplated hereunder and thereunder, have been
duly authorized by all requisite corporate action, subject to receipt of
Shareholder Approval. This Agreement has been duly executed by the Company.
This Agreement and all other agreements and obligations entered into and
undertaken in connection with the transactions contemplated hereby to which
the Company is a party constitute the valid and legally binding obligations of
the Company enforceable against it in accordance with their respective terms.
The execution, delivery and performance by the Company of this Agreement and
the agreements provided for herein, and the consummation by the Company of the
transactions contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (a) violate the provisions of
any material law, rule or regulation applicable to the Company (b) violate the
provisions of the Certificate of Incorporation or Bylaws of the Company; or
(c) violate any judgment, decree, order or award of any court, governmental
body or arbitrator; or (d) conflict with or result in the breach or
termination of any material term or provision of, or constitute a default
under, or cause any acceleration under, or cause the creation of any lien,
charge or encumbrance upon the properties or assets of the Company pursuant
to, any indenture, mortgage, deed of trust or other agreement or instrument to
which the Company is a party or by which the Company is or may be bound.
Schedule 2.2 attached hereto sets forth a true, correct and complete list of
all consents and approvals of third parties that are required in connection
with the consummation by the Company and of the transactions contemplated by
this Agreement. Except with respect to the Shareholder Approval, all consents,
approvals, authorizations and other requirements prescribed by any law, rule
or regulation which must be obtained or satisfied by the Company and which are
necessary for the consummation of the transactions contemplated by this
Agreement have been obtained and satisfied.

2.3 Ownership of the Acquired Assets. Schedule 2.3 attached hereto sets
forth a true, correct and complete list of all claims, liabilities, liens,
pledges, charges, encumbrances and equities of any kind affecting the Acquired
Assets (collectively, the "Encumbrances"). The Company is, and at the Closing
will be, the true and lawful owner of the Acquired Assets, and will have the
right to sell and transfer to the Buyer good, clear, record and marketable
title to such Acquired Assets, free and clear of all Encumbrances of any kind.
Except as set forth in Schedule 2.3, the delivery to the Buyer of the
instruments of transfer of ownership contemplated by this Agreement will vest
good and marketable title to the Acquired Assets in the Buyer, free and clear
of all liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever.

2.4 Financial Statements; Books and Records. Attached hereto as Schedule 2.4
are the unaudited balance sheet of the Company as of September 30, 1997 (the
"Current Balance Sheet") and the related statements of income, shareholders'
equity, retained earnings and changes in financial condition of the Company
for the 9-month period then ended (collectively, the "Current Financial
Statements"). The Current Financial Statements are consistent with the books
and records of the Company and have been prepared in accordance with GAAP,
except that the Current Financial Statements are subject to adjustments that
give effect to the transactions contemplated herein. The general ledgers and
books of account of the Company (i) are complete and correct in all material
respects and have been maintained in accordance with good business practice,
and (ii) indicate that for the twelve month period ended August 29, 1997, the
Acquired Assets generated approximately $27,500,000 in gross revenues to the
Company.

2.5 Absence of Undisclosed Liabilities. Except as and to the extent (a)
reflected and reserved against in the Current Balance Sheet, (b) set forth on
Schedule 2.5 attached hereto, or (c) incurred in the ordinary course of
business after the date of the Current Balance Sheet and not material in
amount, either individually or in the aggregate, the Company has no liability
or obligation, secured or unsecured, whether accrued, absolute, contingent,
unasserted or otherwise, which is material to the condition (financial or
otherwise) of the Acquired Business. For purposes of this Subsection 2.6,
"material" means any amount in excess of $50,000.

2.6 Litigation. Except as set forth on Schedule 2.6 attached hereto, with
respect to the Acquired Business, (a) there is no action, suit or proceeding
to which the Company is a party pending or, to the best knowledge of

B-5
<PAGE>

the Company, threatened before any court or governmental agency, authority,
body or arbitrator that would, if decided adversely to the Company, have a
material adverse effect upon the Acquired Business and/or the Acquired Assets;
(b) the Company has not been permanently or temporarily enjoined by any order,
judgment or decree of any court or any governmental agency, authority or body
from engaging in or continuing any conduct or practice; and (c) there is not
in existence on the date hereof any order, judgment or decree of any court,
tribunal or agency enjoining or requiring the Company to take any action of
any kind.

2.7 Accounts Receivable; Inventory.

(a) Schedule 2.7(a) attached hereto sets forth a true, correct and complete
list of the accounts and notes receivable of the Company that are Acquired
Assets and all deposits and prepayments with respect to such accounts and
notes receivable (collectively, the "Accounts Receivable"). All Accounts
Receivable, as shown on Schedule 2.7(a), are net of royalty and maintenance
fee obligations. The Accounts Receivable designated in Schedule 2.7(a) as
"Guaranteed Receivables" are collectible at 100% of their respective amount
stated on such Schedule within 90 days after the date that they were created.

(b) During the term of the Management Agreement, the Company shall collect
Accounts Receivable and shall, not later than the thirteenth calendar day of
each month, provide the Buyer with an accounting of such collections.

(c) The inventory of the Company that are Acquired Assets (the "Inventory")
consists of raw materials and supplies, goods in process and finished goods,
all of which were used by the Company in connection with the Acquired
Business. The Inventory is listed on Schedule 2.7(c), attached hereto. The
Inventory has a minimum net book value, taken in the aggregate, of $850,000,
computed in accordance with the Company's usual and customary inventory
valuation policies and United States generally accepted accounting principles.
For the purposes of this calculation, the catalog inventory has zero book
value.

(d) In the event that the Buyer's customers that are distributors or
resellers return inventory to the Buyer and provided that (i) the inventory
was in the customer's actual possession on the Management Assumption Date,
(ii) such inventory was subject to the inventory rotation or return provisions
of a distribution or reseller agreement between the customer and the Company
that was in effect on the Management Assumption Date, (iii) the Buyer provides
such inventory to the Company for its inspection within 30 business days of
the Buyer's receipt of such inventory, (iv) such inventory is returned to the
Buyer in accordance with the stock rotation or return terms of the applicable
distributor or reseller agreement, and (v) the Buyer provides the Company with
a written statement indicating the rotation value of such inventory (based
upon the per-unit price schedule set forth in Schedule 2.7(d) attached
hereto), then within 60 days of its receipt of such statement, the Company
shall pay to the Buyer the rotation value of such inventory, and the Company
shall issue a credit or repay its customer in accordance with the provisions
of the applicable distributor or reseller agreement. The Buyer may not
exercise the foregoing inventory rotation privilege on more than six
occasions. The Buyer shall not issue a credit or rebill any customers in
connection with accounts receivable related to any such stock rotation or
return.

2.8 Tax Matters. All tax returns and reports of the Company required by law
to be filed have been filed and are complete and correct in all material
respects, and all taxes and levies of every kind, character or description
upon the Company or upon any of its properties, assets, income or franchises
which are or were owed, have been paid in full, other than those currently
payable without penalty or interest, those currently under appeal (for which
adequate reserves have been taken) and those which would, notwithstanding any
such non-payment, not have a material adverse effect on Acquired Business
and/or the Acquired Assets. No tax lien has been filed and no claim is being
asserted with respect to, any taxes or levies owed by, or with respect to any
properties, assets, income or franchises of, the Company. The Company has
withheld and timely paid all taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, or other third party.

B-6
<PAGE>

2.9 Contracts and Commitments.

(a) Schedule 2.9(a) attached hereto contains a true, complete and correct
list and description of the following contracts and agreements, whether
written or oral, which directly affect the Acquired Business and/or the
Acquired Assets (collectively, the "Contracts") which will continue after the
Closing Date: (i) all loan agreements, indentures, mortgages and guaranties to
which the Company is a party or by which the Company is bound; (ii) all
pledges, conditional sale or title retention agreements, security agreements
(including but not limited to maintenance agreements), equipment obligations,
personal property leases and lease purchase agreements to which the Company is
a party or by which the Company or any of its property is bound; (iii) all
prepaid maintenance contracts; (iv) all contracts, agreements, commitments,
purchase orders or other understandings or arrangements to which the Company
is a party or by which the Company or any of its property is bound (including
upgrade, restocking and return agreements) which either involve payments or
receipts by the Company of more than $25,000 in the case of any single
contract, agreement, commitment, understanding or arrangement under which full
performance (including payment) has not been rendered by all parties thereto,
or may materially adversely effect the condition (financial or otherwise) or
the properties, assets, business or prospects of the Company; (v) all
collective bargaining agreements, employment and consulting agreements,
noncompetition agreements or arrangements, executive compensation plans, bonus
plans, deferred compensation agreements, pension plans, retirement plans,
employee stock option or stock purchase plans and other employee benefit
plans, agreements, arrangements or commitments to which the Company is a
party; (vi) all agency, fulfillment house, distributor, agency distributor,
sales representative, franchise or similar agreements to which the Company is
a party; (vii) all contracts, agreements or other understandings or
arrangements between the Company and its affiliates; and (viii) all material
leases of personal property, whether operating, capital or otherwise, under
which the Company is lessor or lessee.

(b) Except as set forth on Schedule 2.9(b):

(i) each Contract is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, and the
Company does not have any knowledge that any Contract is not a valid and
binding agreement of the other parties thereto; (ii) the Company has
fulfilled all material obligations required pursuant to the Contracts to
have been performed by the Company on its part prior to the date hereof,
and the Company has no reason to believe that it will not be able to
fulfill, when due, all of its obligations under the Contracts which remain
to be performed after the date hereof; (iii) the Company is not in breach
of or default under any material term of any Contract, and to the best
knowledge of the Company, no event has occurred which with the passage of
time or giving of notice or both would constitute such a breach or default;
and (iv) to the best knowledge of the Company there is no existing breach
or default by any other party to any Contract. True, correct and complete
copies of all Contracts, as amended to date, have previously been delivered
by the Company to the Buyer.

2.10 Compliance with Agreements and Laws. Except as set forth on Schedule
2.10 attached hereto, the Company has all material licenses, permits and
certificates, including environmental, health and safety permits, from
federal, state, provincial and local authorities necessary to conduct the
Acquired Business and own and operate the Acquired Assets (collectively, the
"Permits"). Schedule 2.10 attached hereto sets forth a true, correct and
complete list of all such Permits, copies of which have previously been
delivered by the Company to the Buyer. The business of the Company as
conducted on the date hereof does not violate, in any material respect, any
federal, state, provincial, local or foreign laws, regulations or orders the
enforcement of which would have a material adverse effect on the Acquired
Business. Except as set forth on Schedule 2.10, the Company has not had notice
or communication from any federal, state, provincial or local governmental or
regulatory authority since January 1, 1993 of any such violation or
noncompliance and there are no other outstanding notices of any such violation
or noncompliance which have not been cured.

2.11 Employee Relations. The Company is in compliance with all material
federal, state, provincial and municipal laws respecting employment and
employment practices, terms and conditions of employment, and wages and hours,
and is not engaged in any unfair labor practice, and there are no arrears in
the payment of

B-7
<PAGE>

wages or social security taxes. None of the Company's employees are
represented by a union and there have been no union organizing efforts
conducted at the Company and none is now being conducted. The Company has not
had at any time, nor, to the knowledge of the Company is there now threatened,
any strike. Schedule 2.11 sets forth a true, correct and complete list as of
the date hereof showing each employee of the Company that is expected to
transfer employment to the Buyer (collectively, the "Transferred Employees"),
his or her position, salary, benefits and bonuses (if any). The Company and
the Buyer shall each be responsible for salary, severance, termination, bonus
and other employee related obligations in the manner and to the extent set
forth in the Management Agreement and the Transition Agreement.

2.12 Employee Benefit Plans.

(a) Employee Plans. Schedule 2.12 attached hereto contains a true, correct
and complete list of all pension, benefit, profit sharing, trust agreements,
insurance contracts, retirement, deferred compensation, welfare, insurance,
disability, bonus, vacation pay, severance pay and other similar plans,
programs and agreements, whether reduced to writing or not, relating to the
Transferred Employees (the "Employee Plans"). All Employee Plans comply in all
material respects with the requirements prescribed by all statutes, orders or
governmental rules or regulations currently in effect, including Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal
Revenue Code of 1986, as amended (the "Code") applicable to such Employee
Plans. The Company has in all material respects performed all obligations
required to be performed by it under the Employee Plans. The Company has not
ever been obligated to contribute to any "multiemployer plan," as such term is
defined in Section 3(37) of ERISA and has no "defined benefit plan," as such
term is defined in Section 3(35) of ERISA.

(b) Prohibited Transactions. To the best knowledge of the Company, neither
the Company nor any of its directors, officers, employees or agents, or any
"party in interest" or "disqualified person," as such terms are defined in
Section 3 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code has, with respect to any Employee
Plan, engaged in or been a party to any nonexempt "prohibited transaction," as
such term is defined in Section 4975 of the Code or Section 406 of ERISA, in
connection with which, directly or indirectly, the Buyer or any of its
affiliates, directors or employees or any Employee Plan or any related funding
medium could be subject to either a penalty assessed pursuant to Section
502(i) of ERISA or a tax imposed by Section 4975 of the Code.

(c) Copies of Employee Plans and Related Documents. The Company has
previously delivered to the Buyer true, correct and complete copies of all
Employee Plans which have been reduced to writing and written descriptions of
all Employee Plans which have not been reduced to writing, and all agreements,
including trust agreements and insurance contracts, related to such Employee
Plans, and the Summary Plan Description and all modifications thereto for each
Employee Plan communicated to employees.

(d) Qualifications; Claims. Each Employee Plan and all amendments thereto
intended to qualify under Section 401(a) of the Code have been determined by
the Internal Revenue Service to so qualify, and the trusts created thereunder
have been determined to be exempt from tax under the provisions of Section
501(a) of the Code, and nothing has since occurred, or will occur prior to the
Closing Date, which might cause the loss of such qualification or exemption.
Except as set forth on Schedule 2.12(d), to the best knowledge of the Company
there are no pending claims, suits or other proceedings by present or former
employees of the Company or its affiliates, plan participants, beneficiaries
or spouses of any of the above, including claims against the assets of any
trust, involving any Employee Plan, or any rights or benefits thereunder,
other than ordinary and usual claims for benefits by participants or
beneficiaries.

(e) No Implied Rights. Nothing expressed or implied herein shall confer upon
any past or present employee of the Company, its representatives,
beneficiaries, successors and assigns, nor upon any collective bargaining
agent, any rights or remedies of any nature, including, without limitation,
any rights to employment or continued employment with the Buyer, the Company,
or any successor or affiliate; nor shall the Buyer, the Company or their
affiliates be precluded or prevented from terminating or amending any Employee
Plan.

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<PAGE>

(f) Transfer. The Company shall take any actions as may be necessary or
appropriate in the reasonable opinion of the Buyer and the Buyer's counsel
under all applicable laws and the terms of the Employee Plans to establish the
Buyer, or an affiliate of the Buyer, as having all rights and obligations with
respect to the Employee Plans assumed pursuant to this Agreement, including,
without limitation, rights with respect to all annuity or insurance contracts
which form a part of any of such Employee Plans, together with all other
Employee Plan assets. The Company shall obtain as of the Closing Date any and
all consents from trustees required to effect any transfer of any trust(s)
related to such assumed Employee Plans to such trustee(s) as may be appointed
by the Buyer.

2.13 Warranty and Product Liability. Schedule 2.13 attached hereto contains
a true, correct and complete list of all warranty and product liability claims
made against the Company from January 1, 1995 through the date hereof, the
current status of all such claims and the costs of all actions taken in
satisfaction of such claims. All information relative to such claims and those
arising thereafter shall be available to the Buyer from and after the date
hereof.

2.14 Regulatory Approvals. All consents, approvals, authorizations or other
requirements prescribed by any law, rule or regulation which must be obtained
or satisfied by the Company and which are necessary for the execution and
delivery by the Company of this Agreement or any documents to be executed and
delivered by the Company in connection herewith are set forth on Schedule 2.14
attached hereto and have been, or prior to the Closing Date will be, obtained
and satisfied.

2.15 Intellectual Property.

(a) Schedule 2.15 attached hereto sets forth a true, correct and complete
list of items of Intellectual Property (as defined in Schedule 1.1A),
including but not limited to copyrights, copyright registrations, trademarks,
trademark registrations, tradenames, patents, patent registrations and trade
secrets, owned by, or used in the business of, the Company and which
constitute Acquired Assets. Except as otherwise disclosed in Schedule 2.15:
(i) the Company is the sole and exclusive owner of all right, title and
interest in and to the Intellectual Property and all designs, permits, labels
and packages used on or in connection therewith, free and clear of all liens,
security interests, charges, encumbrances, and other adverse claims; (ii) the
Company has the right and authority to use the Intellectual Property in
connection with the conduct of its business in the manner presently conducted,
and, to the best knowledge of the Company, such use does not conflict with,
infringe upon or violate any rights of any other person, corporation or
entity; (iii) the Company has not received notice of a pleading or threatened
claim, interference action or other judicial or adversarial proceeding against
the Company alleging that any of the Intellectual Property infringes any
patent, trademark, trade name, copyright, trade secret or other property right
of a third party, or that it is illegally or otherwise using the trade
secrets, formulae or property rights of others; and (iv) there are no
outstanding, disputes or other disagreements with respect to any licenses or
similar agreements or arrangements described in Schedule 2.15 or with respect
to infringement by a third party of any of the Intellectual Property. Each
item of Intellectual Property owned or used by the Company immediately prior
to the Closing will be owned or licensed for use by the Buyer on identical
terms and conditions immediately subsequent to the Closing.

2.16 Tangible Personal Property. Schedule 2.16 attached hereto sets forth a
true, correct and complete list (the "Personal Property List") of all
equipment, furniture, leasehold improvements and other tangible personal
property that constitute Acquired Assets and that has a book value, with
respect to any individual item, of at least $500. Arthur Andersen, LLP has
reviewed the book value of the items on the Personal Property List.

2.17 Absence of Changes. Except as disclosed on Schedule 2.17 hereto or
otherwise approved in writing by Buyer, since the date of the Current Balance
Sheet, there has not been with respect to the Acquired Business, any (a)
transaction by the Company except in the ordinary course of business as
conducted during the 12-month period ending on that date; (b) capital
expenditures exceeding $100,000 or Inventory expenditures exceeding $100,000,
in each case in the aggregate; (c) physical destruction, damage to, or loss of
any Acquired Asset (whether or not covered by insurance) that, individually or
in the aggregate had a material adverse effect on the

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Acquired Business, taken as a whole; (d) any material increase in compensation
payable to, or any employment, bonus or compensation agreement entered into
with, any Transferred Employees (other than those made after consultation with
Buyer); (e) change in accounting methods or practices (including, without
limitation, changes in depreciation or amortization policies or rates) by the
Company; (f) upward revaluation of the Acquired Assets; (g) sale or transfer
of any asset of the Acquired Business except in the ordinary course of
business; (h) waiver or release of any material right or claim of the Company
that is directly related to the Acquired Business, except in the ordinary
course of business; or (i) any payment or provision with respect to any
employee benefit plan, except in the ordinary course of the administration of
such plans.

2.18 No Misleading Statements. This Agreement, the information and the
schedules referred to herein do not, when taken as a whole, include any untrue
statement of a material fact and do not omit to state any material fact
necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading in any material
respect.

2.19 Accounts Payable. Since the date of the Current Balance Sheet, the
Company has been paying its vendors in the ordinary course of business.

3. REPRESENTATIONS OF THE BUYER

The Buyer represents and warrants to the Company as follows:

3.1 Organization and Authority. The Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, and has all
requisite power and authority (corporate and other) to own its properties and
to carry on its business as now being conducted. The Buyer has complete power
to execute and deliver this Agreement and the agreements contemplated herein,
and to consummate the transactions contemplated hereby and thereby.

3.2 Authorization. The execution and delivery of this Agreement by the
Buyer, and the agreements provided for herein, and the consummation by the
Buyer of the transactions contemplated hereby and thereby, have been duly
authorized by all requisite corporate action. This Agreement and all such
other agreements and written obligations entered into and undertaken in
connection with the transactions contemplated hereby constitute the valid and
legally binding obligations of the Buyer, enforceable against the Buyer in
accordance with their respective terms. The execution, delivery and
performance of this Agreement and the agreements provided for herein, and the
consummation by the Buyer of the transactions contemplated hereby and thereby,
will not, with or without the giving of notice or the passage of time or both,
(a) violate the provisions of any material law, rule or regulation applicable
to the Buyer; (b) violate the provisions of the Buyer's Certificate of
Incorporation or Bylaws; (c) violate any judgment, decree, order or award of
any court, governmental body or arbitrator; or (d) conflict with or result in
the breach or termination of any material term or provision of, or constitute
a default under, or cause any acceleration under, or cause the creation of any
lien, charge or encumbrance upon the properties or assets of the Buyer
pursuant to, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Buyer is a party or by which the Buyer is or may be
bound.

3.3 Regulatory Approvals. All consents, approvals, authorizations and other
requirements prescribed by any law, rule or regulation which must be obtained
or satisfied by the Buyer and which are necessary for the consummation of the
transactions contemplated by this Agreement have been, or will be prior to the
Closing Date, obtained and satisfied.

4. ACCESS TO INFORMATION; PUBLIC ANNOUNCEMENTS

4.1 Access to Management, Properties and Records. From the date of this
Agreement until the Closing Date, the Company shall afford the officers,
attorneys, accountants and other authorized representatives of the Buyer
reasonable access upon reasonable notice and during normal business hours to
all management personnel,

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offices, properties, books and records of the Company, for the sole purpose of
facilitating the closing of the transactions contemplated hereunder and to the
extent directly related to the Acquired Assets and the Transferred Employees.
The Company shall furnish to the Buyer such financial and operating data and
other information as to the business of the Company related to the Acquired
Assets and the Transferred Employees as the Buyer shall reasonably request.
The Buyer shall also have the right to contact the Company's vendors,
customers and other persons having business dealings with the Company for the
sole purpose of facilitating the closing of the transactions contemplated
hereunder relating to the Acquired Assets.

4.2 Public Announcements. Without the prior written consent of the other
party, neither the Company nor the Buyer will disclose the fact that any
discussion or negotiations are taking place concerning a possible transaction
that is the subject matter hereof, or (ii) any of the terms, conditions or
other facts with respect to any such possible transaction, including the
status thereof, unless and only to the extent that such disclosure (and only
after consultation with the other party) is, in the opinion of the other
party's counsel, required by applicable United States and/or Israeli
securities laws. The Company and the parent of the Buyer are publicly traded
companies and United States and Israeli securities laws prohibit any person or
entity who has received material, non-public information concerning a publicly
traded company from purchasing or selling securities of such company or from
communicating such information to any person under circumstances in which it
is reasonably foreseeable that such person is likely to purchase or sell such
securities while in possession of material, non-public information. The fact
that the Buyer and the Seller are considering an acquisition of the Acquired
Assets and the proposed terms of such acquisition could be considered
material, non-public information.

5. PRE-CLOSING COVENANTS OF THE COMPANY AND THE BUYER.

From and after the date hereof and until the Closing Date, the Buyer and the
Company agree as follows:

5.1 Absence of Material Changes. Without the prior written consent of the
Company, which consent shall not be unreasonably withheld, the Buyer shall not
take any actions that are prohibited pursuant to Subsection 4.7 of the
Management Agreement.

5.2 Continued Truth of Representations and Warranties. Neither the Company
nor the Buyer will take any actions which would result in any of the
representations or warranties set forth in Sections 2 or 3 hereof becoming
untrue in any material respect.

5.3 Reports, Taxes. With respect to the Acquired Business and the Acquired
Assets, the Buyer will duly and timely file all reports or returns required to
be filed with federal, state, provincial, local and foreign authorities and
will promptly pay all federal, state, provincial, local and foreign taxes,
assessments and governmental charges levied or assessed upon it or any of its
properties (unless contesting such in good faith and adequate provision has
been made therefor).

5.4 Communications with Customers and Suppliers. The Company and the Buyer
will cooperate in communications with suppliers and customers in connection
with the conveyance of the Acquired Assets to the Buyer on the Closing Date.

5.5 Payment of Arthur Andersen LLP Fees. The Buyer will pay up to $4,000 of
Arthur Andersen LLP's fees in connection with that firm's review of the
Inventory list and the Personal Property list. The Company will pay the
remainder of such costs.

5.6 Shareholder Approval. Subject to the fiduciary duties of the Company's
Board of Directors, the Company shall use its best efforts to obtain the
Shareholder Approval, in accordance with applicable law and in accordance with
the Company's organizational documents. Without limiting the foregoing, the
Company shall prepare a Proxy Statement for a Special Meeting of Shareholders
to solicit the Shareholder Approval and shall submit such Proxy Statement to
the Buyer for its review and, in the case of any information therein with
respect to the Buyer, for the Buyer's approval, which shall not be
unreasonably withheld or delayed.

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5.7 No Solicitations. From and after the date hereof, the Company, without
the prior written consent of the Buyer, will not, and will not authorize any
of its officers, employees, directors, stockholders or other representatives
to, directly or indirectly, solicit, initiate or encourage or take any other
action to facilitate knowingly any inquiries or the making of any proposal
that constitutes or could be reasonably expected to lead to an Alternative
Proposal (as defined below) from any person, or engage in any discussions or
negotiations relating thereto or accept any Alternative Proposal or make or
authorize any statement, recommendation or solicitation in support of any
Alternative Proposal; provided, however, that notwithstanding any other
provision hereof, the Company may (a) at any time prior to the time that the
Company's stockholders shall have voted to approve this Agreement and the
transactions contemplated hereby, engage in discussions or negotiations with a
third party who (without any solicitation, initiation, encouragement,
discussion or negotiation, directly or indirectly, by or with the Company or
any officer, employee, director, stockholder or other representative of the
Company after the date hereof) seeks to initiate such discussions or
negotiations and may furnish such third party with information concerning the
Acquired Business and the Acquired Assets if, and only to the extent that, (i)
(x) such third party has first made, after the date hereof, an Alternative
Proposal in writing, the terms of which reflect a superior transaction
(including, without limitation, the impact on the Transferred Employees, to
the extent appropriate) than the transactions contemplated by this Agreement
and has demonstrated that the funds necessary for the Alternative Proposal are
likely to be available (as determined in good faith in each case by the
Company's Board of Directors after consultation with its financial advisors)
and (y) the Company's Board of Directors shall have determined in good faith,
on the basis of advice of outside counsel, that such action is necessary for
the Board of Directors to comply with the fiduciary duties to stockholders
under applicable law and (ii) prior to furnishing information to or entering
into discussions or negotiations with such person, the Company receives from
such person an executed confidentiality agreement in usual and customary form
and containing terms not in the aggregate materially more favorable to such
person than the terms contained in the September 10, 1997 letter of intent
executed by the Company and the Buyer; or (b) comply with Rule 14(e)-(2)
promulgated under the Securities and Exchange Act of 1934 with regard to a
tender or exchange offer. The Company shall not release any third party from
or waive any provision of, any standstill agreement to which it is a party or
any confidentiality agreement between it and another person who has made, or
who may reasonably be considered likely to make, an Alternative Proposal,
unless its Board of Directors shall determine in good faith, on the basis of
advice of outside legal counsel, that such action is necessary for the Board
of Directors to comply with its fiduciary duties to stockholders under
applicable law. The Company shall notify the Buyer in writing of any such
inquiries (that are or appear to be serious or legitimate), offers of
proposals (including the terms and conditions of any such offer or proposal,
the identity of the person making it, and a copy of any written Alternative
Proposal), as promptly as practicable and in any event within 48 hours after
the receipt thereof, shall keep the Buyer informed of the status and details
of any such inquiry, offer or proposal, and shall give the Buyer 5 days
advance written notice of any agreement to be entered into with, or any
information to be supplied to, any person making such inquiry, offer or
proposal.

The term "Alternative Proposal" shall mean a proposal or offer (other than
by the Buyer) for a stock purchase, asset acquisition, merger, consolidation
or other business combination involving the Acquired Business or any proposal
to acquire in any manner a direct or indirect, majority equity interest in the
Company, or all or substantially all of the Acquired Assets. Notwithstanding
anything to the contrary herein, the covenants of the Company set forth in
Section 7 of the letter of intent between the Company and the Buyer, dated
September 10, 1997, as amended, shall continue in effect for the period ending
October 29, 1997.

6. ANCILLARY AGREEMENTS

6.1 Ancillary Agreements. The Company and the Buyer agree that, except with
respect to the conditions set forth in Subsections 7.1 and 7.2 below, all of
the conditions precedent to the Closing have been satisfied. The Buyer and the
Company shall each use their best efforts to obtain the assignments and
consents set forth in Subsections 6.2, 6.3, 6.4, 6.5 and 6.6 below
(collectively, the "Ancillary Agreements") on or prior to the forty-fifth day
following the Management Assumption Date. The Company agrees to pay the
amounts specified in Subsections 6.2, 6.3, 6.4, 6.5 and 6.6 below in
connection with any such Ancillary Agreement (the "Actual

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<PAGE>

Damages"). The Buyer and the Company shall use their best efforts to agree
upon the Actual Damages, if any, on or prior to the Closing Date, and if the
parties are unable to agree by such date then the Actual Damages shall, at the
option of the Buyer or the Company, be determined by arbitration conducted in
accordance with the provisions of Subsection 12.3 below. The Actual Damages
shall constitute the Buyer's complete and liquidated damages due to a failure
to satisfy any of the Ancillary Agreements. The failure to satisfy the
Ancillary Agreements shall not estop the Closing or the delivery of the
Purchase Price as set forth herein.

6.2 Transferred Premises. The Buyer shall obtain the agreement of Camp
Dresser & McKee, Inc. as sublandlord and of Trustees of One Cambridge Center
Trust as landlord to the sublease of the premises consisting of the eleventh
floor of One Cambridge Center, Cambridge, Massachusetts, it being agreed that
if such sublease assignment requires the payment of any sums in addition to
those otherwise payable by the Company, such additional amounts shall
constitute Actual Damages.

6.3 Macola License Agreement. The Buyer shall obtain the consent of Macola,
Inc. to the assignment to the Buyer of the undated License Agreement and
Limited Product Warranty, with respect to the Macola, Inc. accounting software
package; any out-of-pocket costs incurred in obtaining such assignment shall
constitute Actual Damages.

6.4 TLP Equipment Lease. The Buyer shall obtain the consent of TLP Leasing
Programs, Inc. to the assignment of a certain Master Agreement of Terms and
Conditions for Equipment Lease dated August 4, 1994 to the Buyer; any costs
incurred in connection with such assignment, including any increases in rental
payments under such Equipment Lease due by reason of such assignment, shall
constitute Actual Damages.

6.5 Oracle Database Management Software. The Buyer shall obtain the consent
of Oracle Corporation to the assignment of the Software License and Services
Agreement dated July 2, 1996 to the Buyer; any costs incurred in obtaining
such assignment shall constitute Actual Damages.

6.6 Database America Information Systems, Inc. Agreement. The Buyer shall
obtain the consent of Database America Information Systems, Inc. to the
assignment to the Buyer of the Services Agreement dated July 6, 1995 between
the Company and Database America Information Systems, Inc.; any payments
required to be made to Database America Information Systems, Inc. to obtain
such consent, including any increase in the monthly maintenance fee for the
remainder of the current term, shall constitute Actual Damages.

6.7 Fulfillment House Agreements. The Company and the Buyer shall cooperate
in obtaining an agreement or arrangement with McQueen, City Mail and KAO
(Canada) to provide mail order fulfillment services to the Buyer after the
Closing and, in the absence of obtaining one or more of such agreements, to
obtain comparable fulfillment services from other vendors; provided that no
Actual Damages shall be payable in the event of the failure to obtain any such
fulfillment service agreements.

6.8 Agreements to Be Deposited into Escrow. The Ancillary Agreements
specified in Subsections 6.2 through 6.6 above, together with the Fulfillment
House Agreements specified in subsection 6.7 above, shall, upon their
execution by the applicable parties, be deposited with the Document Escrow
Agent pursuant to the Escrow Agreement (Management Assumption) and shall
constitute Closing Deliveries for purposes of such Escrow Agreement.

7. CONDITIONS TO OBLIGATIONS OF THE BUYER

The obligations of the Buyer under this Agreement are subject solely to the
conditions specified in Subsections 7.1 and 7.2 below.

7.1 Shareholder Approval. The delivery of the Opinion Release Instructions
to the Escrow Agent, in accordance with Subsection 1.2 above.

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<PAGE>

7.2 Accounts Receivable. The Company shall have paid to the Buyer all
amounts due with respect to the Guaranteed Receivables, as set forth in
Subsection 2.7(a) herein, and Fleet National Bank shall have issued the Credit
Advice.

7.3 Closing Deliveries. The Document Escrow Agent has received at least two
fully executed originals of each of the following documents:

(a) an Assignment and Assumption of the SofTrack License Agreement and
the Consent of Integrity Software Inc. and Integrity Software Ltd. to the
Assignment and Assumption of the SofTrack License Agreement;

(b) an Assignment and Assumption of Contracts;

(d) an opinion of Epstein Becker & Green, P.C., counsel to the Company,
in the form attached hereto as Exhibit C;

(e) employment agreement of Ivan O'Sullivan, in the form attached hereto
as Exhibit D;

(f) a bill of sale in the form attached hereto as Exhibit E;

(g) an Instrument of Assumption of Liabilities;

(h) a Side Letter Regarding Brokerage Commissions;

(i) the Escrow Agreement (Management Assumption), together with the
delivery of the Closing Deliveries to the Escrow Agent;

(j) a certificate signed by the Secretary of the Company attesting to the
incumbency of the Company's officers, the authenticity of the resolutions
authorizing the transactions contemplated by this Agreement, and the
authenticity and continuing validity of the charter documents delivered
pursuant to Subsection 2.1; and

(k) a cross-receipt executed by the Buyer and the Company (the "Cross
Receipt").

8. CONDITION TO OBLIGATIONS OF THE COMPANY.

8.1 Conditions Precedent. The obligations of the Company under this
Agreement are subject solely to (i) the delivery of the Opinion Release
Instructions to the Document Escrow Agent, as set forth in Subsection 1.2
above and (ii) the payment of $3,000,000 of the Purchase Price to the Company,
as set forth in Subsection 1.2(c) hereof;

8.2 Opinion of Buyer's Counsel. On the Management Assumption Date, the law
firm of Fulbright & Jaworski, L.L.P. ("F&J"), counsel for the Buyer, shall
deliver an opinion to the Company, in the form agreed upon by the parties. On
the Closing Date, the Buyer shall cause F&J to deliver a bring-down opinion to
the Company, in the form attached hereto as Exhibit G. The foregoing condition
may be waived by the Company in its sole discretion.

8.3 Closing Deliveries. The Document Escrow Agent has received at least two
fully executed originals of each of the following documents:

(a) a certificate signed by the Secretary of the Buyer attesting to the
incumbency of the Buyer's officers, the authenticity of the resolutions
authorizing the transactions contemplated by this Agreement;

(b) an Escrow Agreement (Purchase Bonus), together with delivery of the
Purchase Bonus Escrow Funds to the Purchase Bonus Escrow Agent; and

(c) an executed SofTrack Side Letter, in the form of Exhibit H attached
hereto, whereby any SofTrack Licenses sold by Buyer to the Company to allow
bundling with the Company's Comprehensive Client Manager product, shall be
sold by the Buyer to the Company on a most favored purchaser basis.

The documents described in Subsection 7.3 and 8.3 of this Agreement,
together with the executed documents described in Subsection 6.8 of this
Agreement, are referred to herein as the "Closing Deliveries").

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<PAGE>

9. INDEMNIFICATION

9.1 By the Company. The Company hereby indemnifies and hold harmless the
Buyer from and against all claims, damages, losses, liabilities, costs and
expenses, including, without limitation, settlement costs and any legal,
accounting or other expenses for investigating or defending any actions or
threatened actions (collectively, the "Losses"), in connection with any breach
of any representation, warranty, covenant or condition made by the Company in
this Agreement, in the Security Agreement (Purchase Agreement) dated as of the
date hereof between the Company and the Buyer (as the Secured Party), or in
connection with any obligation of the Company with respect to the Transferred
Employees and/or the Acquired Business that arose prior to the Management
Assumption Date. Notwithstanding anything to the foregoing to the contrary,
the Company shall have no liability whatsoever pursuant to this Section 9 if
the Company is required to make the Liquidated Damage Payment specified by
Section 19 of this Agreement, it being understood and agreed that such payment
shall constitute the Buyer's sole and exclusive remedy in the event of the
Company's failure to obtain the Shareholder Approval.

9.2 By the Buyer. Subject to the express limitations set forth in Subsection
6.6 of the Management Agreement, the Buyer hereby indemnifies and holds
harmless the Company from and against all Losses in connection with any breach
of any representation, warranty, covenant or condition made by the Buyer in
this Agreement, in the Security Agreement (Management Agreement) dated as of
the date hereof between the Buyer and the Company (as the Secured Party) or in
connection with any obligation of the Buyer with respect to the Transferred
Employees and/or the Acquired Business (unless due directly from the Company's
inability to obtain Shareholder Approval) that arises on or after the
Management Assumption Date, provided that if Shareholder Approval is not
obtained as provided herein, then only with respect to matters that arise on
or before the Termination Date.

9.3 Claims for Indemnification. Whenever any claim shall arise for
indemnification under this Section 9, the Buyer, on the one hand, or the
Company on the other hand, seeking indemnification (the "Indemnified Party"),
shall promptly notify the other party hereto (the "Indemnifying Party") of the
claim and, when known, the facts constituting the basis for such claim. In the
event of any such claim for indemnification hereunder resulting from or in
connection with any claim or legal proceedings by a third party, the notice
shall specify, if known, the amount or an estimate of the amount of the
liability arising therefrom. The Indemnified Party shall not settle or
compromise any claim by a third party for which it is entitled to
indemnification hereunder without the prior written consent, which shall not
be unreasonably withheld or delayed, of the Indemnifying Party; provided,
however, that if suit shall have been instituted against the Indemnified Party
and the Indemnifying Party shall not have taken control of such suit after
notification thereof as provided in Subsection 9.4 of this Agreement, the
Indemnified Party shall have the right to settle or compromise such claim upon
giving notice to the Indemnifying Party as provided in Subsection 9.4.

9.4 Defense of any Claim. In connection with any claim which may give rise
to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a third party, the Indemnifying Party may, upon written notice
to the Indemnified Party, assume the defense of any such claim or legal
proceeding. If the Indemnifying Party assumes the defense of any such claim or
legal proceeding, the Indemnifying Party shall select counsel reasonably
acceptable to the Indemnified Party to conduct the defense of such claims or
legal proceedings and at the sole cost and expense of the Indemnifying Party
shall take all steps necessary in the defense or settlement thereof. The
Indemnifying Party shall not consent to a settlement of, or the entry of any
judgment arising from, any such claim or legal proceeding, without the prior
written consent of the Indemnified Party (which consent shall not be
unreasonably withheld or delayed). The Indemnified Party shall be entitled to
participate in (but not control) the defense of any such action, with its own
counsel and at its own expense. If the Indemnifying Party does not assume the
defense of any such claim or litigation resulting therefrom within 60 days
after the date such claim is made or pursue such claim in a reasonably prudent
manner: (a) the Indemnified Party may defend against such claim or litigation
in such manner as it may deem appropriate, including, but not limited to,
settling such claim or litigation, after giving notice of the same to the
Indemnifying Party, on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to participate
in (but not control) the defense of such action, with its counsel and at its
own expense. If the

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<PAGE>

Indemnifying Party thereafter seeks to question the manner in which the
Indemnified Party defended such third party claim or the amount or nature of
any such settlement, the Indemnifying Party shall have the burden to prove by
a preponderance of the evidence that the Indemnified Party did not defend or
settle such third party claim in a reasonably prudent manner.

9.5 Survival of Representations; Claims for Indemnification. If the Closing
occurs, all representations and warranties made in this Agreement, and in the
schedules and exhibits hereto, and in all certificates delivered pursuant
hereto shall survive through and until the expiration of the sixteenth full
calendar month following the Management Assumption Date (the "Termination
Date"). After the Termination Date, all such representations and warranties
shall immediately expire except with respect to claims, if any, asserted in
writing on or prior to the Termination Date. All claims and actions for
indemnity hereunder shall be asserted and maintained in writing by a party
hereto on or prior to the Termination Date.

9.6 Payment of Indemnification Claims. All indemnification hereunder shall
be effected by payment of cash or delivery of a cashier's check to the
Indemnified Party in the amount of the indemnification liability.

9.7 Exclusion for Certain Indemnity Obligations. Notwithstanding anything to
the contrary in this Section 9 or elsewhere in this Agreement, and except for
consensual liens created by the Company or the Buyer in violation of the
respective Security Agreements referenced in Subsections 9.1 and 9.2 hereof
(as to which Losses shall not be subject to the limitations and exclusions set
forth in this Subsection 9.7), neither Indemnifying Party shall be obligated
to pay any Losses suffered by the appropriate Indemnified Party unless and
until the aggregate amount of all such Losses exceeds $150,000 (the
"Recoverable"). Once the aggregate amount of such Losses exceeds the
Recoverable, such Indemnifying Party shall be required to pay Losses only in
excess of the Recoverable and in an aggregate amount not to exceed, in any
event, the Cap. For purposes of this Agreement, the Cap shall be an amount
equal to the sum of $2,000,000 plus, if applicable and if the Indemnifying
Party is the Company, that amount of the Purchase Bonus that would otherwise
be paid to the Company pursuant to Subsection 1.5 above; provided, however,
that (i) any amounts on account of the Purchase Bonus shall be paid solely by
the Escrow Agent and (ii) the indemnity obligations of the Company shall be
satisfied first from the Purchase Bonus Escrow Funds to the extent then
payable to the Company and second from recourse to the Company. In no event
shall either party be liable under this Agreement, whether pursuant to this
Section 9 or otherwise, for any amount in addition to, or from sources other
than, those specified in this Subsection 9.7.

10. POST-CLOSING AGREEMENTS

The Company and the Buyer, as applicable, agree that from and after the
Management Assumption Date:

10.1 Proprietary Information.

The Company shall hold in confidence, and use its best efforts to have the
Company's officers, directors and personnel hold in confidence, all knowledge
and information of a secret or confidential nature with respect to the
Acquired Business and the Acquired Assets and shall not disclose, publish or
make use of the same without the consent of the Buyer, except to the extent
that such information shall have become public knowledge other than by breach
of this Agreement by the Company. The Company agrees that the remedy at law
for any breach of this Subsection 10.1 would be inadequate and that the Buyer
shall be entitled to injunctive relief in addition to any other remedy it may
have on breach of any provision of this Subsection 10.1.

10.2 Sharing of Data.

(a) The Company shall have the right for a period of three years following
the Closing Date to have reasonable access to such books, records and
accounts, including financial and tax information, correspondence, production
records, employments records and other similar information as are transferred
to the Buyer pursuant to the terms of this Agreement for the limited purposes
of concluding its involvement in the business of the Company related to the
Acquired Assets prior to the Closing Date and for complying with its
obligations under

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<PAGE>

applicable securities, tax, environmental, employment or other laws and
regulations. The Buyer shall have the right for a period of three years
following the Closing Date to have reasonable access to those books, records
and accounts, including financial and tax information, correspondence,
production records, employment records and other similar records which are
retained by the Company pursuant to the terms of this Agreement to the extent
that any of the foregoing relates to the business of the Company transferred
to the Buyer hereunder or is otherwise needed by the Buyer in order to comply
with its obligations under applicable securities, tax, environmental,
employment or other laws and regulations. Each of the Company and the Buyer
shall, as a condition to the rights specified in this Subsection 10.2(a),
require its employees and agents to sign a confidentiality agreement in
reasonable form prior to exercising its rights hereunder.

(b) The Company and the Buyer agree that from and after the Closing Date
they shall cooperate fully with each other to facilitate the transfer of the
Acquired Assets from the Company to the Buyer and the operation thereof by the
Buyer.

10.3 Cooperation.

(a) The Company will cooperate with the Buyer in furnishing information or
other assistance reasonably requested in connection with any actions,
proceedings, arrangements or disputes involving the business of the Company
and based upon contracts, arrangements, property rights, acts or omissions of
the Company which were in effect or carried on prior to the Management
Assumption Date. The Buyer shall reimburse the Company, upon demand, for all
reasonable out-of-pocket expenses incurred in providing such cooperation.

(b) The Buyer will cooperate with the Company in furnishing information or
other assistance reasonably requested in connection with any actions,
proceedings, arrangements or disputes involving the business of the Buyer and
based upon contracts, arrangements, property rights, acts or omissions of the
Buyer which were in effect or carried on or after the Management Assumption
Date, but only to the extent involving any potential liability of the Company.
The Company shall reimburse the Buyer, upon demand, for all reasonable out-of-
pocket expenses incurred in providing such cooperation.

10.4 Non-Competition. Except as set forth in Subsection 1.7, neither the
Company nor any of its affiliates will, directly or indirectly, in the United
States or elsewhere in the world:

(a) Use, sell or grant any third party a license, for or without
consideration, to use the Free Trial Marketing Machine (as defined in
Schedule 1.1A or any of its components for any purpose; or

(b) bid for, acquire or compete to acquire SofTrack or any license or
other right with respect to SofTrack upon the expiration or termination of
the SofTrack License Agreement.

10.5 Non-Solicitation. Unless the Buyer consents in writing, neither the
Company nor any of its affiliates will, for a period of two (2) years from the
Management Assumption Date, directly or indirectly, solicit for employment or
employ any of the Buyer's employees, including the Transferred Employees.
Unless the Company consents in writing, neither the Buyer nor any of its
affiliates will, for a period of two (2) years from the Management Assumption
Date, directly or indirectly, solicit for employment or employ any of the
Company's employees.

10.6 Enforceability. If any court determines that any of the restrictive
covenants set forth in Sections 10.4 and 10.5, or any part of such covenants,
is unenforceable because of the duration of such provision or the area covered
thereby, such court shall have the power to reduce the duration or area of
such provision and, in its reduced form, such provision shall then be
enforceable and shall be enforced. It is further understood and agreed that
money damages would not be a sufficient remedy for any breach of the
provisions of Sections 10.4 and 10.5 by the Company or any of its affiliates
and that Buyer shall be entitled to equitable relief, including injunction and
specific performance, as a remedy for any such breach. Such remedies shall not
be deemed to be the exclusive remedies for a breach by the Company of the
provisions of Sections 10.4 and 10.5 but shall be in addition to all other
remedies available at law or equity to Buyer.

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10.7 Use of Name. For a period of 120 days following the Management
Assumption Date, the Buyer shall be entitled to use the Company's name and
trademarks on all products, sales brochures and other documentation which
constitute a portion of the Acquired Business. Upon expiration of such 120 day
period, the Buyer shall immediately cease to have any rights with regard to
such name and trademarks.

11. TERMINATION OF AGREEMENT;

11.1 Termination by Lapse of Time. This Agreement shall terminate on the
Termination Date (as defined in Subsection 1.2(d) above), unless such date is
extended by the written consent of the Company, and the Buyer.

11.2 Termination by Agreement of the Parties. This Agreement may be
terminated by the mutual written agreement of the parties hereto. In the event
of such termination by agreement, the Buyer shall have no further obligation
or liability to the Company under this Agreement and the Company shall have no
further obligation or liability to the Buyer under this Agreement.

12. DISPUTE RESOLUTION

12.1 General. In the event that after the Management Assumption Date any
dispute should arise between the parties hereto with respect to any matter
covered by this Agreement, the parties hereto shall resolve such dispute in
accordance with the procedures set forth in this Section 12.

12.2 Consent of the Parties. In the event of any dispute after the
Management Assumption Date between the parties with respect to any matter
covered by this Agreement, the parties shall first use their best efforts to
resolve such dispute among themselves. If the parties are unable to resolve
such dispute within 30 calendar days after the commencement of efforts to
resolve such dispute, such dispute will be submitted to arbitration in
accordance with this Section 12.

12.3 Arbitration.

(a) Either the Buyer, on the one hand, or the Company on the other hand, may
submit any matter referred to in Subsection 12.2 hereof to arbitration by
notifying the other party hereto, in writing, of such dispute. Within 10 days
after receipt of such notice, the Buyer and the Company shall designate in
writing one arbitrator to resolve the dispute; provided, that if the parties
hereto cannot agree on an arbitrator within such 10-day period, the arbitrator
shall be selected by the American Arbitration Association. The arbitrator so
designated shall not be a current or former employee, consultant, officer,
director or stockholder of any party hereto or any affiliate of any party to
this Agreement.

(b) Within 15 days after the designation of the arbitrator, the arbitrator,
the Buyer and the Company shall meet, at which time the Buyer and the Company
shall be required to set forth in writing all disputed issues and a proposed
ruling on each such issue.

(c) The arbitrator shall set a date(s) for a hearing(s), which shall be no
later than 30 days after the submission of written proposals pursuant to
paragraph (b) above, to discuss each of the issues identified by the Buyer and
the Company. Each such party shall have the right to be represented by
counsel. The arbitration shall be governed by the rules of the American
Arbitration Association; provided, that the arbitrator shall have sole
discretion with regard to the admissibility of evidence.

(d) The arbitrator shall use his best efforts to rule on each disputed issue
within 30 days after the completion of the hearings described in paragraph (c)
above. The determination of the arbitrator as to the resolution of any dispute
shall be binding and conclusive upon all parties hereto. All rulings of the
arbitrator shall be in writing and shall be delivered to the parties hereto
and to the Escrow Agent.

B-18
<PAGE>

(e) The arbitrator may, in his or her discretion, award attorneys' fees and
expenses in connection with the arbitration determination, consistent with the
provisions of Section 19 hereof.

(f) Any arbitration pursuant to this Section 12 shall be conducted in
Boston, Massachusetts. Any arbitration award may be entered in and enforced by
any court having jurisdiction thereover and the parties hereby consent and
commit themselves to the jurisdiction of the courts of the Commonwealth of
Massachusetts for purposes of the enforcement of any arbitration award.

13. BROKERS

13.1 The Company. The Company represents and warrants that, no person, firm
or corporation has acted in the capacity of broker or finder on its behalf to
bring about the negotiation of this Agreement. The Company agrees to indemnify
and hold harmless the Buyer against any claims or liabilities asserted against
it by any person acting or claiming to act as a broker or finder on behalf of
the Company.

13.2 For the Buyer. The Buyer represents and warrants that, no person, firm
or corporation has acted in the capacity of broker or finder on its behalf to
bring about the negotiation of this Agreement. The Buyer agrees to indemnify
and hold harmless the Company against any claims or liabilities asserted
against it by any person acting or claiming to act as a broker or finder on
behalf of the Buyer.

14. NOTICES

Any notices or other communications required or permitted hereunder shall be
sufficiently given if delivered personally or sent by telecopy, overnight
courier, registered or certified mail, postage prepaid, addressed as follows
or to such other address of which the parties may have given notice:

To the Company: ON Technology Corporation
One Cambridge Center
Cambridge, MA 02142
Attention: President

With a copy to: Gabor Garai, Esq.
Epstein Becker & Green, P.C.
75 State Street
Boston, MA 02109

To the Buyer: Elron Software, Inc.
One Cambridge Center
Cambridge, MA 02142
Attn: Ivan O'Sullivan

With a copy to: Elron Electronic Industries, Ltd.
P.O. Box 1573
Haifa, Israel
Attn: Dr. Jacov Ben-Zvi

With a copy to: Richard H. Gilden, Esq.
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103

B-19
<PAGE>

Unless otherwise specified herein, such notices or other communications
shall be delivered by a recognized overnight delivery courier such as DHL or
Federal Express and shall be deemed received on the date of actual receipt.

15. SUCCESSORS AND ASSIGNS

This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that the Buyer, on
the one hand, and the Company, on the other hand, may not assign their
respective obligations hereunder without the prior written consent of the
other party. Any assignment in contravention of this provision shall be void.
No assignment shall release the Buyer or the Company from any obligation or
liability under this Agreement. Notwithstanding the foregoing, other than the
right to use the Free Trial Marketing Machine the Company may, without the
Buyer's consent, assign its rights and obligations hereunder in connection
with the sale of all or substantially all of the Company's assets or stock, or
in connection with the merger or consolidation of the Company with a third
party provided that the Company is the surviving entity, provided that such
assignee assumes the Company's obligations hereunder.

16. ENTIRE AGREEMENT; AMENDMENTS; ATTACHMENTS

(a) This Agreement, all Schedules and Exhibits hereto, and all agreements
and instruments to be delivered by the parties pursuant hereto represent the
entire understanding and agreement between the parties hereto with respect to
the subject matter hereof and supersede all prior oral and written and all
contemporaneous oral negotiations, commitments and understandings between such
parties.

(b) The Buyer, by the consent of its Board of Directors or officers
authorized by such Board, on the one hand, and the Company by the consent of
its Board of Directors or officers authorized by such Board, on the other
hand, may amend or modify this Agreement, in such manner as may be agreed
upon, by a written instrument executed by the Buyer and the Company.

(c) This Agreement shall not preclude or supersede any obligation that
either the Company or the Buyer may have with respect to the purchase, sales
or support of products under existing agreements.

(d) If the provisions of any Schedule or Exhibit to this Agreement are
inconsistent with the provisions of this Agreement, the provisions of the
Agreement shall prevail. The Exhibits and Schedules attached hereto or to be
attached hereafter are hereby incorporated as integral parts of this
Agreement.

17. SEVERABILITY

Any provision of this Agreement which is invalid, illegal or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the
extent of such invalidity, illegality or unenforceability, without affecting
in any way the remaining provisions hereof in such jurisdiction or rendering
that or any other provision of this Agreement invalid, illegal or
unenforceable in any other jurisdiction.

18. EXPENSES; SALES TAXES

The Buyer, on the one hand, and the Company, on the other hand, will pay all
fees and expenses incurred by them in connection with the transactions
contemplated hereunder. All sales taxes that arise directly from the transfer
of the Acquired Assets to the Buyer shall be the sole responsibility of the
Company.

19. LIQUIDATED DAMAGES

In the event that the Shareholder Approval is not obtained as provided
herein and/or the Company accepts a third-party offer, as provided in
Subsection 5.7 herein, then the Company shall pay to the Buyer, on April 1,
1998, the amount of $1,000,000 by wire transfer of immediately available funds
to the Buyer's Account, which amount shall constitute the Buyer's complete and
liquidated damages, and sole and exclusive remedy, for the

B-20
<PAGE>

Company's inability to effect the Closing, and which amount shall not be
subject to any offset. Such $1,000,000 payment is referred to herein as the
"Liquidated Damage Payment."

The Buyer and the Company agree that Liquidated Damage Payment is the
parties' best estimate of the Actual Damages that the Buyer would incur as a
result of the Company's inability to effect the Closing, including damages
with respect to the Buyer's operation of the Acquired Business pursuant to the
Management Agreement.

20. LEGAL FEES

In the event that legal proceedings are commenced by the Buyer against the
Company, or by the Company against the Buyer, in connection with this
Agreement or the transactions contemplated hereby, the party or parties which
do not prevail in such proceedings shall pay the reasonable attorneys' fees
and other costs and expenses, including investigation costs, incurred by the
prevailing party in such proceedings.

21. GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts. Each party hereto irrevocably
consents to the exclusive personal jurisdiction of the state courts of The
Commonwealth of Massachusetts and the federal courts of the United States
resident in The Commonwealth of Massachusetts, and waives any objection which
it might have based on improper venue or forum non conveniens to the conduct
of proceedings in any such court, waives personal service on it, and consents
that all such service of process may be made by mail in accordance with
Section 14 hereof.

22. SECTION HEADINGS

The section headings are for the convenience of the parties and in no way
alter, modify, amend, limit, or restrict the contractual obligations of the
parties.

23. COUNTERPARTS

This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original, but all of which shall be one and the same
document.

24. References to Monetary Amounts, Payments. All references to monetary
amounts herein are references to United States Dollars, and all payments made
hereunder shall be made in United States Dollars.

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<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of and on the date first above written.

BUYER:

ELRON Software, Inc.

By: _________________________________
(Title)

COMPANY:

ON Technology Corporation

By: _________________________________
(Title)

The undersigned Elron Electronics Industries Ltd., an Israeli corporation
and the sole shareholder of Elron Software, Inc., hereby guaranties the
punctual payment and performance of all obligations of Elron Software, Inc.
that arise from the foregoing Asset Purchase Agreement.

ELRON Electronic Industries, Ltd.

By: _________________________________
(Title)

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<PAGE>

LOGO

ON TECHNOLOGY CORPORATION

PROXY SOLICITED BY BOARD OF DIRECTORS

FOR SPECIAL MEETING OF STOCKHOLDERS

FEBRUARY 11, 1998

The undersigned, revoking all prior proxies, hereby appoints John M. Bogdan
and Herman DeLatte or either of them, as proxy or proxies, with full power of
substitution and revocation, to vote all shares of common stock of ON
Technology Corporation of record in the name of the undersigned at the close of
business on January 5, 1998, at the Special Meeting of Stockholders to be held
on February 11, 1998, or at any adjournment or postponement thereof, upon the
following matters:

1. Approval of the Purchase Agreement dated as of October 29, 1997, 1997,
between the Company and Elron Software, Inc., and the transactions
contemplated thereby.

[_] FOR [_] AGAINST [_] ABSTAIN

2. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.

<PAGE>

LOGO

This proxy when properly executed will be voted in the manner direction
herein by the undersigned stockholder. If this proxy is properly executed but
no direction is made, this proxy will be voted FOR Proposal 1.

Please sign your name exactly as it appears below. In the case of shares
owned in joint tenancy or as tenants in common, all should sign. Fiduciaries
should indicate their title and authority.

DATED: ------------------------------------

------------------------------------
(Signature)

PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY