<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 DECEMBER 31, 2000

                                       OR

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


                        Commission File Number 000-31011


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


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


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

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


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


      The number of shares outstanding of the registrant's common stock, par
value $.0001 per share, as of January 24, 2001, was 18,969,149.


<PAGE>   2

                              TALARIAN CORPORATION

                          QUARTERLY REPORT ON FORM 10-Q
                         QUARTER ENDED DECEMBER 31, 2000

                                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 December 31, 2000 and September 30, 2000

               Condensed Consolidated Statements of Operations -              4
                  Three months ended December 31, 2000 and 1999

               Condensed Consolidated Statements of Cash Flows -              5
                  Three months ended December 31, 2000 and 1999

               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 6.        Exhibits and Reports on Form 8-K                               26

--------------------------------------------------------------------------------
SIGNATURES                                                                    27
--------------------------------------------------------------------------------
</TABLE>

<PAGE>   3

                       TALARIAN CORPORATION AND SUBSIDIARY

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,     SEPTEMBER 30,
                                                                     2000             2000
                                                                 ------------     -------------
<S>                                                              <C>              <C>
                      ASSETS
Current assets:
  Cash and cash equivalents                                       $   29,564       $   35,144
  Short-term investments                                              34,185           32,594
  Accounts receivable,  less allowance for doubtful accounts           2,937            2,873
  Prepaid expenses and other                                           1,189            1,011
                                                                  ----------       ----------
      Total current assets                                            67,875           71,622

  Property and equipment, net                                          1,505            1,345
  Goodwill and other intangible assets, net                            4,969            5,577
  Other long-term assets                                                 144               62
                                                                  ----------       ----------
                                                                  $   74,493       $   78,606
                                                                  ==========       ==========

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                $      442       $      730
  Accrued payroll and related expenses                                 1,636            1,287
  Other accrued expenses                                               1,455            1,471
  Current portion of deferred revenue                                  2,953            3,078
                                                                  ----------       ----------
      Total current liabilities                                        6,486            6,566

Deferred revenue, less current portion                                 1,479            1,401
                                                                  ----------       ----------
      Total liabilities                                                7,965            7,967
                                                                  ----------       ----------


Stockholders' equity:
  Common stock                                                            19               19
  Additional paid-in capital                                         106,949          107,495
  Treasury stock                                                         (66)             (57)
  Deferred stock compensation                                         (9,222)         (11,886)
  Note receivable from stockholders                                     (100)            (100)
  Accumulated deficit                                                (31,052)         (24,832)
                                                                  ----------       ----------
      Total stockholders' equity                                      66,528           70,639
                                                                  ----------       ----------
                                                                  $   74,493       $   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
                                                                DECEMBER 31,
                                                          -----------------------
                                                            2000           1999
                                                          --------       --------
<S>                                                       <C>            <C>
Revenue:
  Licenses                                                $  2,022       $  1,829
  Maintenance                                                  839            718
  Professional services                                        556            247
                                                          --------       --------
    Total revenue                                            3,417          2,794

Cost of revenue:
  Licenses                                                      18             60
  Maintenance                                                  370            177
  Professional services                                        236             87
  Amortization of deferred stock compensation                  288             78
                                                          --------       --------
    Total cost of revenue                                      912            402
                                                          --------       --------
    Gross profit                                             2,505          2,392
                                                          --------       --------

Operating expenses:
  Sales and marketing                                        3,473          1,425
  Research and development                                   2,792            824
  General and administrative                                   971            505
  Amortization of deferred stock compensation:
      Sales and marketing                                      810            472
      Research and development                                 723            342
      General and administrative                               468            593
  Amortization of goodwill and intangible assets               608            239
                                                          --------       --------
    Total operating expenses                                 9,845          4,400
                                                          --------       --------
    Loss from operations                                    (7,340)        (2,008)
Interest income (expense) and other, net                     1,118            (25)
                                                          --------       --------
    Net loss                                                (6,222)        (2,033)
Preferred stock dividends                                        -           (124)
                                                          --------       --------
Net loss attributable to common stockholders              $ (6,222)      $ (2,157)
                                                          ========       ========

Basic and diluted net loss per share attributable
  to common stockholders                                  $  (0.34)      $  (0.57)
                                                          ========       ========
Shares used in computing basic and diluted net
  loss per share attributable to common stockholders        18,168          3,813
                                                          ========       ========
</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>
                                                                        THREE MONTHS ENDED
                                                                           DECEMBER 31,
                                                                     -----------------------
                                                                       2000           1999
                                                                     --------       --------
<S>                                                                  <C>            <C>
Cash flows from operating activities:
  Net loss                                                           $ (6,222)      $ (2,032)
  Adjustments to reconcile net loss to net cash used for
      operating activities:
      Depreciation and amortization                                       189             99
      Amortization of goodwill and other intangible assets                608            239
      Amortization of deferred stock compensation                       2,289          1,485
      Change in allowance for doubtful accounts                            60              -

      Changes in operating assets and liabilities:
         Accounts receivable                                             (124)           665
         Prepaid expenses and other assets                               (260)           (25)
         Accounts payable                                                (288)          (110)
         Accrued payroll and related expenses                             349           (123)
         Other accrued expenses                                          (191)           (24)
         Deferred revenue                                                 (47)           (31)
                                                                     --------       --------
            Net cash (used in) provided by operating activities        (3,637)           193
                                                                     --------       --------

Cash flows from investing activities:
  Purchases of short-term investments                                  (1,591)             -
  Purchases of property and equipment                                    (348)           (17)
                                                                     --------       --------
            Net cash used in investing activities                      (1,939)           (17)
                                                                     --------       --------

Cash flows from financing activities:
  Proceeds from sale of common stock                                        5              1
  Repurchase of common stock                                               (9)             -
  Payments on debt                                                          -            (80)
                                                                     --------       --------
            Net cash used in financing activities                          (4)           (79)
                                                                     --------       --------
Net (decrease) increase in cash and cash equivalents                   (5,580)            97
Cash and cash equivalents at beginning of period                       35,144          1,820
                                                                     --------       --------
Cash and cash equivalents at end of period                           $ 29,564       $  1,917
                                                                     ========       ========
Supplemental disclosures of cash flow information:

Cash paid for interest                                                      -             32
                                                                     ========       ========
Accretion for dividends on redeemable preferred stock                       -            124
                                                                     ========       ========
Additional IPO costs accrued                                              175              -
                                                                     ========       ========
Deferred stock compensation on grants of stock options                      -          7,980
                                                                     ========       ========

Deferred stock compensation on stock option cancellations                (301)             -
                                                                     ========       ========
</TABLE>

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



                                       5
<PAGE>   6

                       TALARIAN CORPORATION AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1  BASIS OF PRESENTATION

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

   The results of operations for the interim periods ended December 31, 2000 and
1999 are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year ended 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 FDIC. As of December
31, 2000 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 are classified as short-term investments.
Available-for-sale securities are carried at fair market value, which
approximates amortized cost. Any unrealized gains or losses are recorded as a
component of other comprehensive income (loss).



                                       6
<PAGE>   7

NOTE 4  NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

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


<TABLE>
<CAPTION>
                                                      Three Months Ended
                                                         December 31,
                                                   ------------------------
                                                     2000           1999
                                                   ---------      ---------
<S>                                                <C>            <C>
Shares issuable under stock options .........        563,820        567,106
Shares of unvested stock
subject to repurchase .......................        732,994              -
Shares issuable pursuant to
warrants to purchase common stock . .........         97,367        114,734
Shares of convertible preferred
stock on an "as if converted" basis .........              -      7,239,829
</TABLE>

   The weighted-average exercise price of stock options outstanding was $3.95
and $0.50 for the three months ended December 31, 2000 and 1999, respectively.
The weighted-average purchase price of unvested stock subject to repurchase was
$0.41 for the three months ended December 31, 2000. The weighted-average
exercise price of outstanding warrants to purchase common stock was $0.67 and
$0.71 for the three months ended December 31, 2000 and 1999, 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 December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A that delayed the
implementation date of SAB No. 101. In June 2000, the SEC issued SAB No. 101B
that further delayed the implementation date of SAB No. 101. The Company must
adopt SAB No. 101 no later than the fourth quarter of fiscal 2001. The Company
does not anticipate that the adoption of SAB 101 will have a significant impact
on the Company's financial statements, cash flows, or results of operations.

NOTE 6  BALANCE SHEET COMPONENTS

   Intangible Assets

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

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

   Pro forma revenue, net loss attributable to common stockholders and basic
and diluted net loss per share attributable to common stockholders for the
three months ended December 31, 2000 and 1999 with respect to the WhiteBarn
acquisition is presented below. The pro forma financial information presents
the combined results of operations of the Company and WhiteBarn as if the
acquisition had occurred on October 1, 1999 after giving effect to certain
adjustments including amortization of goodwill and other intangibles, the
elimination of non-recurring items and related income tax effects. The pro
forma financial information does not necessarily reflect the consolidated
results of operations that would have occurred had the company and WhiteBarn
constituted a single entity during these periods (in thousands):

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                DECEMBER 31,
                                                             ------------------
                                                               2000        1999
                                                             --------    --------
<S>                                                          <C>         <C>
Revenue.................................................     $ 3,417     $ 3,486

Net loss attributable to common stockholders............      (6,222)     (2,706)

Basic and diluted net loss per share attributable
to common stockholders..................................     $ (0.34)    $ (0.65)
</TABLE>

                                       7
<PAGE>   8

NOTE 7  SEGMENT INFORMATION

   The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," for the year ended September 30, 1999. SFAS
No. 131 establishes standards for the reporting by public business enterprises
of information about operating segments, products and services, geographic
areas, and major customers. The method for determining what information to
report is based on the way that management organizes segments within the Company
for making operating decisions and assessments of financial performance.

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

   The Company maintains significant operations in the United States, with
direct sales and marketing offices located in the United Kingdom, Germany and
Japan. The Company does not measure performance of net revenue by geographical
area, and accordingly no analysis has been provided. There were no significant
assets maintained by the Company outside the United States for the three months
ended December 31, 2000 and 1999. Revenue from sales made to customers outside
the United States aggregated 20% and 22% for the three months ended December 31,
2000 and 1999, respectively. Customers were primarily concentrated in the United
Kingdom, France and Germany.

   There were no significant customers in the three months ended December 31,
2000. During the three months ended December 31, 1999, there were two
significant customers with 12% and 11% of total revenue.


                                       8
<PAGE>   9

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

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

OVERVIEW

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

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

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

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



                                       9
<PAGE>   10

   Payments received in advance of revenue recognition are recorded as deferred
revenue. As of December 31, 2000, we had $4.4 million of deferred revenue. Of
this amount, $1.5 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.

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

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

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

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

   In March 2000, we acquired WhiteBarn, a professional services and software
development company focused on reliable multicast and network protocols with
cash, stock and options to purchase our common stock that had an aggregate value
of $4.9 million. The transaction was accounted for as a purchase. In this
acquisition, the acquired technology included existing technology, but not
in-process research and development. For the year ended December 31, 1999,
WhiteBarn had revenue of $1.5 million, derived primarily from professional
services fees and, to a lesser extent, from hosting web sites and licensing
products, and net income of $47,000. We are maintaining WhiteBarn's facility in
Illinois and 13 WhiteBarn employees joined us in connection with the
acquisition. 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 have incurred significant losses recently as we have spent
substantial amounts to develop and enhance our products and have invested
heavily in our sales and marketing organizations. We believe our success is
dependent upon our ability to rapidly expand our customer base and enhance our
technology. We intend to continue making significant investments in sales and
marketing and research and development, and expect to incur operating losses for
the foreseeable future.

   In connection with the granting of stock options to our employees through
December 31, 2000, we recorded deferred stock compensation totaling
approximately $22.1 million. This amount represents the difference between the
exercise price and the deemed fair value of our common stock for accounting
purposes on the date these stock options were granted. This amount is included
as a component of stockholders' equity and is being amortized on an accelerated
basis by charges to operations over the vesting period of the options consistent
with the method described in Financial Accounting Standards Board Interpretation
No. 28. The stock options, or restricted stock



                                       10
<PAGE>   11

purchased pursuant to these options, generally vest at a rate of 12.5% upon the
six-month anniversary of the option grant date and 2.083% each month thereafter
for the next 42 months. Amortization of the December 31, 2000 balance of
deferred stock compensation will result in charges to operations of $4.6
million, $3.3 million, $1.2 million and $119,000 for the nine months ended
September 30, 2001, and for fiscal years 2002, 2003, and the nine months ended
June 30, 2004.

   We have recorded no provision for federal or state income taxes for any
period since our inception as we have incurred losses in each period. As of
September 30, 2000, we had net operating loss carryforwards for federal income
tax purposes of approximately $7.2 million and for California income tax
purposes of approximately $2.4 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 December 31, 2000 and 1999 expressed as a percentage of total revenue.

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED
                                                        DECEMBER 31,
                                                     ------------------
                                                      2000        1999
                                                     ------      ------
<S>                                                  <C>         <C>
Revenue:
  Licenses                                              59%         65%
  Maintenance                                           25          26
  Professional services                                 16           9
                                                      ----        ----
    Total revenue                                      100         100

Cost of revenue:
  Licenses                                               1           2
  Maintenance                                           11           6
  Professional services                                  7           3
  Amortization of deferred stock compensation            8           3
                                                      ----        ----
    Total cost of revenue                               27          14
                                                      ----        ----
    Gross profit                                        73          86
                                                      ----        ----

Operating expenses:
  Sales and marketing                                  101          51
  Research and development                              82          30
  General and administrative                            28          18
  Amortization of deferred stock compensation:
      Sales and marketing                               24          17
      Research and development                          21          12
      General and administrative                        14          21
  Amortization of goodwill and intangible assets        18           9
                                                      ----        ----
    Total operating expenses                           288         158
                                                      ----        ----
    Loss from operations                              (215)        (72)
Interest income (expense) and other, net                33          (1)
                                                      ----        ----
    Net loss                                          (182)%       (73)%
                                                      ====        ====
</TABLE>



                                       11
<PAGE>   12

REVENUE

   Total revenue increased by $623,000, or 22%, to $3.4 million for the three
months ended December 31, 2000, from $2.8 million for the three months ended
December 31, 1999. Licenses and associated maintenance revenue represented 84%
of total revenue in the three months ended December 31, 2000 and 91% of total
revenue for the three months ended December 31, 1999. The increase in total
revenue for the three-month period was due equally to increases in software
licenses and associated maintenance revenue, and an increase in professional
services revenue. No customers accounted for more than 10% of our total revenue
in the three months ended December 31, 2000. Two customers each accounted for
more than 10% of our total revenue in the three months ended December 31, 1999.
International revenue increased by $57,000, or 10%, to $615,000 for the three
months ended December 31, 2000, from $558,000 in the three months ended December
31, 1999. International revenue was 18% and 20% of our total revenue in the
three months ended December 31, 2000 and 1999, respectively.

   License. License revenue increased by $193,000, or 11%, to $2.0 million for
the three months ended December 31, 2000, from $1.8 million for the three months
ended December 31, 1999. The increase in license revenue was due to an increase
in the number of SmartMulticast software licenses to new and existing customer,
which was offset by a decrease in SmartSocket license revenue. We started
shipping our stand-alone SmartMulticast products shortly after the acquisition
of WhiteBarn in March 2000. As a percentage of total revenue, license revenue
represented 59% and 65% in the three months ended December 31, 2000 and 1999,
respectively.

   Maintenance. Maintenance revenue increased by $121,000, or 17%, to $839,000
for the three months ended December 31, 2000, from $718,000 for the three months
ended December 31, 1999. The increase in maintenance revenue was due to growth
associated with license agreements entered into in earlier periods. As a
percentage of total revenue, maintenance revenue represented 25% and 26% in the
three months ended December 31, 2000 and 1999, respectively.

   Professional services. Professional services revenue increased by $309,000,
or 125%, to $556,000 for the three months ended December 31, 2000, from $247,000
for the three months ended December 31, 1999. Approximately 68% of the increase
in professional services revenue in the three months ended December 31, 2000 was
a result of new customers obtained through our acquisition of WhiteBarn in March
2000. The remainder of the increase in professional services revenue was
attributable to the increased license activity discussed above and an increase
in training and architectural services associated with an increase in customer
installations. As a percentage of total revenue, professional services revenue
represented 16% and 9% in the three months ended December 31, 2000 and 1999,
respectively.

COST OF REVENUE

   Cost of revenue increased by $510,000, or 127%, to $912,000 for the three
months ended December 31, 2000, from $402,000 for the three months ended
December 31, 1999. Approximately 41% of the dollar increase in cost of revenue
for the three months ended December 31, 2000, was a result of an increase in
amortization of deferred stock compensation for service-related personnel.
Approximately 19% of the dollar increase in cost of revenue for the three months
ended December 31, 2000, was a result of personnel acquired in our acquisition
of WhiteBarn. The remainder of the increase in cost of revenue was attributable
to increased costs related to our growing maintenance and professional services
departments. As a percentage of total revenue, cost of revenue represented 27%
and 14% in the three months ended December 31, 2000 and 1999, respectively. Not
including amortization of deferred stock compensation, as a percentage of total
revenue, cost of revenue was 18% and 12% in the three months ended December 31,
2000 and 1999, respectively. The increase in cost of revenue as a percentage of
total revenue was the result of the increase in costs associated with personnel
responsible for delivering the additional professional services revenue, which
typically has a lower gross margin than other types of revenue, as well as
personnel increases associated with customer support to provide increased
support capabilities across a wider cross section of product lines.

   Licenses. Cost of license revenue includes royalties due for technology
licensed from third parties, product packaging, manuals and documentation, and
software media. Cost of license revenue decreased by $42,000, or 70%, to $18,000
for the three months ended December 31, 2000, from $60,000 for the three months
ended December 31, 1999. The decrease in cost of license revenue was
attributable to a decrease in license revenue from



                                       12
<PAGE>   13

royalty-bearing products. We anticipate that the cost of license revenue will
increase in absolute dollars and as a percentage of license revenue due to an
increasing use of third-party software incorporated into our product line. As a
percentage of license revenue, cost of license revenue represented 1% and 3% in
the three months ended December 31, 2000 and 1999, respectively.

   Maintenance. Cost of maintenance revenue consists of compensation and related
expenses for our technical support organization. Cost of maintenance revenue
increased by $193,000, or 109%, to $370,000 for the three months ended December
31, 2000, from $177,000 for the three months ended December 31, 1999. The
increase in cost of maintenance revenue was due to increased personnel 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 44% and 25% in the three months ended
December 31, 2000 and 1999, respectively. We anticipate that our cost of
maintenance revenue will continue to grow in absolute dollars as we expect to
expand our customer base and provide increasing levels of support for our
customers and as we increase the number of products for which we provide
support.

   Professional services. Cost of professional services revenue consists of
compensation and related overhead expense for personnel and third-party
contractors we use in performing consulting, implementation and training
services for our customers. Cost of professional services revenue increased by
$149,000, or 171%, to $236,000 for the three months ended December 31, 2000,
from $87,000 for the three months ended December 31, 1999. Approximately 65% of
the dollar increase in cost of professional services revenue for the three
months ended December 31, 2000, was a result of personnel acquired in the
acquisition of WhiteBarn. The remainder of the increase in cost of professional
services revenue was a result of additional personnel deployed on our
professional services engagements. As a percentage of professional services
revenue, cost of professional services revenue represented 42% and 35% in the
three months ended December 31, 2000 and 1999, respectively. We anticipate that
the cost of professional services revenue will continue to increase both in
terms of absolute dollars and as a percentage of professional services revenue
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 increased by $210,000, to $288,000 for the three
months ended December 31, 2000, from $78,000 for the three months ended December
31, 1999.

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 $2.0
million, or 144%, to $3.5 million for the three months ended December 31, 2000,
from $1.4 million for the three months ended December 31, 1999. 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 101% and 51% in the three months ended December 31, 2000
and 1999, respectively. 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. Therefore, we expect expenditures in sales and marketing to continue to
increase in terms of absolute dollars for the foreseeable future.

   Research and development. Research and development expenses consist of costs
of research and development personnel and associated overhead, and costs of
short-term independent contractors required in connection with development of
new products, enhancements to existing products, technical documentation, and
quality assurance. Costs incurred in research and development are expensed as
incurred until technological feasibility is established. We believe that under
our current engineering processes, the establishment of technological
feasibility and general release substantially coincide. As a result, no software
development costs have been capitalized to date. Research and development
expenses increased by $2.0 million, or 239%, to $2.8 million for the three
months ended December 31, 2000, from $824,000 for the three months ended
December 31, 1999. Approximately 36% of the dollar increase in research and
development for the three months ended December 31, 2000, 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



                                       13
<PAGE>   14

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 82% and 30% in the three months
ended December 31, 2000 and 1999, respectively. We believe that our product
development activities are critical to attaining our strategic objectives and
expect our investment in research and development to increase in terms of
absolute dollars for the foreseeable future.

   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 and other general
corporate expenses. General and administrative expenses increased by $466,000,
or 92%, to $971,000 for the three months ended December 31, 2000, from $505,000
for the three months ended December 31, 1999. The increase in general and
administrative expenses was due to increased personnel expenses in finance and
administration and in information systems as well as increases in professional
fees associated with additional requirements of being a public company. As a
percentage of total revenue, general and administrative expenses represented 28%
and 18% in the three months ended December 31, 2000 and 1999, respectively. We
expect general and administrative expenses to increase in terms of absolute
dollars for the foreseeable future as we continue to build the necessary
corporate infrastructure associated with being a public company.

   Amortization of deferred stock compensation. During the three months ended
December 31, 2000, we recorded $2.0 million of amortization of deferred stock
compensation in operating expenses, representing $810,000 of additional sales
and marketing expenses, $723,000 of additional research and development expenses
and $468,000 of additional general and administrative expenses. During the three
months ended December 31, 1999, we recorded $1.4 million of amortization of
deferred stock compensation.

   Amortization of goodwill and intangible assets. Amortization of goodwill and
intangible assets was $608,000 and $239,000 for the three months ended December
31, 2000 and 1999, respectively. This amount represents the amortization of
goodwill and other intangible assets acquired in connection with our acquisition
of GlobalCast in September 1999 and WhiteBarn in March 2000.

INTEREST INCOME (EXPENSE) 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 $1.1 million for the three months ended December 31,
2000, compared to expense of $25,000 for the three months ended December 31,
1999. The resulting change was attributable to higher interest income and lower
interest expense in the more recent periods following our private equity funding
in February 2000 and our initial public offering in July 2000. Our average cash
reserves in interest-bearing accounts were thus significantly higher, and the
outstanding balance on our line of credit was lower, during the three months
ended December 31, 2000 than in the same period 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 $3.6 million for the three months
ended December 31, 2000. Net cash provided by operating activities was $193,000
for the three months ended December 31, 1999. For the three months ended
December 31, 2000, substantially all of net cash used in operating activities
was attributable to our net loss of $6.2 million, which included $2.9 million in
non-cash charges. For the three months ended December 31, 1999, net cash
provided by operating activities was primarily due to a decrease in accounts
receivable, partially offset by our net loss, net of non-cash charges, and
decreases in accounts payable and accrued compensation.

   Net cash used in investing activities was $1.9 million and $17,000 for the
three months ended December 31, 2000 and 1999, respectively. For the three
months ended December 31, 2000, net cash used in investing activities was
primarily related to the purchase of short-term securities, and, to a lesser
extent, the acquisition of property and



                                       14
<PAGE>   15

equipment. For the three months ended December 31, 1999, net cash used in
investing activities was related to the purchase of property and equipment. We
expect that capital expenditures will continue to increase to the extent we
continue to increase the number of people we employ and expand our operations.

   Net cash used in financing activities was $4,000 and $79,000 for the three
months ended December 31, 2000 and 1999, respectively. For the three months
ended December 31, 2000, net cash used in financing activities was primarily
attributable to the repurchase of common stock. For the three months ended
December 31, 1999, net cash used in financing activities was attributable to
payments against long-term debt.

   As of December 31, 2000, we had approximately $63.7 million in cash, cash
equivalents, and short-term investments, and working capital of $61.3 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, 2001, at an interest
rate of prime plus 0.25%. Any borrowing will be collateralized by accounts
receivable and other assets of ours. We have no borrowings under this line of
credit and are in compliance with all required financial ratios and covenants.
We expect to renew our line of credit in February under substantially the same
terms. We have no material commitments for capital expenditures; however, we
expect that both capital expenditures and operating lease commitments will
increase as we expand our operations and personnel worldwide. For the next
twelve months, we expect our capital expenditures to be approximately $3.5
million. We anticipate material increases in operating expenses, particularly
sales and marketing and research and development expenses, in order to execute
on our business plan and strategic objectives. Additionally, we may use cash
resources to fund acquisitions or investments in complementary businesses or
technologies. We believe that our current cash, cash equivalents, and short-term
investments will be sufficient to meet our working capital and operating
resource requirements for at least the next 12 months.

FACTORS THAT MAY AFFECT OPERATING RESULTS

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

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

   We have a history of losses, we expect future losses, and we do not expect to
achieve profitability in the near future. We incurred net losses of $1.7 million
in fiscal 1998, $3.5 million in fiscal 1999, and $15.0 million in fiscal 2000.
As of December 31, 2000, we had an accumulated deficit of approximately $31.1
million. We cannot assure you that our revenue will grow or that we will achieve
or maintain profitability in the future. We intend to significantly increase our
future product development, sales and marketing, and administrative expenses.
Accordingly, 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.

   In 1997, we implemented a new business strategy and introduced our
SmartSockets real-time infrastructure software. Thus, we have only a limited
operating history with our current software product line and business strategy.
This limited history makes it difficult to evaluate our businesses.

   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. If our current
business strategy is not successful, our revenue is unlikely to grow
significantly, if at all.



                                       15
<PAGE>   16

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

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

   Our revenue and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, we
have had little backlog and our revenue in any quarter has been substantially
dependent upon orders booked in that quarter. In addition, more than 50% of our
license revenue in a given quarter has often been recorded in the third month of
that quarter, with a concentration of this revenue in the last two weeks of the
third month. Furthermore, more than 50% of our license revenue for a given
quarter has often been derived from fewer than ten customers. For example, in
the quarter ended December 31, 2000, 11 customers represented more than 50% of
our revenue. We expect these trends to continue and, therefore, any failure or
delay in the closing of orders could have a material adverse effect on our
quarterly operating results. Additionally, since our operating expenses are
based on anticipated revenue and because a high percentage of these expenses are
relatively fixed, a shortfall in anticipated revenue could have a significant
negative impact on our operating results.

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

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

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

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

               -  the capital and expense budgeting decisions of our customers;

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

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

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

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

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

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



                                       16
<PAGE>   17

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

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

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

WE DERIVE MORE THAN 90% 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 90% of our total revenue from licensing our
SmartSockets software product line and providing related consulting and
maintenance services. We expect to continue to derive a substantial portion of
our revenue from these sources for the foreseeable future. Accordingly, our
future operating results will depend on the demand for SmartSockets by future
customers. If our competitors release products that are superior to SmartSockets
in performance or price, SmartSockets is not widely accepted by the market, or
we fail to enhance SmartSockets and introduce new versions in a timely manner,
demand for this product may decrease or fail to increase. A decline in demand
for SmartSockets or a failure of demand to increase, as a result of competition,
technological change or other factors, would significantly and adversely affect
our business, financial condition and operating results.

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

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

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

   We believe that our success in penetrating our target markets depends in part
upon our ability to develop and maintain strategic relationships with key
original equipment manufacturers, systems integrators, distributors, and
independent software vendors. Relationships with these parties are also
important because they often influence a customer's decision on which
infrastructure software will be used for a project. We believe these
relationships will introduce our products to potential customers and provide us
with insights into new technologies to which we may not otherwise have access.
For example, a system integrator that is responsible for reengineering a network
may be heavily involved in analyzing and ultimately selecting the infrastructure
software to be used in the network. To date, we have informal working
relationships with several system integrators, and formal agreements with only a
limited number of system integrators. Some of our competitors have developed
more strategic relationships than we



                                       17
<PAGE>   18

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.

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

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

   IT Departments. We currently face competition from the information technology
departments of potential customers which have developed or may develop systems
that provide for some or all of the functionality of our SmartSockets 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



                                       18
<PAGE>   19

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. To date,
less than 10% of our revenue had been derived from customers in the Internet
infrastructure market. This market is new and rapidly changing. Customers in
this market and other potential new markets are likely to have different
requirements than our current customers, and may require us to change our
product design or features, sales methods, support capabilities or pricing
policies. The costs of addressing these requirements, as well as the failure to
do so, could be substantial and could adversely affect our operating results.

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

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

   Revenue from the sale of our products and services outside North America
accounted for 18% of our total revenue in fiscal 2000. 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;



                                       19
<PAGE>   20

               -  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. The
integration of WhiteBarn into our company has not yet been completed and is made
more challenging because its headquarters, near Chicago, Illinois, is
geographically distant from our own. We may not be successful in integrating
acquired businesses or technologies and may not achieve anticipated revenue and
cost benefits. In addition, future acquisitions could result in potentially
dilutive issuances of equity securities or the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill and other intangible
assets, any of which could adversely affect our balance sheet or operating
results. For example, in connection with the acquisition of substantially all of
the assets of GlobalCast, we recorded approximately $2.7 million in goodwill and
other intangibles, which will be amortized over a period of three to four years
and, in connection with the acquisition of WhiteBarn, we recorded approximately
$4.4 million in goodwill and other intangibles, which will be amortized over a
period of two to three years. Moreover, we cannot make any assurances that we
will be able to identify future suitable acquisition candidates or, if we are
able to identify suitable candidates, that we will be able to make these
acquisitions on commercially reasonable terms or at all.

THE 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. We have recently increased our headcount substantially and
plan to increase the scope of our operations and the size of our direct sales
force domestically and internationally. This growth may place a significant
strain on our management systems, infrastructure, and other resources. We expect
that we will need to continue to improve our financial and managerial controls,
reporting systems and procedures. We will also need to expand, train, and manage
our workforce worldwide. Furthermore, 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
$1,000,000 on Thomas J. Laffey and $500,000 on Paul A. Larson.

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

   In order to grow our business successfully and maintain a high level of
quality and service, we will need to recruit, retain, and motivate additional
highly skilled sales, marketing, and engineering and finance personnel. If we
are not able to hire, train, and retain a sufficient number of qualified
employees, our growth will be impaired. In particular, we will need to expand
our sales and marketing organizations in order to increase market awareness of



                                       20
<PAGE>   21

our SmartSockets software and related products and to generate increased
revenue. In addition, as a company focused on the development of complex
software products, we will need to hire additional 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.

A NUMBER OF OUR EXECUTIVES AND OTHER EMPLOYEES HAVE JOINED US ONLY RECENTLY, AND
IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY, WE MAY NOT BE ABLE TO MANAGE
OUR GROWTH AND OPERATIONS.

A number of our executives and other employees joined us only recently and have
had only a limited time to work together. For example, Steven M. Gimnicher, our
Vice President, Product Development, and Mark G. Mahowald, our Vice President,
Multicast and Networking Technologies, joined us in March 2000; and Joseph
Addiego, our Senior Vice President, Sales and Marketing, joined us in April
2000. In addition, many of the senior engineers involved in developing our
multicast technology have only recently joined us as part of our acquisitions of
WhiteBarn and GlobalCast. They may not be able to work effectively together to
develop our technology and manage our growth and continuing operations.

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.



                                       21
<PAGE>   22

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

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

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

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

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

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

   -  variations in our quarterly results;

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

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

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

   -  recruitment or departure of key personnel;

   -  the gain or loss of significant orders or customers;

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

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



                                       22
<PAGE>   23

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

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

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

   As of December 31, 2000, our executive officers, directors, entities
affiliated with them and other five percent stockholders, in the aggregate,
beneficially owned approximately 46% of our outstanding common stock. These
stockholders, acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors. These actions might be taken even if they are opposed by other
stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change of control of our company, which could have a
material adverse effect on our stock price.

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

   The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market or the perception that
these sales could occur. As of January 24, 2001, we had outstanding 18,969,149
shares of common stock. Of these shares, the 4,200,000 shares sold in our
initial public offering are freely tradeable except for any shares purchased by
our "affiliates" as defined in Rule 144 under the Securities Act of 1933.
14,755,880 of the remaining shares of common stock held by our stockholders
prior to our initial public offering were subject to 180-day "lock-up"
agreements with the underwriters or with us. The 180-day lock-up period ended on
January 16, 2001, and pursuant to Rule 144, 12,283,383 of these shares were
immediately subject to sale in the public market without registration subject to
volume limitations. The remaining shares held by our existing stockholders will
become available for sale pursuant to Rule 144 at varying times. Stockholders
owning 9,193,831 shares are entitled, pursuant to contractual provisions
providing for registration rights, to require us to register our securities
owned by them for public sale. In addition, as of December 31, 2001, we had
2,964,758 shares issuable under outstanding options and warrants, 661,187 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;



                                       23
<PAGE>   24

   -  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.



                                       24
<PAGE>   25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

Foreign Currency Exchange Rate Risk

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

Interest Rate Risk

   As of December 31, 2000, we had cash and highly liquid short-term investments
totaling $63.7 million. Declines of interest rates will reduce our interest
income from our short-term investments. Based upon our balance of cash and
short-term investments at December 31, 2000, a decrease in interest rates of
0.5% would cause a corresponding decrease in our annual interest income of
$319,000. As of December 31, 2000, we did not have any short-term or long-term
debt outstanding.



                                       25
<PAGE>   26

                           PART II: OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A.      Exhibits

<TABLE>
<CAPTION>
        Exhibit No.      Description of Exhibit
        -----------      ----------------------
<S>                      <C>
           10.27         Lease dated December 11, 2000 between Talarian and Los
                         Altos Woods, LLC

           27.1          Financial Data Schedule
</TABLE>

B.      Reports on Form 8-K

        None.



                                       26
<PAGE>   27

                                   SIGNATURES


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

                                           TALARIAN CORPORATION

DATE:   February 9, 2001        SIGNATURE: /s/ PAUL A. LARSON
      --------------------                 -------------------------------------

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


DATE:   February 9, 2001        SIGNATURE: /s/ MICHAEL A. MORGAN
      --------------------                 -------------------------------------

                                           Michael A. Morgan
                                           Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)



                                       27

<PAGE>   28

                                 EXHIBIT INDEX



<TABLE>
<CAPTION>
        Exhibit No.      Description of Exhibit
        -----------      ----------------------
<S>                      <C>
           10.27         Lease dated December 11, 2000 between Talarian and Los
                         Altos Woods, LLC

           27.1          Financial Data Schedule
</TABLE>