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

                                   FORM 10-Q


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

                  For the quarterly period ended MARCH 31, 2001

                                       OR

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


                        Commission File Number 000-31011


                              TALARIAN CORPORATION
                              --------------------
               (Exact Name as Registrant specified in its charter)


           DELAWARE                                  33-0323810
           --------                                  ----------
 (State or other jurisdiction of    (I.R.S. Employer Identification Number)
 incorporation or organization)


                                333 DISTEL CIRCLE
                           LOS ALTOS, CALIFORNIA 94022
                    (Address of principal executive offices)

                                 (650) 965-8050
                                 --------------
              (Registrant's telephone number, including area code)


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

      The number of shares outstanding of the registrant's common stock, par
value $.001 per share, as of April 15, 2001, was 19,113,199.

<PAGE>   2

                              TALARIAN CORPORATION

                          QUARTERLY REPORT ON FORM 10-Q
                          QUARTER ENDED MARCH 31, 2001

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE NO.
                                                                         --------
<S>                                                                      <C>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Balance Sheets -
             As of March 31, 2001 and September 30, 2000                 3

          Condensed Consolidated Statements of Operations -
             Three and six months ended March 31, 2001 and 2000          4

          Condensed Consolidated Statements of Cash Flows -
             Six months ended March 31, 2001 and 2000                    5

          Notes to Condensed Consolidated Financial Statements           6

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                  9

Item 3.   Quantitative and Qualitative Disclosures About Market Risk     25


PART II   OTHER INFORMATION

Item 2.   Changes in Securities and Use of Proceeds                      26

Item 4.   Submission of Matters to a Vote of Security Holders            26

Item 6.   Exhibits and Reports on Form 8-K                               26


SIGNATURES                                                               27

</TABLE>

<PAGE>   3

                             TALARIAN CORPORATION AND SUBSIDIARY

                            CONDENSED CONSOLIDATED BALANCE SHEETS
                                        (IN THOUSANDS)
                                         (UNAUDITED)


<TABLE>
<CAPTION>
                                                         MARCH 31,      SEPTEMBER 30,
                                                          2001              2000
                                                         ---------      ------------
<S>                                                      <C>             <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                              $  34,803       $  35,144
  Short-term investments                                    23,599          32,594
  Accounts receivable,  less allowance for doubtful
       accounts                                              4,008           2,873
  Prepaid expenses and other                                 1,328           1,011
                                                         ---------       ---------
      Total current assets                                  63,738          71,622

  Property and equipment, net                                2,252           1,345
  Goodwill and other intangible assets, net                  4,361           5,577
  Other long-term assets                                       145              62
                                                         ---------       ---------
      Total assets                                       $  70,496       $  78,606
                                                         =========       =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                       $     890       $     730
  Accrued payroll and related expenses                         713           1,287
  Other accrued expenses                                     1,354           1,471
  Current portion of deferred revenue                        3,069           3,078
                                                         ---------       ---------
      Total current liabilities                              6,026           6,566

Deferred revenue, less current portion                       1,411           1,401
                                                         ---------       ---------
      Total liabilities                                      7,437           7,967
                                                         ---------       ---------

Stockholders' equity:
  Common stock                                                  19              19
  Additional paid-in capital                               107,013         107,495
  Treasury stock                                               (77)            (57)
  Deferred stock compensation                               (7,249)        (11,886)
  Note receivable from stockholder                            (100)           (100)
  Accumulated deficit                                      (36,547)        (24,832)
                                                         ---------       ---------
      Total stockholders' equity                            63,059          70,639
                                                         ---------       ---------
      Total liabilities and stockholders' equity         $  70,496       $  78,606
                                                         =========       =========

</TABLE>

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


                                       3
<PAGE>   4
                             TALARIAN CORPORATION AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED              SIX MONTHS ENDED
                                                               MARCH 31,                     MARCH 31,
                                                      ------------------------      -----------------------
                                                        2001           2000           2001            2000
                                                      --------       --------       --------       --------
<S>                                                   <C>            <C>            <C>            <C>
Revenue:
  Licenses                                            $  2,488       $  2,251       $  4,510       $  4,080
  Maintenance                                              929            751          1,767          1,469
  Professional services                                    706            632          1,262            879
                                                      --------       --------       --------       --------
    Total revenue                                        4,123          3,634          7,539          6,428
                                                      --------       --------       --------       --------

Cost of revenue:
  Licenses                                                   1            102             19            162
  Maintenance                                              355            172            724            349
  Professional services                                    489            209            725            296
  Amortization of deferred stock compensation              212            221            500            299
                                                      --------       --------       --------       --------
    Total cost of revenue                                1,057            704          1,968          1,106
                                                      --------       --------       --------       --------
    Gross profit                                         3,066          2,930          5,571          5,322
                                                      --------       --------       --------       --------

Operating expenses:
  Sales and marketing                                    3,507          1,997          6,980          3,422
  Research and development                               2,644          1,083          5,436          1,907
  General and administrative                             1,115            482          2,086            987
  Amortization of deferred stock compensation:
      Sales and marketing                                  617            740          1,428          1,212
      Research and development                             568            724          1,290          1,066
      General and administrative                           428          1,284            897          1,877
  Amortization of goodwill and intangible assets           608            314          1,215            553
                                                      --------       --------       --------       --------
    Total operating expenses                             9,487          6,624         19,332         11,024
                                                      --------       --------       --------       --------
    Loss from operations                                (6,421)        (3,694)       (13,761)        (5,702)
Interest income and other, net                             928             55          2,046             30
                                                      --------       --------       --------       --------
    Net loss                                            (5,493)        (3,639)       (11,715)        (5,672)
Preferred stock dividends                                    -         (5,983)             -         (6,107)
                                                      --------       --------       --------       --------
Net loss attributable to common stockholders          $ (5,493)      $ (9,622)      $(11,715)      $(11,779)
                                                      ========       ========       ========       ========

Basic and diluted net loss per share
attributable to common stockholders                   $  (0.30)      $  (2.20)      $  (0.64)      $  (2.88)
                                                      ========       ========       ========       ========
Shares used in computing basic and
diluted netloss per share attributable to
 common stockholders                                    18,391          4,366         18,280          4,089
                                                      ========       ========       ========       ========

</TABLE>

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


                                       4
<PAGE>   5

                       TALARIAN CORPORATION AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    SIX MONTHS ENDED
                                                                        MARCH 31,
                                                                ------------------------
                                                                  2001            2000
                                                                --------       --------
<S>                                                             <C>            <C>
Cash flows from operating activities:
  Net loss                                                      $(11,715)      $ (5,672)
  Adjustments  to  reconcile  net loss to net cash
    used for operating activities:
      Depreciation and amortization                                  427            198
      Amortization of goodwill and other intangible assets         1,215            553
      Amortization of deferred stock compensation                  4,115          3,939
      Non-employee stock compensation                                  -            515
      Change in allowance for doubtful accounts                      186              -
      Changes in operating assets and liabilities:
         Accounts receivable                                      (1,320)        (1,020)
         Prepaid expenses and other assets                          (399)          (131)
         Accounts payable                                            160            182
         Accrued payroll and related expenses                         67            125
         Other accrued expenses                                     (934)           176
         Deferred revenue                                              2            254
                                                                --------       --------
            Net cash used in operating activities                 (8,196)          (881)
                                                                --------       --------

Cash flows from investing activities:
  Sale and maturity of short-term investments                      8,995              -
  Purchases of short-term investments                                  -         (8,000)
  Purchases of property and equipment                             (1,335)          (486)
  Acquisitions, net of cash acquired                                   -           (714)
                                                                --------       --------
            Net cash provided by investing activities              7,660         (9,200)
                                                                --------       --------

Cash flows from financing activities:

  Proceeds from sale of common stock                                 215            618
  Proceeds  from sale of preferred  stock,  net of
    issuance cost                                                      -          9,921

  Repurchase of common stock                                         (20)
  Payments on debt                                                     -           (158)
                                                                --------       --------
            Net cash provided by (used in)
               financing activities                                  195         10,381
                                                                --------       --------
Net (decrease) increase in cash and cash equivalents                (341)           300

Cash and cash equivalents at beginning of period                  35,144          1,820
                                                                --------       --------
Cash and cash equivalents at end of period                      $ 34,803       $  2,120
                                                                ========       ========

Supplemental disclosures of cash flow information:
Cash paid for interest                                          $      -       $     69
                                                                ========       ========
Accretion for  dividends on  redeemable  preferred stock        $      -          6,107
                                                                ========       ========
Additional IPO costs accrued                                    $    175       $      -
                                                                ========       ========

Deferred stock compensation on grants of stock options          $      -       $  7,980
                                                                ========       ========
Deferred stock compensation on stock option cancellations       $    522       $      -
                                                                ========       ========
</TABLE>

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


                                       5
<PAGE>   6

                       TALARIAN CORPORATION AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1  BASIS OF PRESENTATION

   The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly they do not include
all information and footnotes necessary for a complete presentation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the Company's financial position as of March 31, 2001, and the
results of its operations and cash flows for the interim periods ended March 31,
2001 and 2000. These financial statements should be read in conjunction with the
Company's audited financial statements as of September 30, 2000 and 1999 and for
each of the years in the three-year period ended September 30, 2000, including
notes thereto, included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on December 27, 2000. The condensed
consolidated balance sheet at September 30, 2000 has been derived from the
audited financial statements as of that date.

   The results of operations for the interim periods ended March 31, 2001 and
2000 are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year ending September 30, 2001.

NOTE 2  COMPREHENSIVE INCOME (LOSS)

   The Company had no material components of other comprehensive income (loss)
for any of the periods presented.

NOTE 3 CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

   Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of less than 90 days at the date of purchase. The Company
is exposed to credit risk in the event of default by the financial institutions
or the issuers of these investments to the extent of the amounts recorded on the
balance sheet in excess of amounts that are insured by the Federal Deposit
Insurance Corporation. As of March 31, 2001 and September 30, 2000, cash
equivalents consisted of money market accounts.

   The Company classifies its investments in debt securities as
available-for-sale and as such these are classified as short-term investments.
Available-for-sale securities are carried at fair market value, which
approximates amortized cost. Any unrealized gains or losses are recorded as a
component of other comprehensive income (loss).


                                       6
<PAGE>   7

NOTE 4  NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

   Basic net loss per share attributable to common stockholders is computed
using the weighted-average number of outstanding shares of common stock
excluding shares of restricted stock subject to repurchase. Diluted net loss per
share attributable to common stockholders is computed using the weighted-average
number of shares of common stock outstanding and, when dilutive, potential
shares of restricted common stock subject to repurchase and common stock from
exercise of options, using the treasury stock method, and from convertible
securities on an "as if converted" basis. The following potential shares of
common stock have been excluded from the computation of diluted net loss per
share attributable to common stockholders for all periods presented because the
effect would have been antidilutive:

<TABLE>
<CAPTION>
                                                  Six Months Ended
                                                       March 31,
                                               ----------------------
                                                 2001         2000
                                               -------      ---------
<S>                                            <C>         <C>
Shares issuable under stock options....        710,850        166,616
Shares of restricted stock subject to
repurchase ............................        621,276      1,200,891
Shares issuable pursuant to warrants
to purchase common stock ..............         17,367        131,502
Shares of convertible preferred stock
on an "as if converted" basis .........              -      8,810,882

</TABLE>


   The weighted-average exercise price of stock options outstanding was $3.95
and $1.92 for the three months ended March 31, 2001 and 2000, respectively. The
weighted-average purchase price of restricted stock subject to repurchase was
$0.41 for the six months ended March 31, 2001. The weighted-average exercise
price of outstanding warrants to purchase common stock was $0.90 and $0.71 for
the six months ended March 31, 2001 and 2000, respectively. In July 2000, all
outstanding shares of the Company's convertible preferred stock were
automatically converted into common stock upon completion of the Company's
initial public offering.


NOTE 5  RECENT ACCOUNTING PRONOUNCEMENTS

   In September 2000, FASB issued SFAS No. 140, "Accounting for the Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. The Company does not expect the
adoption of SFAS No. 140 to have a material impact on its financial position or
results of operations.



NOTE 6  BALANCE SHEET COMPONENTS

   Intangible Assets

   In September 1999, the Company completed the acquisition of certain assets of
GlobalCast Communications, Inc. for total consideration of approximately $3.6
million. Approximately $2.9 million of the purchase price was allocated to
intangible assets, which included $2.7 million in goodwill and $0.2 million of
developed technology.

   On March 13, 2000, the Company acquired WhiteBarn, Inc. for total
consideration of approximately $4.9 million. Approximately $4.4 million of the
purchase price was allocated to intangible assets including goodwill. The
goodwill and intangible assets acquired in connection with the acquisitions of
GlobalCast and WhiteBarn are being amortized on a straight-line basis over their
estimated useful lives of between two and four years.

   Pro forma revenue, net loss attributable to common stockholders and basic and
diluted net loss per share attributable to common stockholders for the six
months ended March 31, 2001 and 2000 with respect to the WhiteBarn acquisition
is presented below. The pro forma financial information presents the combined
results of operations of the Company and WhiteBarn as if the acquisition had
occurred on October 1, 1999 after giving effect


                                       7
<PAGE>   8

to certain adjustments including amortization of goodwill and other intangibles,
the elimination of non-recurring items and related income tax effects. The pro
forma financial information does not necessarily reflect the consolidated
results of operations that would have occurred had the Company and WhiteBarn
constituted a single entity during these periods (in thousands):

<TABLE>
<CAPTION>
                                                          SIX MONTHS ENDED
                                                              MARCH 31,
                                                       -----------------------
                                                        2001         2000
                                                       --------       --------
<S>                                                    <C>            <C>
Revenue .........................................      $  4,123       $  7,120

Net loss attributable to common stockholders ....        (5,493)       (12,912)

Basic and diluted net loss per share attributable
to common stockholders ..........................      $  (0.30)      $  (2.91)
</TABLE>


NOTE 7  SEGMENT INFORMATION

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

   The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The consolidated financial information reviewed
by the CEO is identical to the information presented in the accompanying
consolidated statements of operations. The Company has determined that it
operates in a single operating segment: real-time infrastructure software.

   The Company maintains significant operations in the United States, with
direct sales and marketing offices located in the United Kingdom, Germany and
Japan. The Company does not measure performance of net revenue by geographical
area, and accordingly no analysis has been provided. There were no significant
assets maintained by the Company outside the United States for March 31, 2001 or
2000. Revenue from sales made to customers outside the United States aggregated
12% and 15% for the six months ended March 31, 2001 and 2000, respectively.
Customers were primarily concentrated in the United Kingdom, France and Germany.

   Significant customer information is as follows:

<TABLE>
<CAPTION>
                           Percentage of                    Percentage of
                           Total Revenue                    Total Accounts
                                                              Receivable
             Three Months Ended      Six Months Ended
                 March 31,              March 31,             March 31,
             ------------------      ----------------        -----------
               2001      2000         2001      2000          2001
             -------    ------       ------   -------        ---------
<S>          <C>        <C>          <C>       <C>           <C>
Customer A      25%       -            14%       -              34%
Customer B       -       15%            -        9%              -
Customer C       5%      12%            5%       8%             11%

</TABLE>


                                       8
<PAGE>   9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

   This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. These statements can
generally be identified by words such as "may", "might", "should", "expects",
"plans", "anticipates", "believes", "estimates", or "predicts", and includes
statements relating to the Company's plans to increase the size of its product
and services offerings , and the Company's expectations regarding future
financial results, expense levels, and size of our customer base. These
forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from the forward-looking statements. These risks
and uncertainties include, but are not limited to, those discussed under
"Factors That May Affect Operating Results", below, and other risks discussed in
our filings with the Securities and Exchange Commission. We do not assume any
obligation to update any such forward-looking statements.

OVERVIEW

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

   We were incorporated in November 1988. From inception through 1996, we
derived a substantial portion of our revenue from a suite of software products
used primarily in connection with mission-critical command and control
operations in industries such as aerospace. In 1997, leveraging our technology
developed for mission-critical command and control operations, we refocused our
business strategy to provide infrastructure software for applications relying
heavily upon the use of real-time, distributed systems. Our operating activities
during 1997 and 1998 related primarily to developing our SmartSockets messaging
infrastructure product line and directing our sales and marketing efforts to
increase market awareness of our SmartSockets product in industries such as
finance, telecommunications and computer hardware and services. In 1999, we
launched MQexpress (now known as SmartMQ), a message queuing product that
provides complementary storage, backup, and audit capabilities to SmartSockets.
We also added Internet-related applications and industries, such as
business-to-business e-commerce, to our sales and marketing focus and began a
concerted effort to market our product to third-party partners such as original
equipment manufacturers and value-added resellers. Additionally in 1999, we
began incorporating reliable multicast capabilities into our SmartSockets
product line.

    As part of our overall multicast initiative, we acquired substantially all
of the assets of GlobalCast Communications, Inc. in September 1999, and acquired
WhiteBarn, Inc. in March 2000. Later in 2000 we launched a suite of reliable
multicast products called SmartMulticast. SmartMulticast includes SmartPGM, our
implementation of a real time reliable multicast protocol known as Pragmatic
General Multicast (PGM) and SmartTransfer, which simplifies the setup and
management of file transfers from a single sender to multiple receivers over an
IP multicast and PGM capable network. In 2000 we also launched two products as
add-on modules to SmartSockets, SmartSocket SSL, which provides private, secure
connections between SmartSockets processes, and RT Gateway, which extends the
message functionality of SmartSockets.

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

   Payments received in advance of revenue recognition are recorded as deferred
revenue. As of March 31, 2001, we had $4.5 million of deferred revenue. Of this
amount, $1.4 million was classified as long-term deferred revenue,


                                       9
<PAGE>   10

relating primarily to software licenses that require us to deliver software over
an extended period and, to a lesser extent, to maintenance and support
agreements that have a term in excess of one year.

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

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

   We market our products primarily through our direct sales force and, to a
lesser extent, through indirect channels. Recently, we have begun to derive
increasing amounts of revenue through indirect channel relationships with
distributors, original equipment manufacturers, value-added resellers, and
systems integrators. Our third-party relationships have typically been with
companies that embed our product within their product, for which we receive a
license fee and, in some cases, future royalties based on our reseller's product
revenue. During 1998, we expanded our international presence by opening a sales
and support office in London, England, and we opened sales offices in Japan and
Germany in 2000 and 2001, respectively. Currently, our international revenue is
primarily generated through distributors. We plan to aggressively expand our
sales force and the market awareness of our company and our products. As a
result, we expect to incur substantial expenditures related to programs designed
to achieve those goals.

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

   In March 2000, we acquired WhiteBarn, a professional services and software
development company focused on reliable multicast and network protocols with
cash, stock and options to purchase our common stock that had an aggregate value
of $4.9 million. The transaction was accounted for as a purchase. In this
acquisition, the acquired technology included existing technology, but not
in-process research and development. In connection with the WhiteBarn
acquisition, we recorded intangible assets of $4.4 million, which we are
amortizing over a two to three year period.

   We have a limited operating history since the implementation of our current
business strategy. We believe our success is dependent upon our ability to
rapidly expand our customer base and enhance our technology. Over the past 12
months we have invested substantial resources in our sales and marketing and
research and development activities. While we generally expect to maintain, but
not further increase such levels of expenditures, we expect to incur operating
losses for the foreseeable future.

   In connection with the granting of stock options to our employees through
March 31, 2001, we recorded deferred stock compensation totaling approximately
$22.1 million. This amount represents the difference between the exercise price
and the deemed fair value of our common stock for accounting purposes on the
date these stock options were granted. This amount is included as a component of
stockholders' equity and is being amortized on an accelerated basis by charges
to operations over the vesting period of the options consistent with the method
described in Financial Accounting Standards Board Interpretation No. 28. The
stock options, or restricted stock purchased pursuant to these options,
generally vest at a rate of 12.5% upon the six-month anniversary of the option
grant date and 2.083% each month thereafter for the next 42 months. Amortization
of the March 31, 2001 balance of deferred stock compensation will result in
charges to operations of $2.7 million, $3.2 million, $1.2 million and $117,000
for the six months ended September 30, 2001, and for fiscal years 2002, 2003,
and the nine months ended June 30, 2004.

   We have recorded no provision for federal or state income taxes for any
period since our inception as we have incurred losses in each period. As of
September 30, 2000, we had net operating loss carryforwards for federal income
tax purposes of approximately $7.2 million and for California income tax
purposes of approximately $2.4


                                       10
<PAGE>   11

 million, available to offset income in future
years. The federal net operating loss carryforwards expire from 2007 through
2020. The California net operating loss carryforwards expire from 2001 through
2005.

RESULTS OF OPERATIONS

   The following table sets forth the results of operations for the three months
ended March 31, 2001 and 2000 expressed as a percentage of total revenue.

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED        SIX MONTHS ENDED
                                        MARCH 31,                 MARCH 31,
                                     -----------------       ----------------
                                     2001        2000        2001        2000
                                     ----        ----        ----        ----
<S>                                  <C>         <C>         <C>         <C>
Revenue:
  Licenses                             60%         62%         60%         63%
  Maintenance                          23          21          23          23
  Professional services                17          17          17          14
                                     ----        ----        ----        ----
    Total revenue                     100         100         100         100

Cost of revenue:
  Licenses                              0           3           0           3
  Maintenance                           9           5          10           5
  Professional services                12           6          10           5
  Amortization of deferred
    stock compensation                  5           6           7           5
                                     ----        ----        ----        ----
    Total cost of revenue              26          20          27          18
                                     ----        ----        ----        ----
    Gross profit                       74          80          73          82
                                     ----        ----        ----        ----

Operating expenses:
  Sales and marketing                  84          55          92          53
  Research and development             64          30          72          30
  General and administrative           27          13          28          15
  Amortization of deferred
    stock compensation:
      Sales and marketing              15          20          19          19
      Research and development         14          20          17          17
      General and administrative       10          35          12          29
  Amortization of goodwill and
    intangible assets                  15           9          16           9
                                     ----        ----        ----        ----
    Total operating expenses          229         182         256         172
                                     ----        ----        ----        ----
    Loss from operations             (155)       (102)       (183)        (90)
Interest income and other, net         22           2          28           2
                                     ----        ----        ----        ----
    Net loss                         (133)%      (100)%      (155)%       (88)%
                                     ----        ----        ----        ----
</TABLE>


REVENUE

   Total revenue increased by $489,000, or 13%, to $4.1 million for the three
months ended March 31, 2001, from $3.6 million for the three months ended March
31, 2000. Total revenue increased $1.1 million, or 17%, to $7.5 million for the
six months ended March 31, 2001, from $6.4 million for the six months ended
March 31, 2000. Licenses and associated maintenance revenue represented 83% of
total revenue for both the three and six months ended March 31, 2001 and 83% and
86% of total revenue for the three and six months ended March 31, 2000. The
increase in total revenue for the three and six-month periods was due to
increases in all three of our revenue components, but primarily due to increases
in software licenses and associated maintenance revenue. One customer accounted
for more than 10% of our total revenue in the three and six months ended March
31, 2001. Two customers each accounted for more than 10% of our total revenue in
the three months ended March 31, 2000. No customer accounted for more than 10%
of our total revenue in the six months ended March 31, 2000. During the three
months ended March 31, 2001, international revenue decreased by $56,000, or 19%,
to $236,000, from $292,000 in the three months ended March 31, 2000. In the six
months ended March 31, 2001, international revenue decreased by $4,000 to
$849,000, from $853,000 in the six months ended March 31, 2000. International


                                       11
<PAGE>   12

revenue was 6% and 8% of our total revenue in the three months ended March 31,
2001 and 2000, respectively, and 11% and 13% of our total revenue in the six
months ended March 31, 2001 and 2000, respectively.

   License. License revenue increased by $237,000 or 11%, to $2.5 million in the
three months ended March 31, 2001, from $2.3 million in the three months ended
March 31, 2000. License revenue increased by $430,000 or 11%, to $4.5 million in
the six months ended March 31, 2001, from $4.1 million for the six months ended
March 31, 2000. The increase in license revenue was due to an increase in the
number of SmartMulticast software licenses to new and existing customers, which
was partially offset by a decrease in other license revenue. We started shipping
our stand-alone SmartMulticast products shortly after the acquisition of
WhiteBarn in March 2000. As a percentage of total revenue, license revenue
represented 60% and 62% in the three months ended March 31, 2001 and 2000,
respectively, and 60% and 63% in the six months ended March 31, 2001 and 2000,
respectively.

   Maintenance. Maintenance revenue increased by $178,000, or 24%, to $929,000
in the three months ended March 31, 2001, from $751,000 for the three months
ended March 31, 2000. Maintenance revenue increased by $298,000, or 20% to $1.8
million in the six months ended March 31, 2001, from $1.5 million for the six
months ended March 31, 2000. The increase in maintenance revenue was due to
growth associated with license agreements entered into in earlier periods. As a
percentage of total revenue, maintenance revenue represented 23% and 21% in the
three months ended March 31, 2001 and 2000, respectively, and 23% in both six
months ended March 31, 2001 and 2000.

   Professional services. Professional services revenue increased by $74,000, or
12%, to $706,000 in the three months ended March 31, 2001, from $632,000 in the
three months ended March 31, 2000. Professional services increased by $383,000,
or 44%, to $1.3 million for the six months ended March 31, 2001, from $879,000
for the six months ended March 31, 2000, respectively. These increases are
primarily a result of new customers obtained through our acquisition of
WhiteBarn in March 2000. As a percentage of total revenue, professional services
revenue represented 17% in both three months ended March 31, 2001 and 2000, and
17% and 14% in the six months ended March 31, 2001 and 2000, respectively.

COST OF REVENUE

   In the three months ended March 31, 2001, cost of revenue increased by
$353,000, or 50%, to $1.1 million, from $704,000 for the three months ended
March 31, 2000. Cost of revenue increased by $862,000, or 78%, to $2.0 million
for the six months ended March 31, 2001, from $1.1 million for six months ended
March 31, 2000. The increase in cost of revenue was attributable to increased
costs related to our growing maintenance and professional services departments,
much of which resulted from personnel acquired in connection with our
acquisition of WhiteBarn. As a percentage of total revenue, cost of revenue
represented 26% and 20% in the three months ended March 31, 2001 and 2000,
respectively, and represented 27% and 18% in the six months ended March 31, 2001
and 2000, respectively. The increase in cost of revenue as a percentage of total
revenue was the result of the increase in costs associated with personnel
responsible for delivering the additional professional services revenue, which
typically has a lower gross margin than other types of revenue, as well as
personnel increases associated with customer support to provide increased
support capabilities across a wider cross section of product lines.

   Licenses. Cost of license revenue includes royalties due for technology
licensed from third parties, product packaging, manuals and documentation, and
software media. In the three months ended March 31, 2001, cost of license
revenue decreased by $101,000, or 99%, to $1,000 from $102,000 for the three
months ended March 31, 2000. Cost of license revenue decreased by $143,000, or
88%, to $19,000 for the six months ended March 31, 2001, from $162,000 for six
months ended March 31, 2000. The decrease in cost of license revenue was
attributable to a decrease in license revenue from royalty-bearing products. We
anticipate that the cost of license revenue will increase in absolute dollars
and as a percentage of license revenue due to an expected increase use of
third-party software incorporated into our product line. As a percentage of
license revenue, cost of license revenue represented 0% and 5% in the three
months ended March 31, 2001 and 2000, and represented 0% and 4% in the six
months ended March 31, 2001 and 2000, respectively.

   Maintenance. Cost of maintenance revenue consists of compensation and related
expenses for our technical support organization. Cost of maintenance revenue
increased by $183,000, or 106%, to $355,000 for the three months ended March 31,
2001, from $172,000 for the three months ended March 31, 2000. In the six months
ended March 31, 2001, cost of maintenance revenue increased by $375,000, or
107%, to $724,000, from $349,000 for the six months ended March 31, 2000. The
increase in cost of maintenance revenue was due to increased personnel and
contractors hired in order to provide increased support capabilities to our
growing installed base of customers across


                                       12
<PAGE>   13

a broader product line. As a percentage of maintenance revenue, cost of
maintenance revenue represented 38% and 23% in the three months ended March 31,
2001 and 2000, respectively, and represented 41% and 24% in the six months ended
March 31, 2001 and 2000. We anticipate that our cost of maintenance revenue will
continue to grow in absolute dollars, albeit at a slower pace, as we expand our
customer base and provide increasing levels of support for our customers and as
we increase the number of products for which we provide support.

   Professional services. Cost of professional services revenue consists of
compensation and related overhead expense for personnel and third-party
contractors we use in performing consulting, implementation and training
services for our customers. Cost of professional services revenue increased by
$280,000, or 134%, to $489,000 for the three months ended March 31, 2001, from
$209,000 for the three months ended March 31, 2000. In the six months ended
March 31, 2001, cost of professional services increased $429,000, or 145%, to
$725,000, from $296,000 for the six months ended March 31, 2000. A portion of
the dollar increase in cost of professional services revenue for the three
months ended March 31, 2001, was a result of personnel acquired in the
acquisition of WhiteBarn. The remainder of the increase in cost of professional
services revenue was a result of additional personnel deployed on our
professional services engagements. As a percentage of professional services
revenue, cost of professional services revenue represented 69% and 33% in the
three months ended March 31, 2001 and 2000, respectively, and represented 57%
and 34% in the six months ended March 31, 2001 and 2000. The increase in the
cost of professional services revenue as a percentage of professional services
revenue was a result of increasing the management and other infrastructure
associated with delivering our professional services. Provided our revenue from
professional services continues to grow, we anticipate that the cost of
professional services revenue will also continue to increase in terms of
absolute dollars as we continue to expand our service offerings and increase the
overall infrastructure related to our professional services organization.

   Amortization of deferred stock compensation. Amortization of deferred stock
compensation in cost of revenue decreased by $9,000, to $212,000 for the three
months ended March 31, 2001, from $221,000 for the three months ended March 31,
2000. In the six months ended March 31, 2001, amortization of deferred stock
compensation in cost of revenue increased by $201,000 to $500,000, from $299,000
for the six months ended March 31, 2000.

OPERATING EXPENSES

   Sales and marketing. Sales and marketing expenses include costs of sales and
marketing personnel and related overhead, commissions, field office expenses,
advertising and promotion expenses, travel and entertainment expenses and other
selling and marketing costs. Sales and marketing expenses increased by $1.5
million, or 76%, to $3.5 million for the three months ended March 31, 2001, from
$2.0 million for the three months ended March 31, 2000. For the six months ended
March 31, 2001, sales and marketing expenses increased by $3.6 million, or 104%,
to $7.0 million, from $3.4 million for the six months ended March 31, 2000. The
increase in sales and marketing expenses was due to substantial expansion of our
sales and marketing department personnel and locations and, to a lesser extent,
increased promotional programs. As a percentage of total revenue, sales and
marketing expenses represented 84% and 55% in the three months ended March 31,
2001 and 2000, respectively, and represented 92% and 53% in the six months ended
March 31, 2001 and 2000, respectively. We plan to closely monitor our spending
in sales and marketing in the coming months to better align such spending with
anticipated revenue. As a result, we expect sales and marketing expenses to
remain relatively flat, with perhaps a slight increase, on an absolute basis.

   Research and development. Research and development expenses consist of costs
of research and development personnel and associated overhead, and costs of
short-term independent contractors required in connection with development of
new products, enhancements to existing products, technical documentation, and
quality assurance. Costs incurred in research and development are expensed as
incurred until technological feasibility is established. We believe that under
our current engineering processes, the establishment of technological
feasibility and general release substantially coincide. As a result, no software
development costs have been capitalized to date. Research and development
expenses increased by $1.5 million, or 144%, to $2.6 million for the three
months ended March 31, 2001, from $1.1 million for the three months ended March
31, 2000. For the six months ended March 31, 2001, research and development
expenses increased by $3.5 million, or 185%, to $5.4 million, from $1.9 million
for the six months ended March 31, 2000. A portion of the increase for the three
months ended March 31, 2001, was a result of personnel acquired in the
acquisition of WhiteBarn. The remainder of the increase in research and
development expenses was due to an increase in personnel and consultants in our
software development, quality assurance, and documentation departments. As a
percentage of total revenue, research and development expenses represented 64%
and 30% in the three months ended March 31, 2001 and 2000, respectively;
compared with 72% and 30% in the six months ended March 31, 2001 and 2000,
respectively. We believe that our product development activities are important
to attaining our strategic objectives. We expect to maintain current levels of
investment in research and development on an absolute basis.


                                       13
<PAGE>   14

   General and administrative. General and administrative expenses include
personnel costs for finance, administration, information systems and general
management, as well as professional fees, legal expenses, bad debt expense and
other general corporate expenses. General and administrative expenses increased
by $633,000, or 131%, to $1.1 million for the three months ended March 31, 2001,
from $482,000 in the three months ended March 31, 2000. For the six months ended
March 31, 2001, general and administrative expenses increased by $1.1 million,
or 111%, to $2.1 million, from $1.0 million in the six months ended March 31,
2000. Approximately $60,000 and $186,000 of the increases in the three and six
months ended March 31, 2001, respectively, were attributable to increases in our
reserve for uncollectable accounts receivable. The accounts receivable reserve
was increased due to current economic conditions. The remainder of the increase
in general and administrative expenses was due to increased personnel expenses
in finance and administration and in information systems as well as increases in
professional fees associated with additional requirements of being a public
company. As a percentage of total revenue, general and administrative expenses
represented 27% and 13% in the three months ended March 31, 2001 and 2000,
respectively; compared with 28% and 15% in the six months ended March 31, 2001
and 2000, respectively. We expect general and administrative expenses to remain
relatively flat on an absolute basis.

   Amortization of deferred stock compensation. During the three months ended
March 31, 2001, we recorded $1.6 million of amortization of deferred stock
compensation in operating expenses, representing $617,000 of additional sales
and marketing expenses, $568,000 of additional research and development expenses
and $428,000 of additional general and administrative expenses. During the six
months ended March 31, 2001, we recorded $3.6 million of amortization of
deferred stock compensation in operating expenses, representing $1.4 million of
additional sales and marketing expenses, $1.3 million of additional research and
development expenses and $900,000 of additional general and administrative
expenses. During the three and six months ended March 31, 2000, we recorded $2.7
million and $4.2 million, respectively, of amortization of deferred stock
compensation.

   Amortization of goodwill and intangible assets. Amortization of goodwill and
intangible assets was $608,000 and $314,000 for the three months ended March 31,
2001 and 2000, respectively. For the six months ended March 31, 2001 and 2000,
amortization of goodwill and intangible assets was $1.2 million and $553,000,
respectively. This amount represents the amortization of goodwill and other
intangible assets acquired in connection with our acquisition of GlobalCast in
September 1999 and WhiteBarn in March 2000.

INTEREST INCOME AND OTHER, NET

   Interest income and other, net consists of interest income, net of interest
expense, and losses on foreign currency transactions. Interest income and other,
net resulted in income of $928,000 and $2.0 million for the three and six months
ended March 31, 2001, respectively, compared to income of $55,000 and $30,000
for the three and six months ended March 31, 2000. The resulting change was
attributable to higher interest income and lower interest expense in the more
recent periods following our private equity funding in February 2000 and our
initial public offering in July 2000. Our average cash reserves in
interest-bearing accounts were thus significantly higher, and the outstanding
balance on our line of credit was lower, during the three and six months ended
March 31, 2001 than in the same periods in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

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

   Net cash used in operating activities was $8.2 million for the six months
ended March 31, 2001. Net cash used in operating activities was $881,000 for the
six months ended March 31, 2000. For the six months ended March 31, 2001,
substantially all of net cash used in operating activities was attributable to
our net loss of $11.7 million, which included $5.3 million in non-cash charges,
an increase in accounts receivable of $1.3 million, and a reduction in other
accrued expenses of $935,000. For the six months ended March 31, 2000, net cash
used in operating activities was primarily due to our net loss of $5.7 million,
which included $5.2 million in non cash charges, and an increase in the accounts
receivable of $1.0 million, offset in part by an increase in deferred revenue of
$254,000 and increases in other current liabilities.


                                       14
<PAGE>   15

   Net cash provided by investing activities was $7.7 million for the six months
ended March 31, 2001 and net cash used in investing activities was $9.2 million
for the six months ended March 31, 2000. For the six months ended March 31,
2001, net cash provided by investing activities was primarily related to the
sale of short-term securities, partially offset by purchases of property and
equipment. For the six months ended March 31, 2000, net cash used in investing
activities represented purchases of short-term investments totaling $8.0
million, the acquisition of WhiteBarn, and purchases of property and equipment.

   Net cash provided by financing activities was $195,000 for the six months
ended March 31, 2001 and $10.4 million for the six months ended March 31, 2000.
For the six months ended March 31, 2001, net cash provided by financing
activities was mainly related to the sale of common stock through employee stock
options. For the six months ended March 31, 2000, net cash provided by financing
activities was primarily attributable to the sale of preferred stock and to a
lesser extent, the sale of common stock through the exercise of employee stock
options.

   As of March 31, 2001, we had approximately $58.4 million in cash, cash
equivalents, and short-term investments, and working capital of $57.7 million.
Our commitments consist primarily of amounts due under our operating leases. As
of that date, we also had a line of credit under which we could borrow up to
$2.0 million with a revolving maturity date of February 22, 2002, at an interest
rate of prime plus 0.25%. Any borrowing will be collateralized by accounts
receivable and other assets of ours. We have no borrowings under this line of
credit and are in compliance with all required financial ratios and covenants.
We have no material commitments for capital expenditures; however, we expect
that both capital expenditures and operating lease commitments will increase to
the extent we expand our operations and personnel worldwide. For the next twelve
months, we expect our capital expenditures to be approximately $2.5 million. We
may use cash resources to fund acquisitions or investments in complementary
businesses or technologies. We believe that our current cash, cash equivalents,
and short-term investments will be sufficient to meet our working capital and
operating resource requirements for at least the next 12 months.

FACTORS THAT MAY AFFECT OPERATING RESULTS

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

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

   We have a history of losses, we expect future losses, and we do not expect to
achieve profitability in the near future. We incurred net losses of $1.7 million
in fiscal 1998, $3.5 million in fiscal 1999, and $15.0 million in fiscal 2000.
As of March 31, 2001, we had an accumulated deficit of approximately $36.5
million. We cannot assure you that our revenue will grow or that we will achieve
or maintain profitability in the future. While we intend to maintain controls on
expenses at approximately current levels, it may be necessary to increase our
future product development, sales and marketing, and administrative expenses. In
any event, we will need to increase our revenue substantially to achieve and
maintain profitability, which we may not be able to do.

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

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


                                       15
<PAGE>   16

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

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

   Our revenue and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, we
have had little backlog and our revenue in any quarter has been substantially
dependent upon orders booked in that quarter. In addition, more than 50% of our
license revenue in a given quarter has often been recorded in the third month of
that quarter, with a concentration of this revenue in the last two weeks of the
third month. Furthermore, more than 50% of our license revenue for a given
quarter has often been derived from fewer than ten customers. For example, in
the quarter ended March 31, 2001, 6 customers represented more than 50% of our
revenue. We expect these trends to continue and, therefore, any failure or delay
in the closing of orders could have a material adverse effect on our quarterly
operating results. Additionally, since our operating expenses are based on
anticipated revenue and because a high percentage of these expenses are
relatively fixed, a shortfall in anticipated revenue could have a significant
negative impact on our operating results.

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

      -  the uncertainty of current economic conditions and their affect on
         customer purchase decisions;

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

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

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

      -  the capital and expense budgeting decisions of our customers;

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

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

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

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

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

   The market for real-time infrastructure software products is relatively new
and rapidly evolving, and there are a variety of infrastructure methods
available. We do not know if customers in our target markets will widely adopt


                                       16
<PAGE>   17

and deploy real-time infrastructure software products such as our SmartSockets
and SmartMulticast software and related products. If real-time infrastructure
software products are not widely adopted by customers in our target markets, our
revenue will not increase substantially, if at all.

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

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

WE DERIVE MORE THAN 80% OF OUR TOTAL REVENUE FROM OUR SMARTSOCKETS PRODUCT LINE
AND IF DEMAND FOR SMARTSOCKETS DECREASES OR DOES NOT INCREASE, OUR TOTAL REVENUE
WILL NOT INCREASE AND MAY DECREASE.

   We currently derive more than 80% of our total revenue from licensing our
SmartSockets software product line and providing related consulting and
maintenance services. We expect to continue to derive a substantial portion of
our revenue from these sources for the foreseeable future. Accordingly, our
future operating results will depend on the demand for SmartSockets by future
customers. If our competitors release products that are superior to SmartSockets
in performance or price, SmartSockets is not widely accepted by the market, or
we fail to enhance SmartSockets and introduce new versions in a timely manner,
demand for this product may decrease or fail to increase. A decline in demand
for SmartSockets or a failure of demand to increase, as a result of competition,
technological change or other factors, would significantly and adversely affect
our business, financial condition and operating results.

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

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

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

   We believe that our success in penetrating our target markets depends in part
upon our ability to develop and maintain strategic relationships with key
original equipment manufacturers, systems integrators, distributors, and
independent software vendors. Relationships with these parties are also
important because they often influence a customer's decision on which
infrastructure software will be used for a project. We believe these
relationships will introduce our products to potential customers and provide us
with insights into new technologies to which we may not otherwise have access.
For example, a system integrator that is responsible for reengineering a network
may be heavily involved in analyzing and ultimately selecting the infrastructure
software to be used in the network. To date, we have informal working
relationships with several system integrators, and formal agreements with only a
limited number of system integrators. Some of our competitors have developed
more strategic relationships than we have. We cannot be certain that we will be
able to establish relationships with additional companies on a timely basis, or
at all, or that these companies will devote adequate resources to embedding,
promoting or selling our products. Potential conflicts between our direct sales
force and third-party reselling efforts could also limit our


                                       17
<PAGE>   18

ability to develop additional key strategic relationships. If we fail to develop
these strategic relationships, or if any of our current relationships with these
types of organizations is terminated, we might lose important revenue
opportunities and our growth might be limited.

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

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

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

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

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

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

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

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


                                       18
<PAGE>   19

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

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

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

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

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

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

   Revenue from the sale of our products and services outside the United States
accounted for 11% and 15% of our total revenue in the first six months of fiscal
2001 and in fiscal 2000, respectively. We believe that we must expand our
international sales and distribution operations to be successful. In attempting
to conduct and expand business internationally, we are exposed to various risks
that could adversely affect our international operations and, consequently, our
operating results, including:

      -  difficulties and costs of staffing and managing international
         operations;

      -  fluctuations in currency exchange rates;

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

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

      -  political and economic instability; and

      -  potentially reduced protection for intellectual property rights.


                                       19
<PAGE>   20

WE HAVE MADE AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH COULD PUT A STRAIN ON
OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS, AND ADVERSELY AFFECT OUR
FINANCIAL RESULTS.

We have made and may continue to make acquisitions of other companies in order
to expand our business and services. For example, in September 1999 we acquired
the assets of GlobalCast, a provider of reliable multicast products and
services. In addition, in March 2000, we acquired WhiteBarn, a provider of
reliable multicast-related consulting services and developer of multicast
technology. Integrating newly acquired organizations and technologies into our
company could be expensive and time-consuming and may strain our resources. We
may not be successful in integrating acquired businesses or technologies and may
not achieve anticipated revenue and cost benefits. In addition, future
acquisitions could result in potentially dilutive issuances of equity securities
or the incurrence of debt, contingent liabilities or amortization expenses
related to goodwill and other intangible assets, any of which could adversely
affect our balance sheet or operating results. For example, in connection with
the acquisition of substantially all of the assets of GlobalCast, we recorded
approximately $2.7 million in goodwill and other intangibles, which will be
amortized over a period of three to four years and, in connection with the
acquisition of WhiteBarn, we recorded approximately $4.4 million in goodwill and
other intangibles, which will be amortized over a period of two to three years.
However, new FASB guidelines relating to accounting for goodwill could make our
future acquisition-related charges less predictable in any given reporting
period. On February 14, 2001, the FASB issued a limited revision of its Exposure
Draft, "Business Combinations and Intangible Assets" that establishes a new
standard for accounting for goodwill acquired in a business combination. It
would continue to require recognition of goodwill as an asset but would not
permit amortization of goodwill as currently required by APB Opinion No. 17,
Intangible Assets. Under the proposed statement, goodwill would be separately
tested for impairment using a fair-value-based approach when an event occurs
indicating the potential for impairment. Any required goodwill impairment
charges would be presented as a separate line item within the operating section
of the income statement. The shift from an amortization approach to an
impairment approach would apply to previously recorded goodwill as well as
goodwill arising from acquisitions completed after the application of the new
standard. If the standard is adopted as described above, our goodwill
amortization charges would cease. However, it is possible that in the future, we
would incur less frequent, but larger, impairment charges related to the
goodwill already recorded as well as goodwill arising out of potential future
acquisitions.

   Additionally, we cannot make any assurances that we will be able to identify
future suitable acquisition candidates or, if we are able to identify suitable
candidates, that we will be able to make these acquisitions on commercially
reasonable terms or at all.

THE GOODWILL AND OTHER INTANGIBLE ASSETS WE RECORDED AS A RESULT OF OUR
ACQUISITIONS MAY BECOME IMPAIRED.

We have acquired two companies since we were incorporated: GlobalCast
Communications in September 1999, and WhiteBarn in March 2000, both of which
were accounted for as purchase business combinations. In conjunction with these
acquisitions, we recorded $7.1 million in goodwill and other intangible assets.
As of March 31, 2001, our stock price had declined significantly since the
respective valuation dates of the shares issued in connection with each
acquisition.

Subsequent to March 31, 2001, our stock price has continued to decline. Due to
these changes, along with changes in the markets in which we compete and the
United States and global economy, we have begun a process to determine whether
the respective fair values of our goodwill and other intangible assets may be
less than their respective carrying values. This process will include a detailed
analysis of estimated cash flows that we expect to generate from future
operations for purposes of determining whether an impairment of goodwill and
other intangible assets has occurred. If, as a result of our detailed analysis
and investigation, we determine that there has been an impairment of goodwill
and other intangibles assets, the carrying value of these assets will be written
down to their fair values as a charge against our operating results in the
period that the determination is made. A significant impairment would harm our
financial position and operating results if and when it is recorded.

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

   Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. Over the past 12 months, we have increased our headcount
substantially. This growth may place a significant strain on our management
systems, infrastructure, and other resources. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems and
procedures. We will also need to expand, train, and manage our workforce
worldwide. Furthermore,


                                       20
<PAGE>   21

we expect that we will be required to manage an increasing number of
relationships with various customers and other third parties. If we do not
manage our growth efficiently and effectively, it could adversely affect our
business, operating results and financial condition.

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

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

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

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

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

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

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

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

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

   As the volume of data transmitted across networks, particularly the Internet,
increases, it may be increasingly important for infrastructure software to make
efficient use of available network bandwidth. One of the potential competitive
advantages of our infrastructure software is that it enables more efficient use
of available network bandwidth. Our software achieves this benefit through an
efficient implementation of publish-subscribe architecture and is capable of
even greater efficiency using multicast technology. However, our customers will
not be able to


                                       21
<PAGE>   22

realize the full efficiency benefits of our multicast capabilities over the
Internet unless the Internet is enhanced to allow multicast. There can be no
assurance that it will be.

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

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

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

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

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

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

      -  variations in our quarterly results;

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

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

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

      -  recruitment or departure of key personnel;

      -  the gain or loss of significant orders or customers;

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

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


                                       22
<PAGE>   23

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

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

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

   As of March 31, 2001, our executive officers, directors, entities affiliated
with them and other five percent stockholders, in the aggregate, beneficially
owned approximately 46% of our outstanding common stock. These stockholders,
acting together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors. These actions
might be taken even if they are opposed by other stockholders. This
concentration of ownership may also have the effect of delaying or preventing a
change of control of our company, which could have a material adverse effect on
our stock price.

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

   The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market or the perception that
these sales could occur. As of April 15, 2001, we had outstanding [18,969,149]
shares of common stock. Of these shares, the 4,200,000 shares sold in our
initial public offering are freely tradeable except for any shares purchased by
our "affiliates" as defined in Rule 144 under the Securities Act of 1933.
14,755,880 of the remaining shares of common stock held by our stockholders
prior to our initial public offering were subject to 180-day "lock-up"
agreements with the underwriters or with us. The 180-day lock-up period ended on
January 16, 2001, and pursuant to Rule 144, 12,283,383 of these shares were
immediately subject to sale in the public market without registration subject to
volume limitations. The remaining shares held by our existing stockholders will
become available for sale pursuant to Rule 144 at varying times. Stockholders
owning 9,193,831 shares are entitled, pursuant to contractual provisions
providing for registration rights, to require us to register our securities
owned by them for public sale. In addition, as of March 31, 2001, we had
3,055,661 shares issuable under outstanding options and warrants, 728,217 of
which were exercisable. On July 21, 2000, we filed a registration statement to
register for resale, subject to the terms of the lock-up agreements, shares
issuable upon the exercise of outstanding stock options and shares reserved for
future issuance under our stock option and stock purchase plans.

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

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

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

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

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

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

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


                                       23
<PAGE>   24

      -  eliminating cumulative voting in the election of directors; and

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

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


                                       24
<PAGE>   25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

Foreign Currency Exchange Rate Risk

   To date, all of our recognized revenue has been denominated in U.S. dollars
and primarily from customers in the United States, and our exposure to foreign
currency exchange rate changes has been immaterial. We expect, however, that
future product license and services revenue may also be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in the exchange rates of various currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.

Interest Rate Risk

   As of March 31, 2001, we had cash and highly liquid short-term investments
totaling $58.4 million. Declines in interest rates will reduce our interest
income from our short-term investments. Based upon our balance of cash and
short-term investments at March 31, 2001, a decrease in interest rates of 0.5%
would cause a corresponding decrease in our annual interest income of $292,000.
As of March 31, 2001, we did not have any short-term or long-term debt
outstanding.


                                       25
<PAGE>   26

                           PART II: OTHER INFORMATION


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

          We paid to the underwriters underwriting discounts and commissions
totaling $4.7 million in connection with the offering. In addition, we incurred
additional expenses of approximately $2.5 million in connection with the
offering, which when added to the underwriting discounts and commissions paid by
us amounts to total estimated expenses of $7.2 million. Thus, the net offering
proceeds to us (after deducting underwriting discounts and commissions and
offering expenses) were approximately $60 million. From the effective date of
the registration statement through March 31, 2001, the proceeds from the
offering have been used to fund $8.8 million of working capital and general
corporate needs. In addition, we applied $35.2 million of the proceeds towards
short-term investments, and $1.5 million of the proceeds towards purchase and
installation of machinery and equipment. The remaining proceeds are held in cash
and cash equivalents. No offering expenses were paid directly or indirectly to
any of our directors or officers (or their associates), or persons owning ten
percent (10%) or more of any class of our equity securities or to any other
affiliates.

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

        At the Company's annual meeting of stockholders held on March 16, 2001
the following matters were approved by the stockholders. The total number of
shares of common stock outstanding and entitled to vote at the meeting was
18,969,149.

<TABLE>
<CAPTION>
                                      VOTES       VOTES       VOTES      VOTES      BROKER
                                       FOR       AGAINST    ABSTAINED   WITHHELD   NON-VOTES
                                     ---------   -------    ---------   ---------  ---------
<S>                                 <C>          <C>        <C>         <C>        <C>
1)    Election of Directors:
          David I. Caplan           12,400,592       --          --       68,399       --
          David E. Gold             12,410,187       --          --       58,804       --
          Thomas J. Laffey          12,428,706       --          --       40,285       --

2)    Ratification of the           12,423,102   29,174      16,715           --       --
      appointment of KPMG LLP as
      the Company's independent
      auditors for 2001

</TABLE>


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A.      Exhibits

        None.

B.      Reports on Form 8-K

        None.


                                       26
<PAGE>   27

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                       TALARIAN CORPORATION

DATE: May 15, 2001          SIGNATURE: /s/ Paul A. Larson
     -------------------               ------------------
                                       Paul A. Larson
                                       President and Chief Executive Officer
                                       (Duly Authorized Officer)


DATE: May 15, 2001          SIGNATURE: /s/ Michael A. Morgan
     -------------------               ---------------------
                                       Michael A. Morgan
                                       Vice President, Finance and
                                       Administration and Chief Financial
                                       Officer
                                       (Principal Financial and Accounting
                                       Officer)

                                       27