<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 JUNE 30, 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 of Registrant as 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 July 31, 2001, was 19,108,927.



<PAGE>   2

                              TALARIAN CORPORATION

                          QUARTERLY REPORT ON FORM 10-Q
                           QUARTER ENDED JUNE 30, 2001

                                TABLE OF CONTENTS


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

Item 1.        Financial Statements

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

               Condensed Consolidated Statements of Operations -              4
                  Three and nine months ended June 30, 2001 and 2000

               Condensed Consolidated Statements of Cash Flows -              5
                  Nine months ended June 30, 2001 and 2000

               Notes to Condensed Consolidated Financial Statements           6

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

Item 3.        Quantitative and Qualitative Disclosures About Market Risk     25



PART II        OTHER INFORMATION

Item 1.        Legal Proceedings                                              26

Item 2.        Changes in Securities and Use of Proceeds                      26

Item 5.        Other Information                                              26

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


SIGNATURES                                                                    27
</TABLE>






<PAGE>   3

                          PART I: FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS


                       TALARIAN CORPORATION AND SUBSIDIARY

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)




<TABLE>
<CAPTION>
                                                          JUNE 30,     SEPTEMBER 30,
                                                            2001            2000
                                                         ---------     -------------
<S>                                                      <C>           <C>
                     ASSETS
Current assets:
  Cash and cash equivalents                              $  34,548       $  35,144
  Short-term investments                                    20,710          32,594
  Accounts receivable, less allowance for doubtful
     accounts                                                2,190           2,873
  Prepaid expenses and other assets                          1,147           1,011
                                                         ---------       ---------
      Total current assets                                  58,595          71,622

  Property and equipment, net                                2,100           1,345
  Goodwill and other intangible assets, net                  2,529           5,577
  Other long-term assets                                       145              62
                                                         ---------       ---------
      Total assets                                       $  63,369       $  78,606
                                                         =========       =========

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                       $     129       $     730
  Accrued payroll and related expenses                       1,151           1,287
  Other accrued expenses                                       592           1,471
  Current portion of deferred revenue                        2,867           3,078
                                                         ---------       ---------
      Total current liabilities                              4,739           6,566

Deferred revenue, less current portion                       1,160           1,401
                                                         ---------       ---------
      Total liabilities                                      5,899           7,967
                                                         ---------       ---------

Stockholders' equity:
  Common stock                                                  19              19
  Additional paid-in capital                               105,148         107,495
  Treasury stock                                              (100)            (57)
  Deferred stock compensation                               (4,329)        (11,886)
  Note receivable from stockholder                            (100)           (100)
  Accumulated deficit                                      (43,168)        (24,832)
                                                         ---------       ---------
      Total stockholders' equity                            57,470         (70,639)
                                                         ---------       ---------
      Total liabilities and stockholders' equity         $  63,369       $  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            NINE MONTHS ENDED
                                                JUNE 30,                      JUNE 30,
                                        -----------------------       -----------------------
                                          2001           2000           2001           2000
                                        --------       --------       --------       --------
<S>                                     <C>            <C>            <C>            <C>
Revenue:
  Licenses                              $  1,200       $  2,721       $  5,710       $  6,801
  Maintenance                                911            781          2,679          2,250
  Professional services                      662            940          1,926          1,819
                                        --------       --------       --------       --------
    Total revenue                          2,773          4,442         10,315         10,870
                                        --------       --------       --------       --------

Cost of revenue:
  Licenses                                    13             70             32            232
  Maintenance                                303            212          1,027            561
  Professional services                      499            560          1,220            856
  Amortization of deferred
     stock compensation                      165            391            665            690
                                        --------       --------       --------       --------
    Total cost of revenue                    980          1,233          2,944          2,339
                                        --------       --------       --------       --------
    Gross profit                           1,793          3,209          7,371          8,531
                                        --------       --------       --------       --------

Operating expenses:
  Sales and marketing                      3,027          2,456          9,905          5,878
  Research and development                 2,237          1,598          7,543          3,505
  General and administrative                 779            519          2,828          1,506
  Amortization of deferred
     stock compensation:
      Sales and marketing                    117          1,200          1,544          2,412
      Research and development               459          1,178          1,749          2,244
      General and administrative             305            749          1,202          2,626
  Excess facilities cost                     275             --            549             --
  Amortization and impairment of
     goodwill and intangible assets        1,832            608          3,048          1,161
                                        --------       --------       --------       --------
    Total operating expenses               9,031          8,308         28,368         19,332
                                        --------       --------       --------       --------
    Loss from operations                  (7,238)        (5,099)       (20,997)       (10,801)
Interest income and other, net               615            126          2,661            156
                                        --------       --------       --------       --------
    Net loss                              (6,623)        (4,973)       (18,336)       (10,645)
Preferred stock dividends                     --           (348)            --         (6,455)
                                        --------       --------       --------       --------
Net loss attributable to common
   stockholders                         $ (6,623)      $ (5,321)      $(18,336)      $(17,100)
                                        ========       ========       ========       ========

Basic and diluted net loss
   per share attributable
   to common stockholders               $  (0.36)      $  (0.99)      $  (1.00)      $  (3.76)
                                        ========       ========       ========       ========

Shares used in computing basic
   and diluted net loss per
   share attributable to common
   stockholders                           18,558          5,350         18,372          4,551
                                        ========       ========       ========       ========
</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>
                                                           NINE MONTHS ENDED
                                                                JUNE 30,
                                                        -----------------------
                                                          2001           2000
                                                        --------       --------
<S>                                                     <C>            <C>
Cash flows from operating activities:
  Net loss                                              $(18,336)      $(10,645)
  Adjustments to reconcile net loss to
    net cash used in
      Operating activities:
      Depreciation and amortization                          690            352
      Amortization and impairment of goodwill
        and other intangible assets                        3,048          1,161
      Amortization of deferred stock compensation          5,160          7,457
      Non-employee stock compensation                         --            515
      Change in allowance for doubtful accounts              186             --

      Changes in operating assets and liabilities:
         Accounts receivable                                 497            406
         Prepaid expenses and other assets                  (219)        (1,397)
         Accounts payable                                   (601)           694
         Accrued payroll and related expenses               (136)           491
         Other accrued expenses                             (879)             2
         Deferred revenue                                   (451)          (606)
                                                        --------       --------
            Net cash used in operating activities        (11,041)        (1,570)
                                                        --------       --------

Cash flows from investing activities:
  Sale and maturity of short-term investments             11,884          1,650
  Purchases of short-term investments                         --         (8,000)
  Purchases of property and equipment                     (1,445)          (954)
  Acquisitions, net of cash acquired                          --           (714)
                                                        --------       --------
            Net cash provided by (used in)
              investing activities                        10,439         (8,018)
                                                        --------       --------

Cash flows from financing activities:
  Proceeds from sale of common stock, net of
    issuance costs                                            49            631
  Proceeds from sale of preferred stock, net of
    issuance cost                                             --          9,921
  Repurchase of common stock                                 (43)           (14)
  Payments on debt                                            --         (1,296)
                                                        --------       --------
            Net cash provided by financing
              activities                                       6          9,242
                                                        --------       --------
Net decrease in cash and cash equivalents                   (596)          (346)
Cash and cash equivalents at beginning of period          35,144          1,820
                                                        --------       --------
Cash and cash equivalents at end of period              $ 34,548       $  1,474
                                                        ========       ========

Supplemental disclosures of cash flow information:
Cash paid for interest                                  $     --       $     73
                                                        ========       ========
Accretion for dividends on redeemable preferred
  stock                                                 $     --       $  6,455
                                                        ========       ========
Additional IPO costs accrued                            $    175       $     --
                                                        ========       ========
Common stock and vested options issued for
  acquisition                                           $     --       $  4,192
                                                        ========       ========
Deferred stock compensation on grants of stock
  options                                               $     --       $ 20,208
                                                        ========       ========
Deferred stock compensation on stock option
  cancellations                                         $ (2,397)      $     --
                                                        ========       ========
Common stock issued in exchange for notes
  receivable                                            $     --       $    100
                                                        ========       ========
</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, not only with accounting principles generally
accepted in the United States of America for interim financial information but
also with 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 June 30, 2001, and the results of its operations and cash flows
for the interim periods ended June 30, 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 two-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 June 30, 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 June 30, 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 investments 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 plus, when dilutive, potential
shares of restricted common stock subject to repurchase and common stock from
exercise of options and warrants, 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>
                                              JUNE 30,
                                       ----------------------
                                         2001          2000
                                       -------      ---------
<S>                                    <C>          <C>
Shares issuable under stock
options                                830,696        251,172
Shares of restricted stock
subject to repurchase                  511,562        563,961
Shares issuable pursuant to
warrants to purchase common
stock                                   17,367        114,734
Shares of convertible preferred
stock on an "as if converted"
basis                                       --      8,827,652
</TABLE>


      The weighted-average exercise price of stock options outstanding was $3.21
and $2.25 as of June 30, 2001 and 2000, respectively. The weighted-average
purchase price of restricted stock subject to repurchase was $0.38 and $0.42 as
of June 30, 2001 and 2000, respectively. The weighted-average exercise price of
outstanding warrants to purchase common stock was $0.90 and $0.71 as of June 30,
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 July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the criteria
for recording intangible assets separate from goodwill. SFAS No. 142 requires
the use of a non-amortization approach to account for purchased goodwill and
certain intangibles. Under a non-amortization approach, goodwill and certain
intangibles would not be amortized into results of operations, but instead would
be reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. As of June 30, 2001, the Company had
recorded goodwill and intangibles of $7.3 million. The Company does not expect
the adoption of SFAS No. 141 and SFAS No. 142 to have material impacts on its
financial position or results of operations.

      In September 2000, the 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 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 IMPAIRMENT OF INTANGIBLES AND OTHER ASSETS

      We record impairments or write-downs of intangibles and other assets when
events and circumstances indicate that an impairment assessment should be
performed and that assessment indicates that there is an impairment. Events and
circumstances that would trigger an impairment assessment include, but are not
limited to, a significant decrease in the market value of an asset, a
significant change in the manner or extent that an asset is used including a
decision to abandon acquired products, services or technologies, a significant
adverse change in operations or business climate affecting the asset not
considered temporary, and historical operating or cash flow losses expected to
continue for the foreseeable future associated with the asset. An asset is
considered impaired when the undiscounted cash flows projected to be generated
from the asset over its remaining useful life is less than the recorded amount
of that asset. Impairment losses are measured based on the difference between
the asset's fair value and carrying amount and are recorded as impairment
write-downs in the consolidated statements of operations in the period that an
indicator of impairment arises. During the quarter ended June 30, 2001, we
recorded a charge of $1.2 million to reflect the impairment of intangibles and
other assets, primarily related to our goodwill associated with our acquisition
of GlobalCast.

                                       7
<PAGE>   8
NOTE 7 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 represented $2.7 million in goodwill and $0.2 million
of developed technology. As per Note 6, during the quarter ended June 30, 2001,
we recorded a charge of $1.2 million to reflect the impairment of intangibles
and other assets, primarily related to our goodwill associated with our
acquisition of GlobalCast.

      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 acquisition of
WhiteBarn are being amortized on a straight-line basis over their estimated
useful lives of between two and three years.

NOTE 8 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
condensed 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 revenue by geographical area, and,
accordingly, no analysis has been provided. There were no significant assets
maintained by the Company outside the United States as of June 30, 2001 or 2000.
Revenue from sales made to customers outside the United States aggregated 15%
and 31% of our total revenue for the three months ended June 30, 2001 and 2000,
respectively, and 21% for the nine months ended June 30, 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 ACCOUNTS
                                     TOTAL REVENUE                     RECEIVABLE
                       THREE MONTHS ENDED      NINE MONTHS ENDED
                            JUNE 30,                JUNE 30,            JUNE 30,
                       ------------------      -----------------        --------
                        2001        2000        2001       2000           2001
                        ----        ----        ----       ----           ----
<S>                    <C>          <C>        <C>         <C>       <C>
Customer A                           12%                    7%             --
Customer B                           12%                    6%             --
Customer C               16%                    18%                        20%
</TABLE>

NOTE 9 SUBSEQUENT EVENTS

      On August 10, 2001 a stockholder class action complaint was filed in the
United States District Court for the Southern District of New York against us,
certain of our officers and directors, and three underwriters of our initial
public offering. The complaint was brought on behalf of purchasers of our common
stock between July 20, 2000 and December 6, 2000. The complaint has been brought
as a purported stockholder class action under Sections 11 and 15 of the
Securities Act and Section 10(b) of the Securities Exchange Act. The complaint
alleges, among other things, that Talarian and the individual defendants named
in the complaint violated the federal securities laws by issuing and selling our
common stock in our initial public offering without disclosing to investors that
certain of the underwriters in the offering allegedly solicited and received
excessive and undisclosed commissions from certain investors. Similar complaints
have been filed against a number of other companies that had initial public
offerings in 1999 and 2000. We have not yet responded to this lawsuit, and no
discovery has been conducted. We believe that the allegations in this action are
without merit, and we intend to defend against this actin vigorously, but we
cannot give any assurance that it will not have a material adverse effect on the
Company. At this point, it is too early to determine whether any loss will be
incurred in connection with these lawsuits.


                                       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
include statements relating to our plans to increase the breadth of its product
and service offerings and our expectations regarding future financial results,
expense levels and size of 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 of these 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 application 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, we recognize revenue
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.


                                       9
<PAGE>   10

      Maintenance and support revenue consists of fees for providing software
updates and technical support for software products. We recognize revenue from
maintenance and support fees 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.

      Payments received in advance of revenue recognition are recorded as
deferred revenue. As of June 30, 2001, we had $4.0 million of deferred revenue.
Of this amount, $1.2 million was classified as long-term deferred revenue,
relating primarily to software licenses that require us to deliver software over
an extended period and, to a lesser extent, to maintenance and support
agreements that have a term in excess of one year.

      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. We
generally recognize revenue from professional services 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 products, 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 in 2000 and 2001, we opened sales
offices in Japan and Germany, respectively. Currently, we generate our
international revenue primarily 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. During the quarter ended June 30, 2001, we recorded a charge of
$1.2 million to reflect the impairment of intangibles and other assets,
primarily related to our goodwill associated with our acquisition of GlobalCast.

      In March 2000, we acquired WhiteBarn, a professional services and software
development company focused on reliable multicast and network protocols, for a
combination of 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. We generally expect to maintain, but not
increase our levels of expenditures in these areas, and therefore we expect to
incur operating losses for the foreseeable future.

      In connection with the granting of stock options to our employees through
June 30, 2001, we have recorded deferred stock compensation totaling
approximately $20.2 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.

      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


                                       10
<PAGE>   11

income tax purposes of approximately $7.2 million and for California income tax
purposes of approximately $2.4 million, available to offset income in future
years. The federal net operating loss carryforwards expire from 2007 through
2020. The California net operating loss carryforwards expire from 2001 through
2005.

RESULTS OF OPERATIONS

      The following table sets forth the results of operations for the three
months ended June 30, 2001 and 2000 expressed as a percentage of total revenue.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED      NINE MONTHS ENDED
                                                   JUNE 30,                JUNE 30,
                                              ------------------      -----------------
                                               2001         2000       2001       2000
                                              -----        -----      -----      ------
<S>                                           <C>          <C>        <C>        <C>
Revenue:
  Licenses                                       43%         61%         55%       62%
  Maintenance                                    33          18          26        21
  Professional services                          24          21          19        17
                                               ----        ----        ----      ----
    Total revenue                               100         100         100       100
                                               ----        ----        ----      ----

Cost of revenue:
  Licenses                                        0           1           1         2
  Maintenance                                    11           5          10         5
  Professional services                          18          13          12         8
  Amortization of deferred stock                  6           9           6         7
   compensation                                ----        ----        ----      ----
    Total cost of revenue                        35          28          29        22
                                               ----        ----        ----      ----
    Gross profit                                 65          72          71        78
                                               ----        ----        ----      ----

Operating expenses:
  Sales and marketing                           109          55          96        54
  Research and development                       81          36          73        32
  General and administrative                     28          12          27        14
  Amortization of deferred stock
   compensation:
      Sales and marketing                         4          27          15        22
      Research and development                   17          26          17        21
      General and administrative                 11          17          12        24
  Excess facilities cost                         10           0           5         0
  Amortization of goodwill and intangible
   assets                                        66          14          30        11
                                               ----        ----        ----      ----
    Total operating expenses                    326         187         275       178
                                               ----        ----        ----      ----
    Loss from operations                       (261)       (115)       (204)     (100)
Interest income and other, net                   22           3          26         2
                                               ----        ----        ----      ----
    Net loss                                   (239)%      (112)%      (178)%     (98)%
                                               ----        ----        ----      ----
</TABLE>


REVENUE


      Total revenue decreased by $1.6 million, or 38%, to $2.8 million in the
three months ended June 30, 2001, from $4.4 million in the three months ended
June 30, 2000. Total revenue decreased $556,000, or 5%, to $10.3 million for
the nine months ended June 30, 2001, from $10.8 million in the nine months ended
June 30, 2000. Licenses and associated maintenance revenue represented 43% and
55% of total revenue for the three and nine months ended June 30, 2001 and 61%
and 63% of total revenue in the three and nine months ended June 30, 2000. The
decrease in total revenue for the three and nine month periods was primarily due
to a decrease in software license revenue. The United States and Europe have
been experiencing a general decline in economic conditions, which has led to
reduced demand for a variety of goods and services, including high technology
goods and services. During the three and nine months ended June 30, 2001, we saw
a significant decrease in the overall demand for our products and services that
resulted in lower than anticipated license revenue and a greater than
anticipated net loss. We plan to continue to monitor the status of the United
States and European economies and, specifically, demand for our


                                       11
<PAGE>   12

products. One customer accounted for more than 10% of our total revenue in the
three and nine months ended June 30, 2001. Two customers each accounted for more
than 10% of our total revenue in the three months ended June 30, 2000. No
customer accounted for more than 10% of our total revenue in the nine months
ended June 30, 2000. During the three months ended June 30, 2001, international
revenue decreased by $952,000, or 70%, to $413,000, from $1.4 million in the
three months ended June 30, 2000. In the nine months ended June 30, 2001,
international revenue decreased by $1.0 million to $1.3 million, from $2.3
million in the nine months ended June 30, 2000. International revenue was 15%
and 31% of our total revenue in the three months ended June 30, 2001 and 2000,
respectively, and 12% and 21% of our total revenue in the nine months ended June
30, 2001 and 2000, respectively.


      Licenses. License revenue decreased by $1.5 million, or 56%, to $1.2
million in the three months ended June 30, 2001, from $2.7 million in the three
months ended June 30, 2000. License revenue decreased by $1.1 million or 16%, to
$5.7 million in the nine months ended June 30, 2001, from $6.8 million in the
nine months ended June 30, 2000. The decrease in license revenue was due to a
decrease in the number of SmartSockets software licenses, partially offset by an
increase in the number of SmartMulticast software licenses. As a percentage of
total revenue, license revenue represented 43% and 61% in the three months ended
June 30, 2001 and 2000, respectively, and 55% and 63% in the nine months ended
June 30, 2001 and 2000, respectively. The decrease in license revenue in
absolute dollars and as a percentage of total revenue for both periods was a
result of a continued softness in the overall customer demand for software
licenses. We have seen a shift from larger initial license transactions to lower
dollar transactions as customers become more cautious in their purchasing
decisions. In addition to the weakness in the United States economy that has
been prevalent over the last six months, we are also experiencing the effects of
an economic downturn in the European markets. This weakness was reflected in the
reduced contribution from international revenue in terms of absolute dollars and
as a percentage of total revenue.

      Maintenance. Maintenance revenue increased by $130,000, or 17%, to
$911,000 in the three months ended June 30, 2001, from $781,000 for the three
months ended June 30, 2000. Maintenance revenue increased by $429,000, or 19% to
$2.7 million in the nine months ended June 30, 2001, from $2.2 million in the
nine months ended June 30, 2000. The increase in maintenance revenue was due to
larger installed base of customers receiving ongoing maintenance. As a
percentage of total revenue, maintenance revenue represented 33% and 18% in the
three months ended June 30, 2001 and 2000, respectively, and 26% and 21% in the
nine months ended June 30, 2001 and 2000.

      Professional services. Professional services revenue decreased by
$278,000, or 30%, to $662,000 in the three months ended June 30, 2001, from
$940,000 in the three months ended June 30, 2000. Professional services
increased by $107,000, or 6%, to $1.9 million in the nine months ended June 30,
2001, from $1.8 million for the nine months ended June 30, 2000, respectively.
The decrease in professional services during the three months ended June 30,
2001 was a result of the continued softness in overall customer demand for high
technology services as discussed above. The increase for the nine months ended
June 30, 2001 is primarily a result of services delivered to new customers
obtained through our acquisition of WhiteBarn in March 2000 through the first
six months of our fiscal year. As a percentage of total revenue, professional
services revenue represented 24% and 21% in the three months ended June 30, 2001
and 2000, and 19% and 17% in the nine months ended June 30, 2001 and 2000,
respectively.

COST OF REVENUE

      In the three months ended June 30, 2001, cost of revenue decreased by
$253,000, or 21%, to $980,000, from $1.2 million in the three months ended June
30, 2000. Cost of revenue increased by $604,000, or 26%, to $2.9 million in the
nine months ended June 30, 2001, from $2.3 million in nine months ended June 30,
2000. The decrease in cost of revenue for the three months ended June 30, 2001,
was primarily a result of a $226,000 decrease in amortization of deferred stock
compensation associated with terminated employees. The remaining decrease in
cost of revenue was attributable to the decrease in associated revenue. The
increase in cost of revenue in the nine months ended June 30, 2001 was
attributable to increased costs during the first six months of our fiscal year
related to our growing maintenance and professional services departments, some
of which resulted from personnel acquired in connection with our acquisition of
WhiteBarn. As a percentage of total revenue, cost of revenue represented 35% and
28% in the three months ended June 30, 2001 and 2000, respectively, and
represented 29% and 22% in the nine months ended June 30, 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, personnel increases associated
with customer support to provide increased support capabilities across a wider
cross section of product lines, and lower overall software license revenue.


                                       12
<PAGE>   13

      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 June 30, 2001, cost of license revenue
decreased by $57,000, or 81%, to $13,000 from $70,000 in the three months ended
June 30, 2000. Cost of license revenue decreased by $200,000, or 86%, to $32,000
in the nine months ended June 30, 2001, from $232,000 in nine months ended June
30, 2000. The decrease in cost of license revenue was attributable to a decrease
in overall license revenue, particularly lower license revenue from
royalty-bearing products. We anticipate the cost of license revenue to fluctuate
in absolute dollar amount and as a percentage of total license revenue as the
related license revenue, and the mix of license revenue among various products,
fluctuates. As a percentage of license revenue, cost of license revenue
represented 1% and 3% in both the three and nine months ended June 30, 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 $91,000, or 42%, to $303,000 in the three months ended June
30, 2001, from $212,000 in the three months ended June 30, 2000. In the nine
months ended June 30, 2001, cost of maintenance revenue increased by $466,000,
or 83%, to $1.0 million, from $561,000 in the nine months ended June 30, 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 a broader product line. As a
percentage of maintenance revenue, cost of maintenance revenue represented 33%
and 27% in the three months ended June 30, 2001 and 2000, respectively, and
represented 38% and 25% in the nine months ended June 30, 2001 and 2000. We
anticipate that our cost of maintenance revenue will remain relatively constant
in terms of absolute dollars over the next six months.

      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 decreased by
$61,000, or 11%, to $499,000 in the three months ended June 30, 2001, from
$560,000 in the three months ended June 30, 2000. In the nine months ended June
30, 2001, cost of professional services increased $364,000, or 43%, to $1.2
million, from $856,000 in the nine months ended June 30, 2000. The decrease in
cost of professional services revenue for the three months ended June 30, 2001
was a result of the associated decrease in professional services revenue for
that period, offset in part by an increase in professional services
infrastructure. A portion of the dollar increase in cost of professional
services revenue for the nine months ended June 30, 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 and an increase in
management and other infrastructure associated with delivering services. As a
percentage of professional services revenue, cost of professional services
revenue represented 75% and 60% in the three months ended June 30, 2001 and
2000, respectively, and represented 63% and 47% in the nine months ended June
30, 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 $226,000, to $165,000 in the
three months ended June 30, 2001 from $391,000 in the three months ended June
30, 2000. In the nine months ended June 30, 2001, amortization of deferred stock
compensation in cost of revenue decreased by $25,000 to $665,000, from $690,000
in the nine months ended June 30, 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
$571,000, or 23%, to $3.0 million in the three months ended June 30, 2001, from
$2.5 million in the three months ended June 30, 2000. In the nine months ended
June 30, 2001, sales and marketing expenses increased by $4.0 million, or 69%,
to $9.9 million, from $5.9 million in the nine months ended June 30, 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 109% and 55% in the three months ended June 30,
2001 and 2000, respectively, and represented 96% and 54% in


                                       13
<PAGE>   14

the nine months ended June 30, 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 , 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 $639,000, or 40%, to $2.2
million in the three months ended June 30, 2001, from $1.6 million in the three
months ended June 30, 2000. In the nine months ended June 30, 2001, research and
development expenses increased by $4.0 million, or 115%, to $7.5 million, from
$3.5 million In the nine months ended June 30, 2000. A portion of the increase
for the three months ended June 30, 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 81%
and 36% in the three months ended June 30, 2001 and 2000, respectively; compared
with 73% and 32% in the nine months ended June 30, 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.

      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 $260,000, or 50%, to $779,000 in the three months ended June 30, 2001, from
$519,000 in the three months ended June 30, 2000. For the nine months ended June
30, 2001, general and administrative expenses increased by $1.3 million, or 85%,
to $2.8 million, from $1.5 million in the nine months ended June 30, 2000. 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 the additional requirements of
being a public company. As a percentage of total revenue, general and
administrative expenses represented 28% and 12% in the three months ended June
30, 2001 and 2000, respectively; compared with 27% and 14% in the nine months
ended June 30, 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
June 30, 2001, we recorded $881,000 of amortization of deferred stock
compensation in operating expenses, representing $117,000 of additional sales
and marketing expenses, $459,000 of additional research and development expenses
and $305,000 of additional general and administrative expenses. During the nine
months ended June 30, 2001, we recorded $4.5 million of amortization of deferred
stock compensation in operating expenses, representing $1.6 million of
additional sales and marketing expenses, $1.7 million of additional research and
development expenses and $1.2 million of additional general and administrative
expenses. During the three and nine months ended June 30, 2000, we recorded $3.1
million and $7.3 million, respectively, of amortization of deferred stock
compensation.

      Excess facilities cost. Excess facilities cost was $275,000 for the three
months ended June 30, 2001, and $549,000 for the nine months ended June 30,
2001. This amount represents expenses related to real estate commitments in
excess of projected needs.

      Amortization of goodwill and intangible assets. Amortization of goodwill
and intangible assets was $1.8 million and $608,000 in the three months ended
June 30, 2001 and 2000, respectively. In the nine months ended June 30, 2001 and
2000, amortization of goodwill and intangible assets was $3.0 million and $1.2
million, 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. Included in the $1.8
million and $3.0 million of amortization of goodwill and intangible assets for
the three and nine months ended June 30, 2001 was $1.2 million representing a
writedown of the carrying value of the goodwill associated with the acquisition
of GlobalCast. As of June 30, 2001, our stock price has declined significantly
since the respective valuation dates of the shares issued in connection with
each acquisition. Due to these changes, the changes in the markets in which we
compete in the United States and global economy, and changes in the market for
the multicast products significantly diminishing the market for the proprietary
technology from GlobalCast, we began a process to determine whether the
respective fair values of our goodwill and other intangible assets may be less
than their respective carrying


                                       14
<PAGE>   15
values. This process included a detailed analysis of estimated cash flows that
we expected to generate from future operations for purposes of determining
whether an impairment of goodwill and other intangible assets has occurred. As a
result of our detailed analysis and investigation, we determined that there was
an impairment of goodwill associated with the acquisition of GlobalCast. The
carrying value of this asset of $1.2 million has been written off as a charge
against our operating results in the three months ended June 30, 2001.

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 $615,000 and $2.7 million for the three and
nine months ended June 30, 2001, respectively, compared to income of $126,000
and $157,000 for the three and nine months ended June 30, 2000. The increase is
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 nine months ended
June 30, 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 $11.0 million for the nine
months ended June 30, 2001. Net cash used in operating activities was $1.6
million for the nine months ended June 30, 2000. For the nine months ended June
30, 2001, substantially all of net cash used in operating activities was
attributable to our net loss of $18.3 million, which included $9.1 million in
non-cash charges, and a reduction in accounts payable and other accrued expenses
of $1.5 million. For the nine months ended June 30, 2000, net cash used in
operating activities was primarily due to our net loss of $10.6 million, which
included $9.5 million in noncash charges, an increase of $1.4 million in prepaid
offering expenses and an increase in deferred revenue of $606,000, offset in
part by a decrease in accounts receivable of $406,000, and increases in accounts
payable and accrued payroll of $1.2 million.

      Net cash provided by investing activities was $10.4 million for the nine
months ended June 30, 2001 and net cash used in investing activities was $8.0
million for the nine months ended June 30, 2000. For the nine months ended June
30, 2001, net cash provided by investing activities was primarily related to the
sale of short-term investments, partially offset by purchases of property and
equipment. For the nine months ended June 30, 2000, net cash used in investing
activities represented purchases of short-term investments, net of proceeds from
the sale of short-term investments, totaling $6.4 million, the acquisition of
WhiteBarn, net of cash acquired, and purchases of property and equipment.

      Net cash provided by financing activities was $6,000 for the nine months
ended June 30, 2001 and $9.2 million for the nine months ended June 30, 2000.
For the nine months ended June 30, 2001, net cash provided by financing
activities was mainly related to the sale of common stock through employee stock
options. For the nine months ended June 30, 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, offset by a repayment of our line of credit.

      As of June 30, 2001, we had approximately $55.3 million in cash, cash
equivalents, and short-term investments, and working capital of $50.5 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 would 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 $1.5 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


                                       15
<PAGE>   16

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, $15.0 million in fiscal
2000 and $18.3 million in the first nine months of fiscal 2001. As of June 30,
2001, we had an accumulated deficit of approximately $43.2 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.

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 June 30, 2001, nine customers represented more than 50% of
total 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 effect on
          customer purchase decisions;

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


                                       16
<PAGE>   17

      -   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
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, if SmartSockets is not widely accepted by the market,
or if we fail to enhance SmartSockets and introduce new versions in a timely
manner, demand for this product may decrease or fail to


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<PAGE>   18

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 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
Technology.

      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.


                                       18
<PAGE>   19

      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.

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. Over the
last 12 months, 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.


                                       19
<PAGE>   20

      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 12% and 21% of our total revenue in the first nine 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.

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 $2.9 million in goodwill and other intangibles, 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. 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.
During the quarter ended June 30, 2001, we recorded a charge of $1.2 million to
reflect the impairment of intangibles and other assets, primarily related to our
goodwill associated with our acquisition of GlobalCast.

      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.

                                       20
<PAGE>   21


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 $7.3 million in goodwill and other intangible assets.
As of June 30, 2001, our stock price has declined significantly since the
respective valuation dates of the shares issued in connection with each
acquisition.

      Due to these changes, along with changes in the markets in which we
compete and the United States and global economy, we performed an impairment
assessment of the carrying values of our goodwill and other intangible assets.
An asset is considered impaired when the undiscounted cash flows projected to be
generated from the asset over its remaining useful life is less than the
recorded amount of that asset. Impairment losses are measured based on the
difference between the asset's fair value and carrying amount and are recorded
as impairment write-downs in the consolidated statements of operations in the
period that an indicator of impairment arises. During the quarter ended June 30,
2001, we recorded a charge of $1.2 million to reflect the impairment of
intangibles and other assets, primarily related to our goodwill associated with
our acquisition of GlobalCast. Future significant impairments 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 train, and manage our workforce worldwide. As
part of our growth plan, in December 2000 we leased an additional 13,000 square
feet of office space. Given current economic conditions and revisions to our
hiring plans, we do not plan to have use for this space in the near future and
have been attempting to sublease this space. The current real estate market
conditions have softened and we may have difficulty finding sublease tenants.
We are currently reporting costs associated with this lease as excess facilities
costs on our income statement. As we are able to further determine the actual
future liability associated with this excess facility, we may incur a charge
related to future costs of this lease. Furthermore, we expect that we will be
required to manage an increasing number of relationships with various customers
and other third parties. If we do not manage our growth efficiently and
effectively, it could adversely affect our business, operating results and
financial condition.

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

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


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<PAGE>   22


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

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

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

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

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

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

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

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

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


                                       22
<PAGE>   23

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.

      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 June 30, 2001, our executive officers, directors, entities
affiliated with them and other five percent stockholders, in the aggregate,
beneficially owned approximately 40% 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 July 31, 2001, we had outstanding 19,108,927
shares of common stock. Of these shares, the 4,200,000 shares sold in our
initial public offering were 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


                                       23
<PAGE>   24

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
June 30, 2001, we had 2,762,035 shares issuable under outstanding options and
warrants, 848,063 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;

      -   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.


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<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 June 30, 2001, we had cash and highly liquid short-term investments
totaling $55.3 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 June 30, 2001, a decrease in interest rates of 0.5%
would cause a corresponding decrease in our annual interest income of $277,000.
As of June 30, 2001, we did not have any short-term or long-term debt
outstanding.


                                       25
<PAGE>   26

                           PART II: OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

     On August 10, 2001 a stockholder class action complaints was filed in the
United States District Court for the Southern District of New York against us,
certain of our officers and directors, and three underwriters of our initial
public offering. The complaint was brought on behalf of purchasers of our common
stock between July 20, 2000 and December 6, 2000. The complaint has been brought
as a purported stockholder class action under Sections 11 and 15 of the
Securities Act and Section 10(b) of the Securities Exchange Act. The complaint
alleges, among other things, that Talarian and the individual defendants named
in the complaint violated the federal securities laws by issuing and selling our
common stock in our initial public offering without disclosing to investors that
certain of the underwriters in the offering allegedly solicited and received
excessive and undisclosed commissions from certain investors. Similar complaints
have been filed against a number of other companies that had initial public
offerings in 1999 and 2000. We have not yet responded to this lawsuit, and no
discovery has been conducted. We believe that the allegations in this action are
without merit, and we intend to defend against this action vigorously, but we
cannot give any assurance that it will not have a material adverse effect on the
Company.

      In addition, from time to time, we may be involved in litigation relating
to claims arising out of our operations in the normal course of business. As of
the date of this quarterly report on Form 10-Q, except as described herein, we
are not engaged in any legal proceedings that are expected, individually or in
the aggregate, to have a material adverse effect on our business, financial
condition, operating results or cash flow.

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 amounted 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 June 30, 2001, the proceeds from the offering
have been used to fund $11.8 million of working capital and general corporate
needs. In addition, we applied $35.2 million of the proceeds towards short-term
investments, and $1.7 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 5. OTHER INFORMATION

      Joseph Addiego, Senior Vice President, Sales and Marketing, resigned
effective April 1, 2001. We are currently conducting a search for his
replacement. Mark Mahowald, formerly our Vice President, Multicast and
Networking, has been promoted to Chief Operating Officer. Steven Gimnicher,
formerly Vice President of Engineering, now serves as our Vice President,
Marketing. The Company is currently conducting a search for both a Vice
President of Sales and a Vice President of Engineering. Paul Larson, our
President and Chief Executive Officer, and Mark Mahowald are serving as interim
Vice President of Sales and Vice President of Engineering, respectively.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A.      Exhibits

        None.

B.      Reports on Form 8-K

        None.


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<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.

<TABLE>
<S>   <C>                              <C>        <C>
                                                  TALARIAN CORPORATION

DATE:                                  SIGNATURE: /s/ Paul A. Larson
      --------------------------                  ------------------------------

                                                  Paul A. Larson
                                                  President and Chief Executive
                                                  Officer
                                                  (Duly Authorized Officer)


DATE:                                  SIGNATURE: /s/ Michael A. Morgan
      --------------------------                  ------------------------------

                                                  Michael A. Morgan
                                                  Vice President, Finance and
                                                  Administration and Chief
                                                  Financial Officer
                                                  (Principal Financial and
                                                  Accounting Officer)
</TABLE>


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